My ebook “Charity Registration: State-by-State Guidelines for Compliance”
Late last week, The Chronicle of Philanthropy and The New York Post reported that 925 New York City charities lost their property tax exemption because they failed to demonstrate a legitimate charitable purpose to the city’s Department of Finance.
According to The Post, one of the challenged charities, American Youth Hostel, plans to appeal because it has been a recognized charity since 1934, presumably relying on the IRS’s determination that bestows tax-exempt status.
Not long ago, that federal 501(c)(3) charitable designation would have been sufficient to stave off a local or state inquiry into whether tax-exempt status is warranted. No longer.
My hypothesis is that as New York City scrambles for new revenue sources, tax-exempt charities are in Finance’s sights.
Last Friday for Tony Martignetti Nonprofit Radio I interviewed Paul Clolery, editor-in-chief at The Nonprofit Times, at a fundraising conference. He’s concerned about corporations in California, so called “B Corps” that provide a public benefit, eventually appealing to the state for tax exemption proportional to the percentage of revenue (or some other formula) that is devoted to charitable work. (Video of the interview isn’t available yet, but will link it here when it’s ready.)
As charities on both coasts lose exempt status, would that not be a harsh irony?
There are a few wake up calls for charities. You’ve got to stay true to the work that got you the charitable designation from IRS. Relying on a description of your work that’s decades or generations old won’t suffice. Also, stay in compliance with regulations. I can see a failure to adhere to state or local laws being tied to maintaining tax advantages.
Tell me if you’ve seen other instances of states or cities challenging tax-exempt status.
Last week I used Mary J. Blige’s foundation as an example of a noncompliant charity and opened an explanation of why it’s important to register your charity in each state where it solicits donations.
Here’s a motivation I didn’t mention last week: IRS Form 990.
If you’re required to file Form 990 annually, rather than one of the shorter annual forms like 990-EZ or 990-N (the postcard), then you’re answering questions about whether your charity is complying with state registration laws.
The alternate forms for smaller charities (based on gross receipts and/or total assets) don’t inquire about that.
For 990 filers, take a look at Part VI, question 17. (Use the link above to view the form.) It asks you to, “List the states with which a copy of this Form 990 is required to be filed.” Submitting the form is a basic request in every state registration regimen.
If you’re required to register in a state, you are required to submit the 990. (I speculated last week that not having its 990 ready may be why Ms. Blige’s charity hadn’t kept up with its New York registration.)
Charities required to file Schedule G of the 990 (who’s required?) will have their interest piqued by Part I, question 3: “List all states in which the organization is registered or licensed to solicit contributions or has been notified it is exempt from registration or licensing.”
That’s straightforward reporting of your compliance with state laws.
To blatantly nitpick, there is another possibility beyond registration and notification of exemption. Many states allow you to decide for yourself that you’re exempt. You won’t get notified by those states.
This is all quite interesting. A federal agency’s form asking about your compliance with state laws. Might that information be shared with states? I don’t see evidence that it is now, but I have heard rumblings about greater cooperation between IRS and state charities bureaus.
To round out your 990 thrills, the form is signed under penalty of perjury by an officer. It best be filled out honestly.
Performer Mary J. Blige’s, Foundation for the Advancement of Women Now is under investigation for not filing its annual charity registration with the New York attorney general, among other things.
The NY Post story doesn’t go into detail, but that’s not newsworthy. (Though I love their headline: “Mary J. Bilk.”)
A search of the the NY AG’s charity bureau database shows there hasn’t been a registration filing by the organization since 2009. The form for charity registration annual renewal is the CHAR 500. The Foundation requested multiple extensions for filing the federal IRS form 990, and those extensions are quite common.
The 990 is part of New York state’s annual renewal, so the failure to prepare the 990 may have led to the lack of filing of the New York renewals.
Here is a sample of other charities that made news by not keeping up with charity registration laws:
You’ve got to keep up with registrations in each state where you solicit donations. (Here’s a video from an AFP conference to explain that if you’ve got a “Donate Now” button on your site, you are soliciting in many states.)
By not complying, you open your charity up to investigations and public scrutiny. And your board members, as fiduciaries, suffer the risk of personal liability for the organization’s failures to comply with laws. In a lot of states there are civil and even criminal penalties, including fines. Plus, it’s just bad business.
I offer compliance motivation to the Direct Marketing Association in this video.
If you want help getting into compliance, let’s talk. If you want to do it yourself, I wrote Charity Registration: State-by-State Guidelines for Compliance.
One way or another, get into compliance and keep up with renewals.