Tag Archives: donations

What to Do If Embezzlement Occurs at Your Nonprofit

Last time, we discussed how you can protect your organization from embezzlement or other misappropriation of funds. But what if the theft has already occurred?

Gathering Evidence of Theft

If you have funds or property that can’t be accounted for, it’s time to investigate what happened. You’ll want to make sure that you know 1) you want to make sure that embezzlement actually occurred, and 2) who committed the theft. The investigation should begin as soon as possible. Delays can invite additional theft and make recovery of stolen property harder.

If you suspect a particular person, limiting his or her access to funds and other property during the investigation is probably a good idea. Another approach would be to leave the person in the position and watch for continued theft, but I don’t like that idea much. It continues to put the organization’s property at risk, and if word gets around that an investigation is underway, it’s not likely to be all that helpful. Confronting the person at this stage might be premature; I’d wait until you have pretty clear evidence that the person is actually stealing.

Punishing the Thief

Once you have clear evidence of who committed the theft, now it’s time to deal with the thief. It’s difficult for me to imagine a situation where no punishment would be appropriate; generally, I consider embezzlement to be fireable offense. Surprisingly, it doesn’t always work out that way. The Chronicle of Philanthropy reports that in one study, only 72% of organizations fired employees that stole from them, and 7% did nothing at all.

Why do so many organizations do so little? According to the Chronicle of Philanthropy, there are a few reasons:

  • Thief’s Remorse. Sometimes the thief is sorry for what they’ve done. A person that shows genuine contrition and returns the stolen property may be able to remain in the organization. Even in those cases, however, I cannot see levying no punishment at all. At a minimum, the person should not be allowed to handle organizational property again.
  • Embarrassment to the organization. Sometimes, organizations are embarrassed to admit what happened. Often, embezzlement exploits a flaw in the organization’s internal controls.
  • Loss of donors. It’s possible that donors may stop giving to an organization***It’s better, I think, to admit what happened and explain how the organization is improving its controls than to try to cover up what happened.

Additionally, you may want to consider filing a police report, particularly for large thefts. The police report is helpful in any future employment actions that might be filed by the thief and in recovering any stolen funds. Additionally, if your organization carries insurance against embezzlement, you may need to file a police report before making a claim–of course, you should check your insurance policy to make sure.

Recovering Stolen Assets

Recovering stolen assets, particularly cash, is difficult. However, that’s not to say that it isn’t worth trying. In some cases, you may be able to work out repayment with the person, and in other cases, you may need to take legal action. Just like with the investigation, it’s important not to delay the process of recovery. This is especially true if you have to file suit, because your organization will have a limited amount of time to do so.

Doing Better

Next, use this as an opportunity to improve your controls. What vulnerabilities in your system did the thief exploit? How can this sort of thing be prevented in the future? Leaving a known vulnerability in place is absolutely unacceptable–the problem must be identified and solved.

Making these needed changes doesn’t just protect your organization, but it also helps to restore the confidence of your donors, clients, volunteers, an other employees. Handling embezzlement is an enormous drain on the organization–it takes time and energy to deal with, in addition to the financial damage. Creating solid internal controls and improving them if you ever (unfortunately) need to is vital to keeping your organization focused on accomplishing its mission.


Is Starting a Nonprofit for You?

“This dream of theirs is just that. Most of them don’t even have anything written down that they can present to me. They don’t have even a starting point yet. But they have the passion. They have the dream.”

Jim Maltry, SCORE Cincinnati

And many times the people who have the dream do not wind up creating a nonprofit. I agree with the article–that’s not necessarily a bad thing–but it’s important to understand why that is and how you can go from dream to functional organization.

Is the nonprofit itself a good idea?

Starting and running a nonprofit organization is a lot of work, and I think it makes sense at the beginning to decide whether or not what you want to do will work. If you’re thinking about it, I recommend asking yourself these questions:

1. Do you do something unique compared to the other organizations around you?

Often, people think of non-profits as somehow separate from the world of business. I don’t see it that way. Nonprofits have to deal with many of the same issues for-profits do, and one of those issues is competition. If you duplicate something that an already-established organization does, you might be better off working with them instead. Duplicate organizations compete with each other for donors and grant dollars, and that may lead to each organization being less effective than it could be without its competitors.

2. Is this organization aimed at a recent disaster or tragedy?

Sometimes a tragic event can cause an outpouring of support and assistance. There are others who disagree with me on this, but I’m generally not a fan of creating an organization in response to a specific event. Here’s why:

  • Other relief organizations already have assets in place to assist; if the disaster spurred you to create an organization, odds are you probably don’t.
  • Putting together an organization takes time. Governance structures, legal entity creation, and tax-exemption application are all important steps, and it really can’t (and even if it can, it shouldn’t) be done overnight.
  • Organizations that appear in response to a disaster are more likely to be scammers. Obviously, not everyone falls into that category, but that perception can hinder your efforts.

