A recent New York Times’ article attacked American charities that help build communities in  Israel’s West Bank and IRS policy that enables donations to these organizations to be tax-deductable.  As with any piece about the Palestinian-Israeli conflict, many people have been quick to attack or defend the veracity of the article.

To nonprofit organizations, the value of the article is not the accuracy of the authors’ claims, but rather the article’s insight into current concerns and trends influencing the nonprofit sector.  These can serve as warnings and guidelines to US charities that operate internationally.

Towards this end, I have highlighted themes in the article through blocks of text.

Charity Law as an Extension of US Policy

Using tax-exempt donations to help Jews establish permanence in the Israeli-occupied territories – effectively obstructing the creation of a Palestinian State.

Mr. Obama has particularly focused on them as obstacles of peace.

As the American government seeks to end the four-decade Jewish settlement enterprise…the American Treasury helps sustain the settlements through tax breaks on donations to support them.

Washington has consistently refused to allows Israel to spend American government aid in the settlements.

The article hints to a link between United States charity regulation and governmental policy.   While there necessarily shouldn’t be a connection between the two, the facts on the ground seem to hint otherwise.  More because of increased scrutiny by the governmental department tasked with overseeing nonprofits rather than because of changes in law.

It would behoove organizations operating overseas to consider this growing link (at least during President Obama’s tenure) and to consider US policy when formulating strategy and governance.

Board Members and Officers Should Not Be A Rubber Stamp

It [Shuva Israel, a US tax-exempt charity] has two volunteers who double as board members. “I’ve never been to the board,” said one of them, Jeff Luftig.

Independence and control: two running themes in nonprofit legislation, regulation, and audits.

Volunteers who agree to serve as a board member should understand that this voluntary service comes with mandatory responsibilities. The same holds true for a nonprofit searching for potential candidates.  The United States Government and the public look to a Board of Directors as the brains and power behind a charity; as such, the board is expected to actively participate in the running and planning of a nonprofit.

Local Charity, Local Board

Although IRS rules require that American charities exhibit “full control of the donated funds and discretion as to their use,” Shuva Israel [a US tax-exempt charity] appears to be dominated by Israeli settlers.

The IRS does not want an American charity to be a puppet, subservient to the wishes of another organization or individual — local or foreign.  While foreigners are allowed to sit on the boards of American charities, the nonprofit should never appear as if it has lost its American identity and independence.

Silence Speaks Volumes

Settlements violate international law…

In some ways, American tax law is more lenient than Israel’s.

Asked whether it had ever filed a tax return, he responded, “I’m not in a position to answer that.”

Records from the group [Manhigut Yehudit] say a portion of the $5.2 million collected has gone to Israeli “community facilities”…neither man would answer questions about the nature of the “community facilities.”

Silence can sometimes be the worst answer an organization can give as it hints that perhaps no employee knows the answer or, even worse, that the organization has never bothered to ask the question.  Conferencing with lawyers, accountants, and other professionals can often turn up most of the potential challenges facing the charity. It is to the benefit of the organization to prepare responses to expected Frequently Asked Questions and designate  employees and volunteers best equipped to answer them.

The organization’s reputation demands an answer better than silence.

Filing with the IRS: The Best Defense is a Good Offense

Religious charities are still more opaque; the tax code does not require them to disclose their finances publicly.

Religious groups have no obligation to divulge their finances, meaning that settlements may be receiving sums that cannot be traced.

Religious organizations – like many of the charities that support Israel – that expect to come under government or general scrutiny should consider filing relevant IRS paperwork even though they are not required. Entering background, managerial, and financial information information ahead of any “investigative piece,” is convincing evidence that the nonprofit’s intentions are noble, as well as legal.

Conclusion

As the United States Government loses millions of dollars from noncollectable donations to tax-exempt organizations, charities will always be subject to public and governmental scrutiny.

