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Are You Misappropriating Your Nonprofit’s Funds?

Misappropriating Funds

One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle money wisely.  A nonprofit is no different than any other business in that you must make ends meet.  Otherwise, your charity will cease to exist.  The current economic difficulties make this task even more challenging as we all are stretching dollars until they are see-through.

But here’s a question you probably haven’t considered:  In all of your efforts to keep the lights on, could it be that you are misappropriating funds without knowing it?  Is it possible that you are even committing a crime?  If you do not understand what the IRS requires regarding designated funds, you might be.

I cannot begin to tell you how many times we see this situation messed up.  Most of the time, it is an innocent attempt by a board or executive director to just be good stewards of the money people have donated.

For example, suppose things are tight at the soup kitchen.  There is not enough cash in the general operating fund to buy all the food that is needed for the upcoming Christmas season.  There is, however, a pretty good chunk of cash sitting in the fund designated for building a new facility.  And, in truth, the food shortage is a far more pressing need.  It is unlikely a building project will be started for at least two years.  Is it OK to divert some of the building fund money to the food fund?

Maybe…or maybe not.

Two Types of Designated Funds

Understanding that there are two types of designated funds (or donations), solicited and unsolicited, is the first step in getting this right.  Let’s take a look at each:

Solicited designations. A solicitation means that your organization asked for donations for a particular cause.  Maybe it was by letter, email, website, radio spot…it doesn’t really matter.  What matters is that donations given in response to a direct solicitation are to be permanently dedicated to that purpose.  In our soup kitchen example, the board cannot move that money around, no matter how dire the circumstances, if those funds are the result of a solicitation.  Just last week, many of you may have read the story of the director of a large, national charity resigning after it was found he did just this very thing.  Was it for a good reason?  Yes.  Was it illegal?  Unfortunately, yes.

Unsolicited designations. These are donated funds that the donor designates without having been solicited by the charity.  For example, Bob decides to donate $100 to the local soup kitchen, but on his own decides to “designate” that those funds be used for future expansion.  In this situation, can the charity legally divert that money to its food fund?  This may surprise you…but the answer is, “Yes!”  To be fair, there are certainly times where it is politically expedient to honor an unsolicited designation, but the key point is that only the charity itself can tie strings to the donation.  This news often comes as a welcome relief to charities that have struggled with how to deal with these situations.

One more point about solicited designations…there are ways to avoid this problem.  First, provide a disclaimer with your solicitation that the organization reserves the right to move money as it sees fit.  Or, that any funds received over and above the budget of the solicited purpose will be put into the general fund.  In a situation where it’s too late for a disclaimer, you can go back to donors and ask permission to retask their donations.  Keep in mind that they have the legal right to say no, though that is unlikely in most legitimate situations of need.

Handling the finances of a nonprofit is always a challenge.  Knowing how to properly address designations is crucial to staying out of trouble with your donors…and the law.

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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Bob Pangburn
Guest

If there is no recorded action by the Board in setting up a Designated account (Building Fund) but there has been solicitation from the pulpit, can you transfer funds if the organization needs to make rent payments on the facility they are currently using?
Thanks

Nelson Horton
Guest
Regardless of the technical legal aspect. It is generally deemed unethical to accept a donation designated by the donor and then use it for another purpose than the purpose the donor intended. The charity should communicate with the donor and receive the donor’s written approval to drop the unsolicited designation or if the donor doesn’t agree the money should either be returned with a “thanks but no thanks”, or booked and held in a designated fund account until used for the designated purpose. It is perfectly fine to turn down designated gifts for projects or purchases which do not fit… Read more »
Robert Weston
Guest

Great article. I know a California non-profit theatre production company which solicits funds for their free children’s classes. However, their classes are stop/start at best and most of the funds seem to go to the rent of their offices and sushi dinners for their board members. How and to whom do report such a thing so that it can be investigated?

Ben
Guest

Quick question, here’s the situation: What if donations are made as a memorial for someone that has passed away but the obituary listed the charitable foundation’s “general scholarship fund” as the destination for the money.

Later, the family of the deceased reveals that they intended the money to be appropriated as a “specific scholarship” (named after the deceased) but managed by the foundation. Is it misappropriation of funds if the donated memorial money is not used for a general scholarship, rather a new memorial scholarship that is created in honor of the person that died?

Help!

Gayle
Guest

What is a board member’s responsibility if s/he discovers that a misappropriation of funds has occurred in his/her organization? Could that board member and the other board members (all of whom were unaware of the misappropriation) be held accountable or would it only be the ones who carried out the transactions?

questioning
Guest

Who would one contact anonymously if they believe funds are being spent or allocated inappropriately? The desired outcome would be for internal investigation to happen within the non-profit agency.

