September 18, 2013

By Karen Dunn, JD, LLM

No prohibition exists against a 501(c)(3) organization using the internet for fundraising, the IRS said in a recently released information letter. Web or email fundraising should comply with the same rules* that apply to other solicitations. Since most organizations do some sort of internet solicitations, organizations must be cautious and aware of the requirements. IRS examination guidelines and the recent information letter highlight recommendations to follow.

IRS Recommendations for Online Fundraising

1. Comply with the Regular Donation Substantiation Requirements

This includes such requirements as the substantiation of quid pro quo contributions of more than $75. Quid pro quo contributions involve providing something of value to donors in exchange for their donations.

2. Disclose Your Exemption Status

If your organization has not yet received recognition of exemption, disclose this clearly in a conspicuous statement in the solicitation that also states that contributions may not be deductible.

3. Avoid any Private Inurement or Benefit when Dealing with Professional Fundraisers.

In this regard, consider any fees that a fundraiser may charge for their services and whether that is reasonable and consistent with your organization’s tax exempt status.

4. Beware Unrelated Business Income Tax

Selling merchandise or providing advertising on the web site could result in unrelated business income tax. The taxability of such revenue is based on the same principles of law regardless of whether the organization sells the merchandise or advertisements in a gift shop, publication, or on the web. Speak to your tax advisor before putting merchandise, advertisements, or links on the web to determine whether they are or are not taxable activities.

5. Comply with State Solicitation Registration and Filing Requirements

Currently 39 States (40 starting in 2014) and the District of Columbia have charitable solicitation statutes that require an organization to register before soliciting charitable contributions from their state residents and to file annual reports. The definition of solicitation includes soliciting on the web, such as having a “donate now” button. However, most states, but not all, require more directed activity in the state or substantial contributions from the state for a web site to rise to the level of soliciting in the state.

6. Review the State’s Solicitation Requirements

If your organization receives contributions from donors in a state and then corresponds further with those donors, as is usually the case, your organization may have begun to solicit in that state. Review the state requirements as each state has its own form and due dates as well as varying exclusions, exemptions, and minimum thresholds.

If your organization is ineligible to receive tax deductible contributions, its solicitations must disclose that contributions are not deductible. This disclosure must be on web or email solicitations and must be conspicuous enough to ensure that the viewer has an opportunity to see the statement before making the contribution. The statement must be:

  • In the same type size as the primary message,
  • Readily visible against the background of the page
  • On the same page as, and in close proximity to, the actual request for funds
  • Either the first sentence in a paragraph or the statement itself constitutes a paragraph
  • Presented without the viewer having to follow a link to see the statement
  • In plain view before the viewer clicks on the “submit,” “transmit,” “accept” or other button that transmits their donation information to the soliciting organization

Web sites provide an excellent means to ask for donations as often they are the first place a person looks for information about an organization. However, web sites also openly show compliance, noncompliance, and taxable or prohibited activities to the public, states, and the IRS. IRS examination guidelines instruct IRS examiners to look at organizations’ web sites for required disclosures, proper substantiation of donations, and possible taxable sales of merchandise or advertising. It behooves every organization to have their tax advisor look at their web based fundraising activities before they are launched and periodically thereafter to avoid risks of noncompliance.

*A bit of relief is provided by the Unified Registration Statement (URS) which many states accept instead of their own form, at least for the initial registration. However, some of these states require their own supplementary form to file with the URS and some require their own form for annual reporting, after the initial registration.

© Clark Nuber PS, 2013.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.