Short version: when a disaster or tragedy occurs, help through reputable, established organizations.


3. Do you have a plan?

I think that business plans can be helpful for a new (or established) business. It’s not so much that I think you need to have this pretty report with cool charts and graphs, but rather that putting together the business plan is serious work. It forces you to think about your business, and seriously answer questions like:

  • What is my business going to do?
  • Who will my business help?
  • Who is going to buy my product?
  • How will my customers know I exist?
  • How much money does the business need to keep running?
  • Who is going to run the business?
  • What competition does my business face?

Those questions, with minor modifications, can be asked of non-profits quite easily:

  • What is my organization’s mission?
  • Who will my organization help?
  • Who will donate to support my organization’s mission?
  • How will my organization’s potential donors and potential clients know I exist?
  • How much money does the organization need to accomplish its mission?
  • Who will be responsible for leading the organization?
  • What other organizations are doing the same thing my organization is doing?

I think that even if you don’t put together a pretty report with cool charts and graphs, I recommend writing your answers out. Putting the answers in writing focuses and clarifies your answers.

Is starting a nonprofit a good idea for you?

Also, starting a nonprofit organization isn’t for everyone. If you’re going to lead the organization, here’s what you should be asking yourself:

1. What skills do you and the other people involved bring to the organization?

In the early days of an organization, the people running the organization are usually the people that are working directly on doing the work. Later on, you might have people that manage the organization, staff, and volunteers, but in my experience, it usually doesn’t start that way. However, the startup phase is where a lot of the groundwork is laid–so the skills of you and your team are very important.

What kind of skills should you be looking for?

  • Management: At the board level, you want to have someone who can make high-level management decisions. In the beginning, those same people might also need to be able to lead others, both staff and volunteers.
  • Fundraising: Almost every mission requires some money to be accomplished. Without money, an organization is bound to fail. People with connections throughout the community and the ability to raise funds are vital to almost every organization’s success.
  • Finance: That money you need to bring in needs to be tracked. Even if you need help creating financial reports, it’s important to have people that can understand them on board.
  • Legal: Organizations can run into a variety of legal issues. It’s great to have your very own expert on board, or at least someone who may be able to recommend outside lawyers.

2. Have you (or at least someone involved in your organization) done work in the area you want to serve already?

If your organization wants to complete a certain mission, it’s reasonable to expect someone in the organization to have some experience executing the mission. This will help you understand what resources you need, the logistical issues you face, and the challenges of completing that mission. If the answer to this question is “no,” maybe now isn’t the time. If you don’t have this, you might be better off volunteering for a similar organization to learn about how to better fulfill your mission.

3. How will you support yourself during the start-up phase?

When you start a for-profit business, money doesn’t just appear out of nowhere; you need customers who want to trade money for whatever you sell. It’s a similar idea for a non-profit; money won’t just appear. You’ll have to get people to donate, and to do that, they have to believe that you will handle their donation wisely. That requires trust, and that doesn’t appear overnight either. I’d suggest to you that’s even harder than starting a business, because when you accept a donation, you have nothing to give in return. Money may be hard to come by early on in the organization’s life, and if you plan to work full-time for the organization and be paid, you may find life very difficult in the early stages.

Starting a nonprofit organization is not impossible, but it does require an honest assessment of your chances of creating something successful. If you’re gone through this assessment and you are confident in your project, then you likely have a good foundation for success. If not, you may need to make some adjustments before going forward.

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. I have updated the post for posting here. Enjoy!

Photo credit, Tim Gouw, via Unsplash.com, licensed under CC-0

Documentation Requirements for Donors Making Donations of $250 or More

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. You can read the the post about $250 contributions here, and the post about $75 contributions here. I have updated and revised both posts for posting here. Enjoy!

If you run a 501(c)(3) organization, one of the important benefits your donors enjoy is the ability to deduct their contributions on their taxes. In certain cases, the IRS requires the organization receiving the donation to provide donors with written acknowledgements of the contribution. It’s not difficult, but it is critically important for your donors.

There are two situations that require written acknowledgement from charities:

  • Any contribution of $250 or more, and
  • A contribution of $75 or more when the donor receives goods or services in exchange.

