When Should Not-for-Profit Organizations Return Donations?

A donor makes a cash contribution to a nonprofit community health organization. The donor itemizes income tax deductions and meets the IRS’s substantiation requirements. So he’s entitled to take a deduction for the donation. The not-for-profit is happy to accept his gift and uses the money to further its charitable mission. Everyone wins — that is, until the donor asks for his money back.

Can a donor do this? Is your nonprofit required to return cash or property if a donor requests it? One thing is certain: Return requests raise all kinds of issues. Let’s look at them.

What the Law Says

There are several common reasons donors ask for their gifts back. For example, a donor may:

• Believe the charitable organization is misusing or “wasting” donated funds,
• Think that the nonprofit is no longer fulfilling its charitable mission. This could involve philosophical differences or a recent trend that the donor dislikes.
• Argue that the organization is ignoring his or her wishes or that the funds aren’t being used for their earmarked purpose. The donor may have stated such terms in a written memorandum when the gift was made.
• Have had a change of heart.

There’s no federal law that requires nonprofits to return donations. But individual states have enacted various laws relating to the operation of not-for-profits that could come into play. Generally, such laws are vague about returning contributions. But they usually assume that a gift is no longer the property of a donor once a charity accepts it. What’s more, organizations are expected to act in the public interest. Thus, state regulators may rule that returning a donation harms the public good or that a return is unreasonable for other reasons.

Case in Point

Consider this example. Say a donor gives $500,000 to a nonprofit’s building renovation fund. But a few months later, the donor requests a refund. This puts the organization in a difficult spot. It may have spent the funds already on construction and lack the cash available to refund the donor. Or it may still have the funds, but returning the money would jeopardize its financial standing. For instance, the nonprofit may have qualified for a construction loan that assumes it has the $500,000 available. In such a situation, the state may say that the nonprofit is under no obligation to return the money.

If, on the other hand, a small donation is involved — for example, $25 — state regulators aren’t likely to get involved. And the size of the gift is unlikely to affect the nonprofit’s plans or programs either way. In such cases, it generally makes sense to return a donation.

No Questions Asked

When are returns mandatory? One circumstance is when the terms of a donation agreement are substantially violated. If a donor stipulates that money must go directly to hurricane relief and the funds are instead spent on iPads for staffers, the charity is legally obligated to return the donation.

Another circumstance is when a nonprofit’s employee embezzles the donated money or otherwise uses the funds illegally. And, if a donor pays for a ticket to a fundraising event and the event is cancelled, the money must be returned — no questions asked.

Simple Steps to Return a Donation

But you shouldn’t wait for disputes to arise. You can head off unwanted return requests by clearly communicating your organization’s policies:

• Adopt a written donation refund policy. State that most donations aren’t eligible for return and explicitly describe the circumstances under which a donation is eligible for return.
• Document large gifts using a standard agreement form that includes your return policy. Make sure the donor receives a copy.
• Consider including a “gift-over clause” in any agreement. This permits a donor to request that a gift is transferred to another organization if the donor believes it has been misused.
• Observe the best fundraising practices. By adhering to the highest ethical standards, you may be able to avoid misunderstandings and conflicts that could result in a refund request.

Prevent It From Happening

Return requests are unfortunate, but they happen. It’s probably wise to return small donations without argument. Although, make sure you understand why the request is being made so you can prevent similar requests in the future. After all, many small returns add up.

With large donations, go over the potential ramifications of returning or not returning them with Kirsch CPA Group at 513.858.6040.