Non-Profit Organizations & Disclosure Laws

By Michele Vrouvas

The public would not trust a nonprofit organization that claims to have a philanthropic mission but uses profits for its own gain. Building trust is crucial for nonprofits because many rely on donations and tax exemptions to survive. In return for receiving such benefits, nonprofits must comply with disclosure laws that help assure a skeptical public that the organization is accountable and transparent.

Background

The term "nonprofit" refers to organizations that reserve income for humanitarian projects, such as religious charities or national sports associations. Some nonprofits seek exemption from federal income taxes under certain sections of the U.S. Internal Revenue Code, such as 501(c) and 501(c)(3). The code exempts nonprofits that comply with laws requiring them to disclose their financial information to the Internal Revenue Service and the public. Disclosure laws are necessary to satisfy taxpayers and the government that donations and government funds given to the nonprofit are used to further its goals and not to personally enrich its directors.

Public Records

The code requires that tax-exempt organizations and the IRS publicly disclose documents supporting an organization’s eligibility for tax-exempt status. Depending on which section of the code the nonprofit qualified under, the records comprise applications filed as Form 1023, Form 1024 or Form 8871. The records also include the organization’s annual return, such as Form 990, Form 990-T, Form 990-EZ, Form 990-PF, Form 1065 or Form 8872. Private nonprofits and some political ones must disclose the names of their contributors. Returns must include attachments, schedules and supporting documents and be available for three years following the due date.

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Public Inspection

Nonprofits must provide copies and allow inspection of documents upon public requests. They must immediately provide copies for in-person requests. For written requests, they must provide copies within 30 days and can charge postage and copying fees of about 20 cents per page. Under inspection requirements, the nonprofit must make the documents available at its principal office or any regional office that has at least three employees.

Exceptions

Under certain conditions, the IRS will waive disclosure requirements. The “widely available” exception relieves a nonprofit of the duty to provide copies of tax documents if it posts exact reproductions on the Internet. However, the nonprofit must still make the documents available for inspection. The “harassment campaign” exception applies if the IRS makes a final determination that a nonprofit is the subject of bad-faith efforts by individuals or groups who are requesting documents because they want to disrupt the nonprofit’s work.

Penalties

The public can report noncompliance with disclosure laws to the IRS. The IRS may impose a $20 fine for each day an organization refuses to provide documents. The maximum fine for not providing a copy of an annual return is $10,000. There is no maximum fine for failing to provide a copy of an exemption application.

State Disclosure Laws

As business entities, nonprofits are subject to state disclosure laws. For example, Texas nonprofits that receive donations of more than $10,000 per year must comply with a state law requiring that they prepare and allow public inspection of an annual detailed financial report. Similarly, New Jersey’s Charitable Registration and Investigation Act requires charities in that state to disclose information about their fund-raising activities before soliciting contributions.

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Regulations for 501(c)(3) Donations
 

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