News for Nonprofits

IRS issues new rules for lump sum contributions

Last Aug. 16, the Pension Protection Act became law. It included provisions specifically targeted at nonprofits. One of these was a provision to require donors to have a tax receipt to substantiate all contributions rather than only those that exceeded the old $250 threshold.

On Jan. 8, the IRS issued new requirements for lump sum contributions, which are all cash contributions other than those made through a payroll deduction program. These include information on to whom a contribution was designated.

Additionally, the IRS has indicated they are considering adding a requirement to include information on when the designated amount was actually paid out to the designated agency and the amount actually paid to them. United Way of America has provided its national network information on how to handle these new requirements.

UWA believes the administrative burden of attempting to provide this information would be astronomical for United Ways and is working to convince the IRS to delay implementation of the new rules. In the meantime, UWA has provided interim guidance to members on how to comply. HANO is sharing this with Hawai‘i nonprofits as a courtesy. Please check with your own financial and legal advisors before implementing any changes to your fundraising policies and procedures.

When must a receipt be issued to a donor?

The short answer is, when the charity decides it wants to. The IRS regulations do not require charities to issue receipts for donations and there is no penalty for not issuing one. They do, however, require donors to be able to substantiate any contribution in excess of $250 to take a deduction. Whether you issue receipts to donors who have not requested one is still up to you to decide, ultimately it is a donor relationship issue.

As a customer service, many organizations issue receipts automatically for all contributions over some threshold. United Ways have been expecting an increase in requests for receipts this year and gearing up to meet that demand but now they need to decide whether or not to change their format to include the newly required information.

If the donor paid by check or credit card, is the canceled check or credit care receipt enough?

Yes. IRS rules state the donor must maintain a bank record or a written acknowledgement. However, to be sufficient, written acknowledgements provided to donors must contain:

  • The date of the contribution
  • The amount of the contribution
  • The name of the donee organization
  • The name of the donee organization that is the ultimate recipient of the charitable contribution in the case of a donation through a United Way.
What if they gave me cash? What information must be included on the receipt?

The rules have changed. A written acknowledgment must contain:

  • The date of the donation
  • The amount of the donation
  • The name of the recipient organization
  • The name of the donee organization that is the ultimate recipient of the charitable contribution in the case of a donation through a United Way.
  • A statement whether the donee organization provided any goods or services in consideration for the contribution and a description and “good faith” estimate of their value. If the value of any goods or services provided is “insubstantial” as defined in IRS Publication #1771, they do not have to be valued or described.
How are the payroll deduction rules different?

When a donor makes a contribution by payroll deduction, the donor must have these documents to substantiate the deduction:

  • A pay stub, W-2 or other document furnished by the employer that shows the amount withheld during the tax year for payment to the donee organization and,
  • A pledge card, or other document prepared by the donee organization that shows the donee organization name.

If the donor makes a single donation in excess of $250 by payroll deduction, the pledge card or other documentation must also include a statement that the organization does not provide goods or services (other than those considered “insubstantial”) in consideration for any contributions made by payroll deduction.

When must the donor receive the receipt?

The rules have not changed here. For a written acknowledgement to be considered contemporaneous with the contribution, a donor must receive the acknowledgement by the earlier of:

  • The date on which the donor actually files the tax return claiming the charitable deduction or
  • The due date (including extensions) of the tax return.
When do these rules go into effect?

Taxpayers claiming charitable contribution deductions for gifts made in taxable years beginning after Aug. 17, 2006 must comply with the new rules for substantiation of contributions. Since most individual taxpayers are “calendar year” taxpayers, they will need to meet the newlevel of substantiation when they file their 2007 tax returns between now and April. Thus,

  • For payroll deduction pledges made in the Fall 2006 campaigns, donors will need copies of their pledge forms when they file between now and April, just as before.
  • For other types of contributions – cash, check, etc. – after Dec. 31, 2006, the donor will need a receipt for every contribution, regardless of amount between now and April.
What if I already issued acknowledgements and they didn’t include the info on designations?

Likely, there will be little immediate repercussion. Long term, some donors who are either very informed about the tax rules or use tax preparers who are, may come back to you and ask for a corrected acknowledgement. If this happens, good customer service would dictate that you look up the designation information and reissue their acknowledgement.

Some donors who are eventually audited may come back to you and ask for a corrected acknowledgement. If this happens, good customer service would dictate that you look up the designation information, reissue the acknowledgement, and be sure to note on the reissued document that it is replacing one that was incorrectly prepared on a prior date (include that date). This will be important for the donor because you are helping them to establish that the reason they did not have the information within the required time is not their fault. We hope this will be sufficient for the IRS to allow the deduction.

What will UWA be doing relative to these issues going forward?

United Way of America will be asking the IRS to withdraw this new requirement due to the administrative burden it imposes on Federated Fundraising Organizations, such as United Ways and Combined federal Campaign partners. If they are unwilling to do so, UWA will ask them to at least delay implementation of the new requirement of designation information until tax years beginning after Dec. 31, 2007.

Delayed implementation would mean that no one whose 2007 tax return is audited would loose their deduction simply because the acknowledgement they received from the nonprofit did not have the designation information on it originally.

UWA is currently drafting a request to this effect to the U.S. Department of Treasury and is hopeful that it will agree, but there are no guarantees. UWA is also hoping to consult further with IRS during 2008 on how to address other issues, such as not including information on what was paid to a designated agency and when. The IRS has indicated an initial willingness to discuss other options with us that would allow them to enforce a specific section of the tax code without placing undue burden on the Federated Fundraising Organizations.

What should I be doing relative to these issues going forward?

You are likely starting to receive requests from donors for receipts or are sending out your standard acknowledgements to donors. Here are a few suggestions to consider:

  • Share this information with your company campaign representatives and talk to them about your customer service needs. If a company does not provide sufficient donor-level detail to issue receipts on demand, you will need to determine how to get the data on short notice or to help the company prepare to respond to requests from their employees on your behalf.
  • Prepare a statement to give to donors who call about the new rules letting them know that the requirements for documenting tax-deductible donations can be found in IRS Publication # 1771. It is always advisable, however, to tell them to consult their tax advisor for more information about what they need.
  • Print a supply of blank, two part, receipts for cash contributions that include the necessary components and disclosures. Make these available for new contributions in 2008.
  • Start talking to the companies that collect data for their own campaigns about providing you with sufficient data to provide donors with receipts.
  • Take another look at your “e-campaigns” to ensure donors can print an acknowledgement containing the required information after donating.
  • Start thinking about changes you may need to make to your pledge forms for the fall 2008 campaign to assure that you are meeting the disclosure requirements.
  • Start thinking about the level of customer service you can or will provide and whether you will need to change procedures or software to be able to automatically issue receipts with designation information.
Where do I go for answers to additional questions?

The IRS website, http://www.IRS.gov, has the most recent version of Publication #1771. You may also contact Ken Euwema, vice president for Membership Accountability, United Way of America, ken.euwema@uwa.unitedway.org.