With the recent state of natural disasters devastating communities both in the U.S. and abroad, many people turn to charities to see what they can do to help those affected by these tragic events.
Over the past two decades, charitable giving has grown considerably in the U.S. The number of public charities is up almost 60 percent, from about 643,000 in 2000 to more than 1 million today, according to the National Center for Charitable Statistics. In 2013, public charities reported over $1.74 trillion in total revenues and $1.63 trillion in total expenses.
More recently, many groups have opted to set up their own charities to help victims of Hurricanes Harvey, Irma and Maria, due in part to the skepticism some harbor towards major charities such as the American Red Cross, which was criticized for its response to Superstorm Sandy and Hurricane Isaac in 2012.
Unfortunately, during times of need, there also emerges an unscrupulous industry of criminals who fraudulently set up charities and attempt to enrich themselves on unsuspecting people’s goodwill. The IRS has been issuing warnings about possible fake charity scams by people who seek to take advantage of this generosity. The IRS recommends being wary of charities with names that are similar to familiar or nationally known organizations. There is a page at IRS.gov with a search feature," Exempt Organizations Select Check," through which people may find qualified charities.
For those interested in legitimately setting up a new charity, there are specific rules governing responsible charitable giving everyone must follow. Charities live in a highly regulated universe, where they are governed by the IRS, states’ attorneys general and industry-wide best practices.
It is generally understood that once a new charity is formed, its money must be used as promised. Other important commandments require that every charity honor the following rules:
- Its purpose must benefit the public.
- It has no owners; it has no shareholders. And it has no person’s money. Although it has stakeholders, they are not owners—just parties with an interest in the charitable purposes of the foundation.
- None of its profits or proceeds may be distributed to any individual—not even to the founder or his family.
- It must have a real board of directors, with members who have no conflicts, can make independent decisions and do not engage in self-dealing.
- It must account for all money in its possession.
- It must keep records of meetings, distribute minutes and be transparent about what it does and how it does it.
- It must be careful to document any and all compensation/wages paid to its insiders.
- It must steer clear of political activity.
- It must comply with all federal and state laws requiring registration and solicitation.
Nonprofit organizations run the gamut from small mom and pop associations that meet quarterly to large foundations with billions of dollars in assets. The U.S. continues to be the world’s leader in charitable giving and instinctively rises to voluntarily help people in need. Individuals interested in setting up a charity should be careful to follow the IRS rules and have the resources and dedication necessary for it to be successful.
Penina K. Lieber is a tax attorney practicing in the Pittsburgh office of Dinsmore & Shohl LLP. She represents a wide variety of nonprofit and tax-exempt organizations, associations and foundations in matters arising throughout their life cycle. She is a member of the Board of Governors of the American Bar Association.