Note: Much of this post is anecdotal, based on personal experience, not well documented online or in any official publications. It was written to help with clients’ management decsion-making.
IRS has been tough on disaster relief nonprofit organizations in the past decade. We have observed shifting internal processes and results. This guidance is a combination of personal observation and AI-assisted compilations attempting to offer information to these 501(c)(3) organization board members.
Recordkeeping requirements:
Private foundation
A 501(c)(3) private foundation has specific recordkeeping requirements to ensure compliance with IRS regulations. Here are the key points:
1. Books and Records: Maintain detailed books and records that document the sources of receipts and expenditures reported on annual returns and any tax returns filed. This includes financial records, receipts, and documentation of income and expenses.
2. Supporting Documents: Keep supporting documents for all income, expenses, and credits reported on Form 990-PF (the annual return for private foundations). This includes records of contributions, grants, and other financial transactions.
3. Availability for Inspection: Ensure that books and records are available for inspection by the IRS. This means keeping them organized and accessible.
4. Retention Period: Maintain records for a minimum of three years from the date the annual return is filed. This includes all financial records, board meeting minutes, and other important documents.
5. Financial Statements: Prepare and keep accurate financial statements that comply with Generally Accepted Accounting Principles (GAAP).
6. Board and Activity Records: Keep records of corporate actions, such as board meeting minutes, resolutions, and other official documents.
Public charity
In addition to the general recordkeeping requirements for 501(c)(3) private foundation organizations listed above, public charities have some additional requirements to ensure compliance with IRS regulations:
1. Detailed Financial Records: Maintain detailed financial records that accurately reflect all income and expenses. This includes receipts, bank statements, and documentation of all financial transactions.
2. Supporting Documentation: Keep supporting documents for all income, expenses, and credits reported on Form 990. This includes records of contributions, grants, and other financial transactions.
3. Donor Information: Maintain records of donor information, including donor acknowledgement letters and records of donations received. This is important for substantiating charitable contributions.
4. Board Records: Keep records of corporate actions, such as board meeting minutes, resolutions, and other official documents.
5. Program Monitoring: Document the activities conducted, income received, and expenses incurred to monitor programs and ensure they align with the organization’s mission.
6. Retention Period: Maintain records for a minimum of three years from the date the annual return is filed. This includes all financial records, board meeting minutes, and other important documents.
7. Public Inspection: Ensure that books and records are available for inspection by the IRS. This means keeping them organized and accessible.
8. Unrelated Business Income: Keep records of revenues derived from, and expenses attributable to, any unrelated trade or business to properly prepare Form 990-T and calculate unrelated business taxable income.
Why is IRS tougher on disaster relief nonprofits than other types of 501(c)(3) organizations?
There is no official answer. But a past IRS Commissioner and IRS officials addressing tax professional group indicate informally that they believe that small disaster relief organizations pay for the travel costs of the founders. Third party authors state or imply that the risk of fraud is higher in these organizations. One IRS officer made an offhand (and possibly inappropriate) comment to me in an informal setting that his opinion was that these organizations are often run as “adrenalin kicks to cover travel expenses for the storm chasers”.
What other options exist when IRS requirements become burdensome?
– Start a new organization.
– Change the type of organization (requires a fee payment)
– Define the business differently
– Hire professional management
– Split an organization into several different organizations
Where does IRS provide more information?
https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-organizations-providing-disaster-relief-questions-and-answers
What about state requirements?
State requirements can be substantial but are not considered in this communication.
| 501(c ) 3 public charity | 501(c ) 3 private foundation | |
| Annual compliance: Under $50,000 receipts | Short form annual filing (I do for free) No management attestations | Full form 990 filing with management attestations and financial statements |
| Annual compliance: Over $50,000 receipts | Full form 990 filing with management attestations and financial statements | Full form 990PF filing with management attestations and financial statements Substantial internal recordkeeping * |
| What IRS may request to see in a disaster relief organization for initial approval | Conflict of interest policy Dissolution of assets clause Evidence of public fundraising platform, activity, or history of public donations Donor acknowledgement letters Financial practices policy statement Financial records Business plan Self-sustaining board apart from the founder | Conflict of interest policy Dissolution of assets clause |