After reading the excerpts from the Times article, one can certainly understand more of the public and regulatory sentiment towards US registered charities operating abroad, especially those supporting Israel. This said, American nonprofits can still fulfill their mission, operating at their peek capacity.

Among the many DON’Ts mentioned by the authors were also some excellent DOs, which, if followed, can prevent the very accusations highlighted in the article:

The [US] tax code encourages citizens to support nonprofit groups that may diverge from official policy, as long as their missions are educational, religious or charitable.

The Time’s review of pro-settler groups suggests that most generally lie within the rules o the American tax code. Some, though, risk violating them by: (1) by using the money for political campaigning and residential property purchases, (2) by failing to file tax returns, (3) by setting up boards of trustees in name only and (4) by improperly funneling donations directly to foreign organizations.

But the IRS does allow deductions for donations to American nonprofits that support charitable projects abroad, provided the nonprofit is not simply a funnel to another group overseas.

Truly, good advice to follow.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Israeli charities (amutot in Hebrew) rely on donations from overseas – no secret there.  Many foreign-based charities choose to create an American based nonprofit, more commonly referred to as a “Friends of” organization so donations can be tax-deductible vis-a-vis the American Federal Government. (In a previous post, I spoke about IRS trends when a “Friends of Organization” is applying for tax-exempt status.)

However, it could be that establishing a “Friends of” organization is not in your charity’s best interest. The following are some considerations that elaborate on:

Why not to establish a U.S. registered “Friends of” Organization to help fundraise?

1. Fees and Costs

Setup Costs: Experts estimate the fees associated with opening and registering a nonprofit organization in the United States at $5,000. With a complicated request, this number could increase. The organization has to answer to itself and to its donors if this cost is worth it. (More on startup fees can be found on the Social Citizen, “Want to Start a Nonprofit — Think Again.”)

Ongoing Administrative Costs: An American charity requires a presence in America. The government and private donors will expect a local address to handle their needs. Office space, supplies, travel, and salary are just a few of the ongoing expenses that can be expected for an American-based charity to support its ongoing costs.

2. Double the Regulatory Headache

On both sides of the ocean, international charity has become more complex in the last decade. A nonprofit that wishes to operate in two countries must, therefore, also adhere to two separate sets of relevant regulations, on issues ranging from philanthropy, tax, and law (too name but a few). Operating in accordance with one country’s regulations can be trying, let alone two countries (which by the way, can sometimes contradict one another). This is not to say that it is impossible. But an organization needs to understand from the outset that additional paperwork, manpower, and money might be required to ensure that both organizations are operating as they should.

3. Independence

Charities that want to register abroad (in this case the United States) need to understand and appreciate that for all intents and purposes, they are creating a new, separate entity there. The attempt by an Israeli institution to control, force, or participate in the American “Friends of” organization is not looked upon favorably by the I.R.S. (to put it mildly). The US government has hinted – and sometimes stated outright – that no charity shall be subservient to the control of another party; including but not limited to, donors, foundations, and other charities (local or abroad).  (For more, see my article on international charity.)

An Israeli charity might not by ready or willing to relinquish control over its fundraising efforts and branding to a separate entity – even one committed to helping raise funds. One only needs to examine the recent cases of American Friends of Magen David Adom and others to understand the potential clashes that can occur.

4. No Monopoly on Raising Money

Nowadays it is possible to issue US tax-deductible receipts to donors without actually being registered in America, namely through a Middleman Organization. Also known as Conduit Organizations, these charities’ by-laws allow them to give financial support to other worthy charities that forward similar goals. While the PEF is the most famous, many other 501(c)3 tax-exempt organizations offer similar services. Recently, some online donation portals have also joined the ranks. This is even assuming that all donors want a tax-deductible receipt, which not all donors do.

What should my organization do? Register as “Friends of” or not bother?

Only the organization – through its staff and board – can know the answer to this question; it shouldn’t hire a consulting firm or be pushed around by a big donor. Like everything else, it is about strategy and purpose.

