When Should Not-for-Profit Organizations Return Donations?
Kirsch CPA Group
Jan 07, 2021
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.
About The Author
Kirsch CPA Group is a full service CPA and business advisory firm helping businesses and organizations with accounting,…
Tags
Sign Up for Email Updates
Related Articles
Does your Business Deduct Research & Development Expenses? Major Changes Impact 2022 Taxes…
- 11-09-22
- Elizabeth Michalak
Why Have Your Financial Statements Reviewed (Even When Not Required)
- 10-17-22
- Kirsch CPA Group
Case Study: Strategic Accounting Support from Acquisition to Sale
- 09-20-22
- Kirsch CPA Group
Prevent a Poorly Structured Chart of Accounts from Hiding Your Profitability
- 01-06-22
- Nick Roell
Entrepreneurial Mindset: Kirsch CPA Group Sets a Framework for Growth
- 10-28-21
- Kirsch CPA Group
What Your Numbers Are Saying: Are You Listening?
Part 2: How Attractive Is Your Balance Sheet?
- 07-19-21
- Kirsch CPA Group
What Your Numbers Are Saying: Are You Listening?
Part 1: Do You Know Your Profitability?
- 06-09-21
- Kirsch CPA Group
Using Cash Flow Forecasting to Avoid Problems & Grow Your Business
- 04-07-21
- Kirsch CPA Group
Selecting the Right Payroll System for Your Construction Business
- 04-01-21
- Kirsch CPA Group
Self-Employed May Be Eligible for COVID-Related Tax Breaks for 2020
- 03-17-21
- Kirsch CPA Group
COVID-19 Relief: Overview of the New American Rescue Plan Act for Individuals
- 03-17-21
- Kirsch CPA Group
COVID-19 Relief: Business Overview of the New American Rescue Plan Act
- 03-17-21
- Kirsch CPA Group
Opportunity Zone Investments: A Tax Deferral Opportunity You May Have Overlooked
- 02-17-21
- Kirsch CPA Group
The Status of Temporary COVID Tax Relief Measures After the New Law
- 01-21-21
- Kirsch CPA Group
8 Accounting Practices for a Financially Healthy Construction Business
- 01-07-21
- Kirsch CPA Group
Appropriations Law Adds Some Business Tax Breaks and Extends Others
- 01-07-21
- Kirsch CPA Group
Contending With the Patchwork of State Requirements for Nonprofits
- 12-17-20
- Kirsch CPA Group
Employee or Independent Contractor? The Rules May Be Getting Simpler
- 11-12-20
- Kirsch CPA Group
Do the COVID-19 Extended Deadlines for Health Plans Still Apply?
- 11-12-20
- Kirsch CPA Group
Using Remote Workers? Protect Sensitive Company Data from Exposure
- 10-28-20
- Kirsch CPA Group
What You Need to Know About the Deferral of Payroll Tax Obligations
- 09-15-20
- Kirsch CPA Group
Hobby or Business? How to Treat COVID-19 Sideline Activities for Taxes
- 09-15-20
- Kirsch CPA Group
Monitor These 3 Things as COVID-19 Changes Your Nonprofit’s Priorities
- 08-11-20
- Kirsch CPA Group
FASB Offers Reprieve from Updated Lease and Revenue Recognition Rules
- 07-23-20
- Kirsch CPA Group
COVID-19 Crisis May Affect Tax Angles for Rental Property Losses
- 07-10-20
- Kirsch CPA Group
Last-Minute Strategies for Businesses that Deferred Filing Tax Returns
- 07-01-20
- Kirsch CPA Group
Can Your Business Survive and Even Thrive in These Trying Times?
- 06-18-20
- Kirsch CPA Group
Five COVID-19 Obstacles a Construction Company Needs to Navigate
- 06-12-20
- Kirsch CPA Group
Cash Flow Tip: Postpone Payment of Certain Federal Employer Payroll Taxes
- 04-20-20
- Sue Schloemer
Tax Filing Deadline Remains April 15 – Payment Due Extended to July 15
- 03-19-20
- John Kirsch
8 strategies to help you adapt to economic down turn without layoffs
- 02-24-18
- Diane Glover
Which Research Activities Qualify for the Qualified Small Business Tax Credits
- 07-17-17
- Diane Glover