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For attorneys representing nonprofit organizations, navigating the complexities of federal and state regulations is crucial to safeguarding operations and maintaining public trust. Whether ensuring compliance with IRS tax-exempt requirements or managing multi-state charitable solicitation registrations, attorneys play a pivotal role in helping nonprofits meet their obligations.
This blog delves into the federal and state oversight frameworks that govern nonprofits and offers key strategies for attorneys to guide their clients effectively through these regulatory requirements.
At the federal level, the IRS is responsible for overseeing tax-exempt organizations, with a focus on ensuring compliance with 501(c)(3) requirements. Attorneys play a critical role in advising clients on maintaining their tax-exempt status and staying compliant with federal regulations.
Nonprofits must secure and maintain their 501(c)(3) tax-exempt status by aligning with the IRS’s criteria. Attorneys assist nonprofit clients by preparing and submitting Form 1023 or 1023-EZ and ensuring that the nonprofit’s mission and financials meet the necessary standards for charitable purposes.
Nonprofits are required to submit an annual Form 990, detailing their financials, governance practices, and compensation of executives, among other things. Legal professionals play a crucial role in guiding clients through the complexities of this filing, ensuring accuracy and avoiding potential red flags that could trigger an audit. There are two types of Form 990s:
Failure to file a Form 990 for three consecutive years results in automatic revocation of tax-exempt status.
The IRS may conduct audits if a nonprofit is suspected of violating tax laws, such as engaging in prohibited political activities or excessive lobbying. Attorneys are instrumental in representing nonprofits during these audits and ensuring compliance with IRS requirements.
Nonprofits generating income outside their exempt purposes may be subject to UBIT. Attorneys are tasked with advising clients on how to structure these activities in a way that minimizes tax liability while preserving their tax-exempt status.
By maintaining a thorough understanding of IRS regulations, legal counsel can help nonprofits avoid compliance issues and potential penalties.
While federal regulations focus on tax-exempt status, state governments regulate charitable solicitations, requiring nonprofits to register before soliciting donations.
Attorneys advising nonprofits operating across multiple states must navigate a patchwork of state-specific regulations to ensure compliance.
Most states mandate that nonprofits register with the state before fundraising. States like California, Florida, New York, and Pennsylvania are particularly stringent when it comes to charitable solicitation. In addition to initial registration, nonprofits must renew their charitable solicitation status annually in thirty-eight states.
Attorneys guide clients through the multi-state registration process, ensuring timely filings and compliance with each state’s unique regulations.
States also regulate professional fundraisers, requiring them to register and adhere to strict contract disclosures. Attorneys are responsible for drafting contracts that comply with state laws while protecting their nonprofit clients from potential liabilities. Negotiations between nonprofit and professional fundraiser can last months, during which attorneys play a pivotal role.
Many states require annual financial filings in addition to Form 990. These reports may disclose fundraising expenses, executive compensation, and other governance details. Attorneys ensure that these reports are accurate and filed on time to prevent penalties.
State laws protect donors from fraudulent fundraising practices. Nonprofits must provide transparent and accurate information in their solicitations. Attorneys play a vital role in reviewing solicitation materials to ensure compliance with both state and federal consumer protection laws.
Staying current with state-specific regulations is critical for attorneys advising multi-state nonprofits, as noncompliance can lead to significant legal and financial consequences.
As the regulatory landscape for nonprofits continues to evolve, legal professionals must stay ahead of emerging trends that could impact their clients.
With the rise of online platforms and social media-driven fundraising, new regulations around digital solicitation are likely to emerge. Attorneys must help clients comply with these evolving rules, ensuring transparency in how donations are used.
An excellent example is California's latest legislation, CA AB 488, which regulates charitable fundraising platforms like GoFundMe, DonorsChoose, Classy, and others.
Nonprofit governance and executive compensation are receiving increased regulatory attention. Attorneys should prepare for tighter standards around governance structures and leadership pay, with a greater emphasis on transparency.
With regulations like GDPR and CCPA influencing how nonprofits handle donor data, attorneys will need to ensure that clients comply with heightened data privacy and security standards, particularly when engaging in digital fundraising that crosses state and global lines.
Expect more aggressive enforcement of fraud prevention measures in both fundraising and grant management. Attorneys will need to help clients implement strong internal controls to mitigate fraud risks.
Attorneys representing nonprofit clients are integral to ensuring these organizations stay compliant with both federal and state regulations. From securing tax-exempt status to managing multi-state charitable solicitation registrations, legal professionals help nonprofits navigate complex regulatory frameworks and avoid legal risks.
As digital fundraising grows and regulatory oversight intensifies, staying informed and proactive is essential to providing effective legal counsel. By partnering with Change, attorneys can streamline compliance processes, protect their clients, and focus on supporting nonprofits in achieving their charitable missions.
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