However, there are some universal factors. The following are some considerations that might influence a decision:

Cost – It takes a buck to make a buck. Do the setup and ongoing expenses outweigh the benefits?

Volunteers – Does the organization have supporters living in the States that are willing (or unwilling) to take on the responsibilities for running a nonprofit?

Board Members – The IRS, among others, has frowned upon overlapping board members between American organizations and the foreign charities they support (see same post on international charity mentioned above). Does the organization have the fresh faces to help found an independent American charity?

Ongoing Fundraising Efforts – Will the organization be engaged in ongoing fundraising efforts in the United States throughout the year or just infrequent fundraising campaigns?

Donor Relations – One of the main reasons for creating a “Friends of” organization is to communicate, recruit, and retain donors. Can the organization accomplish these goals from Israel? (Remember that for the same job, an Israeli’s salaried employee will cost less than an American’s salary.) Will an American living in America but employed by the Israeli charity suffice?

Control – Never forget that an American charity (whether its actual called a “Friends of” or not) must be independent. Is the foreign-based charity willing and able to give up control to a group of supporters and like-minded individuals? (And yes, this consideration is so important that I mentioned it twice.)

Conclusion

I want to stress that I am not advocating one over the other – there is no objectively better option. However, I will say this: the instinctive, gut-reaction for an Israeli charity to automatically setup a “Friends of” organization, regardless of whether or not it fits into the strategy of the organization is, in my opinion, premature and incorrect. Simply put, money and time might be better spent elsewhere.

What’s your experience? Why not share a story that might help another organization out…

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

International organizations have been highly successful in raising funds from the United States through U.S. based charities commonly referred to as “Friends of” organizations. These charities are registered in the States and have 501(c)3 tax-exempt status, allowing donations to these essentially foreign organizations to be tax-deductible.

As you can imagine, many charities registered outside of the United States consider an “American Friends of” organization as a vital part of their fundraising strategy.

Jewish causes, especially those based in Israel, are no exception to this rule. A recent report compiled by Dr. Nissan Limor estimated that foreign donations to Israeli charities from sources outside of Israel stood at 2.165 billion dollars in 2007, with much of that coming from the United States (although, he didn’t stipulate how much). There are about 1,000 new Israeli charities [amutot] created every year and it would hold that many of these organizations will seek to create an “American Friends of” supporting charity.

Hence, recent conversations I have had are causing me to worry.

The Reduction of 501(c)3 Exemptions Granted

In late July, I wrote about the scandal that rocked the Jewish community of Brooklyn and Deal, culminating in the arrest of three mayors, five respected community rabbis, and a score of government officials. Specifically, my third post on the scandal described the The IRS Expected Response.

In that post, one prediction I made was the “Reduction of 501(c)3 Exemptions Granted”

The easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status…The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

Well, unfortunately, this seems to becoming a reality. Three recent conversations are shedding light on what seems to be new practices by the IRS. (Specific names are being withheld as applications and relationships are still ongoing.)

The Name “American Friends of” Bothers the IRS

On a recent trip to the States, I had the fortune to sit with a prominent lawyer that represents many Jewish nonprofits. He informed me that he submitted a file for 501(c)3 approval for the “The American Friends of _______,” an organization that would like to raise funds for a charity operating outside of America (but not in Israel). The application is taking an inordinate amount of time, mostly due to the staggering number of questions the lawyer has received from the IRS representative assigned to his file. His application folder measures an astounding 2.5 inches! Having been submitting similar applications for decades, the lawyer is quite surprised at the level of scrutiny and feels that it is the organization’s name that is evoking this reaction. The lawyer is losing patience and if nothing changes, will close the application and resubmit under a different name, hoping this will solve the problem.

