If you have children involved in activities, chances are you are involved with or are a member of one or more parent association(s) to support those activities. Most of these associations are structured as IRS Section 501(c)(3) tax-exempt organizations that are public charities and, as such, are responsible for following applicable federal and state regulations. Compliance with these regulations safeguards association funds and donor wishes.
What questions should you, the involved parent, ask?
Is the association formally incorporated as a nonprofit under state law, and does it have recognized tax-exempt status with the IRS?
Formal articles of incorporation recognized by the appropriate state body and an IRS determination letter of exempt status should be part of the association’s permanent records. Any association member should be able to review these documents. You can check the federal tax-exempt status of your association using the IRS’s Tax-Exempt Organization Search.
Does the association have a set of by-laws that it follows and updates on a regular basis?
By-laws should address the number, election, terms, and duties of officers; the rights of members, including removal of officers; how meetings are set and conducted; required transparency for financial matters; and other governance topics. Members should have the opportunity to review and approve the bylaws annually at a meeting.
Is the association protecting its tax-exempt status by filing annually the appropriate 990 Form for its size of operation (990, 990-EZ, or 990-N)?
Current federal law calls for automatic revocation of tax-exempt status if an organization fails to file the appropriate 990 Form for three consecutive years. For an organization that regularly changes its officers and has no paid staff, missing a filing is easy. States may require annual filings for certain nonprofits as well.
Does the association comply with IRS regulations against private inurement?
Under federal regulations, the association’s activities must exclusively serve its charitable purpose and not benefit personal or private interests. To aid in compliance with these tenets, an association should have a robust conflict of interest policy known to all members. In addition, fundraising efforts should accrue to the association as an organization and not to individual children’s “accounts” to be used to offset membership dues, activity and competition fees, trips, etc. for the individual child. Capital Gymnastics Booster Club v. Commissioner, T.C. Memo 2013-193 (8/26/2013) illustrates the IRS’s concern regarding individual accounts. The Booster Club lost its tax-exempt status because only 7% of its fundraising efforts went to the Club as a whole.
Does the association provide financial information regularly to its members?
Complete transparency for financial activities is critical to safeguard the association’s assets and to protect its donors’ interest. Best practice would call for the association to be providing an annual budget and monthly or quarterly financial statements (a balance sheet, income statement, and budget-to-actual statement) to its members.
Knowledgeable parent association members will ensure that the activities and conduct of the association serve the children it was founded to serve. Visit the IRS website, StayExempt, for more information, or read the Exempt Organizations Continuing Professional Education article, “Athletic Booster Clubs: Are They Exempt?”