December 7, 2020
Not-for-profits are held to strict reporting standards. For instance, your organization is required to annually file Form 990 with the IRS to preserve your tax–exempt status, among other requirements. But reporting isn’t limited to the federal level. Most states have their own laws regulating charitable solicitations. Registration requirements are designed to increase transparency and improve public trust in your nonprofit.
State By State
As of this writing, 41 states and the District of Columbia require nonprofits to register if they want to conduct solicitation activities. These registrations must be renewed on an annual basis and include specific supporting documentation. The nine states that don’t currently require registration are Delaware, Iowa, Idaho, Indiana, Montana, Nebraska, South Dakota, Vermont and Wyoming. Several others — including Arizona, Louisiana, Missouri and Texas — mandate that organizations register if they’re engaged in certain activities or if they engage professional fundraising advice.
This state-by-state approach has resulted in a crazy quilt of reporting requirements for charities that operate on a national or regional basis. Although state laws often are similar, even small differences can make your job difficult. For this reason, advice from a CPA is recommended when filing financial statements and tax forms.
Drilling Down
What constitutes “solicitation” for registration purposes? It includes such established activities as direct mail, phone calls, emails and in-person requests for donations. Newer solicitation forms may include “Donate Now” buttons on websites and social media platforms or crowdfunding activities. Using such web-based communications means that solicitations now effectively cross state lines, even when you aren’t specifically targeting out-of-state donors. This greater reach means you usually need to register in multiple states.
Your not-for-profit generally will need to register with a state’s Attorney General’s office, department of consumer affairs or a similar agency. Depending on the state, you’ll need to provide the agency with:
- A registration fee,
- A copy of the IRS determination of tax-exempt status — as well as Forms 990 and accompanying schedules,
- Records of organization within the state,
- Contact information for your organization’s officers, board of directors and key executives,
- Financial statements prepared by tax professionals, and
- A description of your nonprofit’s purposes and charitable solicitation activities.
Note: If you need to obtain a copy of the original determination letter for your organization’s tax-exempt status, submit Form 4506-A to the IRS.
Focus on Financial Statements
In at least half of the states, nonprofits must submit financial statements audited or reviewed by an independent CPA in accordance with Generally Accepted Accounting Principles. These requirements kick in if your organization’s annual income exceeds the statutory threshold for reporting — and on this point, there may be significant disparities between states. To compound the difficulty of complying, thresholds and other state requirements may change slightly from year-to-year.
Generally, failure to provide financial statements in a timely fashion could result in a prohibition of your nonprofit’s ability to legally solicit donations. In certain limited circumstances, you might be able to obtain a waiver. For example, in Illinois an organization may benefit from a “once-in-a-lifetime” waiver, while Pennsylvania requires evidence of special facts or circumstances. However, it’s important to note that most states are reluctant to grant these waivers.
Completing the Task
Registering your organization in the states where you conduct solicitation activities isn’t the responsibility of a specific job position. But both your top executives and board members — ideally working with outside experts — should make certain your nonprofit meets these obligations.
To ensure you’re registering in every state where you’re obligated to do so, be sure to review your operating and fundraising activities continually. Pay close attention both to the states involved and the income threshold that triggers mandatory reporting in those states.
Avoid Potential Pitfalls
As is probably obvious, complying with multiple state registration and reporting requirements can be a time-consuming task with many potential pitfalls. For this reason, engage professional advisors who understand your state’s rules regarding nonprofits and know what your obligations are in other states where you may solicit donations.
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