Contributions of $250 or More

If a donor makes a single donation of at least $250 to your organization, the donor needs a contemporaneous written acknowledgement of the contribution. The acknowledgement must contain:

  • The name of your organization;
  • If any money was contributed, the amount of money donated;
  • If there was a non-cash contribution, a description of the contribution (but you need not provide the value);
  • If no goods or services were received by the donor, a statement saying that;
  • If goods or services were received by the donor (more on that in a moment), a description and a good faith estimate of the value of the goods or services; and
  • If only intangible religious benefits were received by the donor, a statement saying that.

What is “contemporaneous?” You don’t actually have to provide the acknowledgement immediately–it’s “contemporaneous” as long the donor receives it before the donor files his or her tax return or the due date (plus extensions) for filing the tax return. Because taxpayers may still be getting W-2s through the end of January, January 31 of the year following the year of the contribution is about as late as I’d want to wait.

As a practical matter, though, why wait that long? I think it’s probably best to issue written acknowledgements shortly after receiving the donation so you don’t forget later. If you do wait, you may wind up having a bunch to issue at once (that doesn’t sound fun) or you might miss the deadline, which will disqualify those donations from deduction (which makes for angry donors, which also doesn’t sound fun).

Above, I mentioned that if there were goods or services received by the donor, a description and good faith estimate of the value of those goods or services is required. There are a couple exceptions to that rule:

  • Low-value items. I like to think of this as the “tote bag” or “coffee mug” exception. An item qualifies for this if:
    • The fair market value of the benefit received no greater than 2% of the donation or $106 (the $106 part is adjusted each year for inflation–that’s the 2016 value), or
    • These three things are true:
      • The donation is at least $53 (again, that’s inflation-adjusted, and $53 is the value for 2016),
      • The only items provided bear the organization’s name or logo, and
      • The cost of the items is within the limit for “low-cost articles,” which is $10.60 for 2016 (and is also inflation-adjusted)
  • Membership benefits. If members get some sort of benefit for an annual payment of $75 or less, it doesn’t count as substantial. For instance, free/discounted admissions, parking, or gift shop discounts for members would qualify under this exception.

One of the great things the IRS does in Publication 1771 is to give you clear examples of acknowledgements that follow the rules:

Cash contribution, nothing in return:

“Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2015. No goods or services were provided in exchange for your contribution.”

Cash contribution, something substantial in return:

“Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2015. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.”

Non-cash contribution:

“Thank you for your contribution of a used oak baby crib and matching dresser that (organization’s name) received on March 15, 2015. No goods or services were provided in exchange for your contribution.”


Contributions of $75 or more where the donor receives goods or services in return

From the point of view of a charitable organization, this documentation requirement is different than the “$250 disclosure” in a very important way: failure to provide written documentation when a donor contributes more than $75 and receives something in return results in a penalty to the charitable organization. The penalty is $10 per undocumented contribution with a cap of $5,000 per fundraising event or mailing.

The reason the IRS is so interested in whether or not a donor receives goods or services in return for a contribution because that affects how much of the contribution is deductible. If a donor receives something in return, the value of whatever he or she received is not deductible. For example, if a donor donates $200 to a charitable organization, and gets an item in return that is valued at $50, only $150 of that contribution is deductible.

The written statement has to have two additional key pieces of information:

  • A statement informing the donor that, in the words of 26 U.S.C. 6115(a)(1), “the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization,” and
  • A good faith estimate of the goods and/or services received.

A “good faith estimate” is exactly what it sounds like: a fair estimate of what the goods or services provided were worth.

The disclosure must be made either during the solicitation or once the contribution is received, and the disclosure has to be made in writing that would be sufficient to get the donor’s attention.

There are also a couple of exceptions to this rule. A written disclosure is not required when:

  • The “low-value item” (or as the IRS calls it, the “token” exception) or “membership benefits” exceptions that we discussed earlier apply,
  • The only benefit consists of intangible religious benefits, or
  • There’s no real donative intent involved–the classic example is a sale of an item at a gift shop, it’s not really a donation, it’s more like a retail sale.

Beyond the legal stuff: donor communication

These acknowledgments don’t have to be bland, “let’s meet those legal requirements” boring stuff. Donation acknowledgements are a great way to deepen your relationship with your donors and help them feel like they’re supporting a great cause–because they are, right?

I’m a blood donor (I know, I talk about this a lot, but stick with me here). Every time that I do a donation, the blood center sends me an e-mail, thanking me for my donation and telling me that my donation helped save lives, and they usually provide an example patient–usually a cute, smiling kid that needed blood. It’s not a legal requirement, but they want me to feel good about my donation and encourage me to keep coming back in the future. You have to communicate with the donor anyway, why not use it to meet the legal requirements and deepen your relationship with the donor?

Photo credit: Volkan Olmez, via unsplash.com, licensed under CC-0