Charities Should be Supporting a Mission, Not Supporting an Organization

The following day I met with a well known nonprofit consultant that works with both Jewish and non-Jewish charities. He informed me that it has come to his attention that the IRS will no longer approve 501(c)3 status for organizations that are founded simply to support one specific institution. In other words, when applying for exemption, the papers should list the mission or objective that the charity supports, not what organization it supports. It was implied, however, that in practice, a 501(c)3 charity can transfer money to (i.e. support) a single foreign organization without fear of losing its tax-exempt status — the American nonprofit, though, must be able to prove its independence. (More analysis, tips and background on international charity emanating from America can be found on an article I wrote: “International Charity in the Face of Global Terrorism.”)

Don’t Go Against American Policy

And finally, upon returning to Israel, I was speaking to a director of a Israeli nonprofit who told me of a colleague of his whose American charity had applied for 501(c)3 tax-exempt status.  At the time, the applicant informed this director that in his application he stated that the mission was to support Judea/Sumaria/Gaza. The applicant assured the director that the approval was imminent. A half a year later, his approval had yet to come and this applicant soon gave up.

The Obama administration is not in favor of what it calls the “Territories.” Leaving politics aside, we are seeing organizations whose mission clashes with American policy and/or opinion having trouble obtaining 501(c)3 tax-exempt status.

Conclusion

In closing, I would like to stress that whether these trends are good or bad is not the issue. The important point is that Israeli nonprofits and their American supporting counterparts should take notice and act accordingly.

These conversations stress:

1. New organizations that have the words “American Friends of” in their name will have trouble getting their 501(c)3 tax-exempt status approved.
2. By-laws of organization should list the cause that the organization is supporting, and should not specify particular organizations.
3. When applying for tax-exempt status from the American government, it might be best to “tow the party line.”

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

The arrests of 44 individuals–including, 3 mayors, 5 respected community rabbis, a score of government officials, and others–on Thursday of last week (July 23) should highlight the dangers of organizations donating to international causes; and I guarantee you, the I.R.S. is having similar thoughts.

I believe that two reactions can be expected.

1. Greater Scrutiny of Charities

The fear that a charitable donation might not be used for a charitable purpose is not new. The U.S. Department of Treasury has long known the important role that charities play in financing terror and released in 2006 its third version of “Financing Guidelines: Voluntary Best Practices for U.S. Based Charities.”

(For a more detailed analysis, I published an article entitled, “International Charity in the Face of Global Terrorism: The U.S. Department of Treasurys Response.”)

Until now the guidelines produced by the IRS and other groups have been voluntary in nature and not enforced by the U.S. Government. Incidents like the one from last week and the Spinka Hasidim in 2007 are convincing the IRS that terrorists aren’t the only ones abusing the system.

With President Obama’s civic-minded government, we can expect these recommendations to become laws (click here to read more about Obama’s nonprofit agenda). When the Treasury reviews the practices of international organizations they will find that many of them are not following the guidelines that have been suggested. Organizations that are found to be negligent can find themselves facing criminal charges, fines, and revocation of tax-exempt status.

The U.S. government has already invested the time. The literature exists. In just a few short weeks, we can theoretically find these voluntary principles mandatory, so read the letter of the law and obey even the spirit of the law. Remember, the Patriot Act of 2002 allows the IRS to freeze accounts first, and ask questions later.

2. Restriction of 501(c)3 Tax-Exempt Status

The general locker-room talk, as one accountant put it, is that the easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status. Many Israeli organizations currently have or are thinking of opening “Friends of” organizations in the States to help fundraise from American citizens. Donations to these American-based organizations are exempt from United States federal taxes and are channeled to the final destination in Israel.

The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

This could be done simply by requiring additional paperwork or by imposing a minimum existence period, as is the case in Israel.

(More about the difference between USA and Israeli charities can be found in my article entitled “Defining an Israeli Nonprofit Organization.”)

Those that are worried about obtaining this status should forget about waiting for the “right” time and apply now. For those organizations that do not set up a “Friends of” charities, organizations such as the PEF, Central Fund, FJC, One Israel Fund and others can provide receipts to donors and forward the money to the intended Israeli causes.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 2: The Israel Fallout