The IRS has been concerned with the misuse of individual fundraising accounts (IFAs) for decades due to the tendency to blur the lines between permissible public and illegal private benefit. While the IRS has stopped short of an outright ban, it has also made clear that IFAs pose serious compliance risks and could lead to loss of tax-exempt status.
According to the Internal Revenue Code, a §501(c)(3) entity must be organized and operated exclusively for exempt purposes such as education or community benefit. Therefore, the organization’s activities cannot primarily benefit any private individuals or for-profit entities. This means no person (or private entity) can personally profit from the organization’s funds, including through special credits or earmarked accounts. Instead, funds must be distributed equally and solely for the benefit of the entity’s charitable purpose, regardless of individual participation or volunteer efforts.
While this principle applies broadly to all charitable organizations, it often comes into sharp focus in parent-run booster groups. These groups, which support school athletics, music programs, and other extracurricular activities, frequently raise questions about the use of IFAs to credit members who complete necessary volunteer hours while addressing an ever-growing problem with individuals who agree to complete necessary volunteer hours but then fail to do so. While crediting funds raised only to those who participate in the fundraiser (i.e., utilizing IFAs) may seem like a helpful solution, they can create more problems than they solve. The safest approach is to keep all fundraising dollars in one general account for the overall benefit of the entire organization and thinking of other created solutions to boost volunteerism. Doing so not only ensures compliance with IRS rules and regulations but also protects your organization’s integrity.
While more information is available on the IRS website, if your charitable organization is unsure about compliance or wants to review its fundraising policies, seeking the guidance of a business law attorney can help avoid costly mistakes and safeguard your organization’s tax-exempt status.
(This blog, prepared by Campanella Law Office, is for general informational purposes only and is not intended to convey specific legal advice, nor is it intended to create or constitute an attorney-client relationship.)