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.

Too many times the IRS has hinted at the direction to which it is heading, with people taking little notice.  Well, in quiet screams, the IRS is doing it again, with the release of their interim report last week: “IRS Exempt Organizations – Colleges and Universities Compliance Project.”

I preface that I have not yet read the report, but I will. And here’s why I think you should too:

1. The I.R.S. is Cracking Down

The interim report summarized responses to “compliance questionnaires sent to 400 public and private colleges and universities in October 2008″ (IRS press release).  This is not the first report (the IRS did a similar report on nonprofit hospitals) that the IRS has sponsored nor will it be the last.

2. Knowing is Half the Battle

Reading the report can give a nonprofit – especially schools — a sense of what to expect:

The interim report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation as well as governance practices. (IRS Newswire IR-2010-058)

3. The IRS has Teeth

The report was not just some intellectual study.

The IRS has opened examinations of more than 30 organizations that were selected based on responses to the questionnaire. These examinations focus primarily on unrelated business income and executive compensation issues.  A summary of findings and information learned from the examinations will also be included in the final report. (IRS Newswire IR-2010-058)

Last time I checked, examinations were not a good thing.

4. The IRS is Learning

“This compliance project, like our previous one on nonprofit hospitals, gives us a lot of valuable information on activities conducted by those organizations that will help us in our enforcement and services efforts,” said Lois Lerner, Director of the IRS Exempt Organizations.  “Our findings will be reported in a final report after we have completed our analysis of all of the data.” (IRS Newswire IR-2010-058)

In other words, the IRS is learning more and understanding better how organizations work; the IRS sees itself as better equipped to oversee tax-exempt charities and judge their activities.  In my opinion, this feeling will lead to an increased desire by the IRS to put their newfound understanding to use and create more pinpointed inspections — performed both before and after a 501(c)3 tax-exemption has been issued.

Conclusion

I only happened to come across this announcement by accident (I can’t seem to unsubscribe from the IRS Newswire email list), but I am glad that I did.  We are seeing the IRS on an almost consistent basis increase its oversight of charities.  The old ways of running a nonprofit — little transparency, fiscal responsibility, and strategy — are quickly and quietly becoming extinct.  Or they should, if you want your organization to survive the IRS’ version of natural selection.

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.