Is your Organization Compliant to Solicit Charitable Gifts in the U.S.?
The United States is a key source of funding for charitable organizations and causes across the globe, but soliciting donations in the US can be a complex and burdensome process.
To start, let’s stay within the US borders. The Internal Revenue Service (IRS) certifies the creation and oversees the activities of all charitable organizations in the US, therefore registering with the IRS is the first step an organization must take before beginning any fundraising efforts within the borders of the US. However, receiving tax-exempt status from the IRS does not confer the automatic right to fundraise within or from each of the 50 states. Nearly every state has rules requiring nonprofits to register with the state government before conducting any fundraising from its residents.
Next, let’s look into cross-border giving. Any foreign charitable organization that solicits tax-exempt donations in the US is subject to charity registration laws in approximately 41 states that qualify it to solicit donations from those states’ taxpayers. Solicitation is any activity that asks an individual, group, or organization for a donation, and can be done via phone call, text, social media, mailing, or other means (though the exact definition differs per state). It is illegal to contact a resident of one of these 41 states to ask them for a donation unless you have registered with the state beforehand. Many of these states require annual renewal of these registrations, and some will require a disclosure statement informing donors that your organization is registered with the state.
Foreign charities are also subject to these regulations; if you are raising money from US donors to benefit a charitable project or organization in another country, any solicitation will have to comply with the pertinent state regulations. Even if you obtain registration with the IRS, failure to register on the state level could lead to your organization being fined or banned from receiving money from that state’s taxpayers in the future.
Many charities, domestic and foreign, hire professional fundraising solicitors to attract donations. These relationships are also regulated—any professional fundraising solicitor also needs to register in many states. In some cases, even the contract between the charity and its fundraising affiliate should be registered with each state’s fraud watch dogs. Establishing that a solicitation is actually on a charity’s behalf ensures that donors can be certain that their donations are going to a legitimate organization, and is crucial to the process. Often, however, charities fail to do their own due diligence on what is expected of them as end beneficiaries of such fundraising campaigns, and failure to fill out the required registration renders the charity susceptible to severe penalties.
Using an intermediary organization
The requisite paperwork needed to ensure compliance with every state law can be cumbersome, but charities, whether domestic or foreign, can be relieved that there is an easy solution. Working with an established grantmaking intermediary—such as a donor advised fund —can cut the burden of compliance significantly, as long as that intermediary is a US registered charity in every relevant state. It is important to note that in this scenario, the intermediary organization is legally the recipient of any donations generated by the fundraising activity. Intermediaries must demonstrate legal control and discretion of any donations they receive through the framework of the given fundraising campaign. However, this also means that the obligation to register in the US states where the fundraising campaign takes place rests with the intermediary.
While using an intermediary to fundraise in various or all US states may decrease the administrative burden and costs significantly, it is important that you work with the intermediary to ensure that any fundraising campaigns are in legal compliance. As such, you should include the intermediary in any agreement with a third-party paid solicitor and notify it of any fundraising campaigns you plan to conduct.
More and more charities are looking to crowdfunding to reach untapped donor pools. Online platforms make it easy to create a crowdfunding campaign for your cause and begin receiving donations within hours. However, most crowdfunding sites do not conduct charity or donor due diligence, do not handle tax-receipting or state fundraising registrations for the campaigns that they host. It is therefore vital for your organization to understand that, unless properly set up, by launching a public crowdfunding campaign, you may be receiving donations from donors in states where you may not be legally allowed to fundraise. Receiving a donation from an individual in a state and subsequently providing them with a tax-receipt is likely to trigger a reaction from the state’s regulatory oversight body.
Are you compliant?
As if registering with the IRS was not complicated enough, the requirement of many states for charities to register their fundraising activities is a heavy cost for small charitable organizations. Before conducting any fundraising activities in the US, always ask yourself, “is my organization compliant to solicit charitable gifts in the US?”—you might be surprised by the answer.
This blog is based on CAF America’s analysis and best practices, this should not be construed as legal advice.