Update on the IRS and Booster Club Fundraising

I mentioned in a previous post that three booster clubs in KY were being fined by the IRS for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts.

The IRS and Fundraising

The booster clubs have appealed to their congressmen for help.  But it appears the IRS is digging in its heels on this issue. From the Lexington Herald-Leader:

Lois G. Lerner, Director of Exempt Organizations for the IRS, explained in a letter to the booster clubs that any booster club that raises money to benefit an individual student rather than a group is in violation of federal law and stands to lose its tax-exempt status. Lerner said the practice was against federal law.

“The requirement that each parent/member of the club must participate in the fund-raising activities in direct proportion to the benefits they expect to receive toward their children’s expenses directly benefits specific individuals and the parents instead of the class of children as a whole,” she wrote.

Do a Google search on “KY Booster Club IRS” to read more on the story (copyright prohibits a direct link)

So my advice is as before: If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, stop the practice and leave all fund raising proceeds in the general fund to benefit the group at large.

I’ll keep watching this issue. If the congressmen have any success with the IRS, I’ll let you know via this blog and my monthly newsletter (subscribe in the upper right hand corner of this page)

Carol Topp, CPA

The IRS and Fund Raising

The IRS is playing Santa Claus this Christmas!

No, the IRS is not giving out presents this Christmas, but they are like Santa Claus and “making a list, checking it twice, gonna find out who’s naughty and nice...” and they have found some naughty children.

It seems that several booster clubs in KY were audited by the IRS and were fined for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts. Like a lot of organizations, the parents worked at concessions stands, car washes, candy sales and bongo games. The booster club awarded parents monetary credit for working the fundraisers. The IRS fined one organization $61,000! The group is even facing losing 501c3 tax exempt status. Sounds like the IRS is playing Scrooge and not Santa!

It is a common practice to set up individual accounts and split the fund raising proceeds among the parents that participated in the fund raising effort. If Johnny sold the most candy, he gets the largest share of the fund raising proceeds in his account. The IRS is concerned about private benefits. They expect to see the entire group of students benefit from fund raisers, not individuals.

If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, you are on the IRS naughty list! You had better restructure your fund raising efforts and get on the IRS nice list.

If you care to read more, do a Google search on : “KY Booster IRS.” The report from the Lexington Herald-Leader at Kentucky.com is most thorough in telling the story about KY’s booster clubs. (copyright prohibits me from a direct link)

Merry Christmas everyone!

Update posted January 14, 2009: Update on the IRS and Booster Club Fundraising

Carol Topp, CPA

Homeschool group avoids IRS tax notices

A homeschool group in Georgia asked for my help because they had been getting letters from the IRS about back taxes.

We are in dire need of your help. Our homeschool group has received notices from the IRS saying that we need to contact them regarding our overdue taxes. Our group was incorporated (in 2003) but we have not filed any paper work (tax returns or corporate updates) since. Please advise, as soon as possible.
TD, Georgia

I e-mailed and spoke to this homeschool leader several times, so I’ll summarize the resolution:

The treasurer e-mailed me because she had been getting letters from the IRS stating that the homeschool group was late in filing their corporate income tax return. The group ignored these letters for a few years until they found my website. It seems that the original founder had mistakenly thought that the group owed corporate income tax on their surplus. She had filed a Form 1120 (Corporate Income Tax Return ) with the IRS and paid them $71 several years ago. The IRS expected to see corporate tax returns every year thereafter and was mailing the letters when the returns were not filed.

Fortunately, the group had filed for nonprofit incorporation status with the State of Georgia several years before. This was solid documentation that the group was a nonprofit organization (even they did not have 501 tax exempt status with the IRS).

I called the IRS on behalf of the group and the IRS employee told me to mail a cover letter and a copy of the nonprofit incorporation certificate from the State of Georgia. I did so and when I called the IRS two weeks later, the IRS employee told me that the situation was taken care of, the case was closed and the group wouldn’t be getting any more letters! (We didn’t ask for a refund of the $71 previously paid, though!)

That is an excellent example of how nonprofit incorporation status helped one group avoid paying federal corporate income tax. I’m not sure that I could have convinced the IRS of their nonprofit status without the nonprofit incorporation certificate from the State of Georgia.

This is NOT to say that state nonprofit incorporation is the same as tax exempt status with the IRS. Tax exempt status with the IRS (granted by applying to the IRS using Form 1023 and paying the IRS fee) is the only way to guarantee that your group’s financial surplus will truly be classified as tax exempt.

You can read more about the benefits of nonprofit incorporation and tax exempt status in my book The IRS and Your Homeschool Organization.

Carol Topp, CPA