A charitable contribution is a gift and an irrevocable transfer of a donor’s interest in the money. Whether or not nonprofit organizations can refund a donor’s contribution, however, depends on the size of the gift, the state’s regulations, and the impact of returning the gift. But what motivates a donor to seek a reimbursement for their contributions? Some of the most common reasons a donor might request their contribution be returned are listed below:
- A genuine concern that the charitable organization is mishandling or squandering donated funds.
- A belief that the nonprofit is no longer effectively fulfilling its charitable mission, potentially due to differing philosophical views or disapproval of recent developments.
- The organization is not utilizing the funds for the specific purpose they were designated for upon donation.
- A change in one’s feelings or intentions.
While there is no federal law mandating refunding donations, individual states have implemented specific laws concerning the operations of not-for-profit organizations, which may become relevant. Generally, these laws are ambiguous regarding donation returns, but they typically assert that a gift becomes the property of the charity once it is accepted. Most state rules do not give much detail regarding nonprofit organizations returning gifts. However, states do recognize that when a donor gives money to a nonprofit organization, the money is, in effect, owned by the public interest. State authorities will be concerned that gifts are used to further the public interest and returning a donor’s gift could be contrary to the public interest.
For example, at the time of the request, the nonprofit may have already spent the money, may not have sufficient cash on hand to provide a refund, or providing a refund may substantially hurt the organization’s financial position. Consequently, state regulators might determine that refunding a donation adversely affects the public welfare or that such a return is unreasonable due to other considerations. State officials are unlikely to get involved in these matters unless the gift in question is of a substantial amount. If nonprofits return a charitable contribution, they must send the IRS a 1099-Misc to declare the refund amount if the amount is $600 or more and the refund is in a later tax year.
In order for a nonprofit organization to be prepared in a refund request situation, the organization should adopt a donation refund policy. This policy might include some of the following provisions:
- Provide a “gift-over-clause” option which allows a donor to request the transfer of their gift to another organization.
Nonprofits are only required to return a donor’s gift if they are unable to use the funds as the donor intended. However, it is advisable for nonprofits to consider returning small donations without contention. The best thing all nonprofits can do is minimize the circumstances that can lead a donor to request a refund. A gift agreement is one way to outline the donor’s intent and ensure that the donation is used accordingly.
When dealing with refund requests, nonprofits should always ask donors to provide their reasoning – why do they want their donation returned? This is vital information for the organization going forward because an unhappy donor is not a repeat donor.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
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