Cindy
Guest
The non-profit I am consulting for is researching treatment for a terminal disease. Assuming the research leads to a successful treatment, the founder of the non-profit intends to license the drug/treatment/therapy to a for-profit entity. The for-profit entity is also being formed by the founder. He has spent money to form the legal for-profit corporation and has paid people to develop the business plan. The money has come from the non-profit’s funds. My gut check says this is not ethical and probably not legal. Even if he intends to pay back the money to the non-profit, I have read that… Read more »
Kelly
Guest

I am the treasurer of a 501(c)(3) with a 509(a)(1) status. Our board was recently approached by a member and asked open a new bank account that another non-501(c)(3) group could contribute to and then pay expenses for that group. In other words, to be able to use our 501(c)(3) status only. I do not think that, when formed, there was anything stated in the groups purpose, to help other groups, I believe it was set up for a singular purpose. Can this be done legally?

Nancy Barkman
Guest

I am a volunteer for a small 501 (c) 3 social service agency affiliated with my church that gives aid and assistance for short terms to people in need. A local corporation has been making donations to us and designating particular people in need to whom specific gifts should be given. Is this ethical and legal?

John Ayers
Guest
Dear Mr. McRay, I am the treasure of a small church on the east coast. In 2008, the church received a lump sum donation from a parishioner estate who passed away. There was not a designation or stipulation from the estate or family regarding this donation. Those funds where placed into the General Funds. In 2009, we were in a building program for our church when the family of this same parishioner made another donation. However, this donation was requested to be designated for a Memorial Fund to honor their loved one. The parishioner owned property that receives yearly profits… Read more »
Donna
Guest
Greg, Thank you for all of this valuable information! I am the bookkeeper for a church where we have been in the middle of a building campaign. Therefore, we have solicited, designated funds for a Family Life Center to be built with in the future. These monies have been deposited over the past 3-4 years in a money market account that has earned interest. As other churches these days, money has become more scarce and some in the church have suggested using the “interest earned” on these designated monies for pet projects and church maintenance. Two questions: 1.) Is the… Read more »
Sharon
Guest
A board voted to restrict specific funds of a local sports booster club to future large improvements. The intention was to be able to save for several years for very large projects that no single board (which turns over frequently as their kids leave the sports program) could raise the cash for on its own. This board created a special committee to convene for the disbursement of their specific restricted funds. This board also created by-laws to govern the creation and disbursement of such restricted funds. A couple years later, a new board changed these by-laws, and co-mingled the restricted… Read more »
Rachel
Guest
I serve as treasurer for a sports association in my town. Recently our president has, in my opinion, misappropriated funds. We have always run our sport as a Spring league. However, this fall we were asked to join a neighboring cities Fall league. We decided to do so as a board and paid entrance fees for each of our 3 teams to join as well as purchased new uniforms for the 3 teams. We solicited donations from sponsors for our Fall teams with a question on the sponsor form of “which age division would you like to sponsor?” There are… Read more »
Athletic Bobert
Guest
I run an athletic contest within a festival run by a 501c3 organization. For participants to compete in this contest, they pay a registration fee. The web page for this festival states that for the registration fee, the contestant will receive a t-shirt and lunch. The festival lost money this year as it rained enough to keep people away but not enough to trigger weather insurance. Now there is a scramble to pay bills. Some say the registration fees are earmarked funds that have to first be used to pay the expenses of the contest within the festival. If so,… Read more »
Grieving widow
Guest
Hi Mr. McRay – Please help. I recently made a large, unsolicited donation to my child’s preschool to be used to create a memorial playground in memory of my late husband. The non-profit that runs the school cashed the check and subsequently advised me that another family previously donated funds for a similar effort (a playground built in memory of his mother). Because another family approached the organization first, I was advised my wishes for a memorial playground in memory of my late husband could not be honored. I was given the option to get a full refund of my… Read more »
Ted Campbell
Guest

I sit on the board of directors for a 501c3. We do an annual benefit which advertises (solicits?) funds for projects. Participants pay an entrance fee and get food and beverage. In addition to this, we auction off donated items to raise money for our projects. Are these considered general funds or designated funds? The funds for one of the projects are no longer needed for that purpose and I am wondering if we can re-direct those funds. If so, will we need to get permission from the participants to re-direct the funds?

Joe
Guest

We are a 501c3 church. Is it wrong to give money to the poor from the Poor Fund. Isn't the person receiving the Poor Fund money privately benefiting from contributions?

Patrice
Guest
Hello Greg. Great article – really eye-opening! I work for a private Christian school that is 501c3 but operates under the church's umbrella. We do not have a separate tax id #. Each year in our enrollment packets, we list the cost of tuition and all of the fees that the parents will incur for the upcoming school year. Any money that we collect from parents or donors (tuition, money from fundraisers, book fees, supply fees, graduation fees, sports fees, etc.,), has to be turned over to the church. All accounts payable and receivable goes through the church and is… Read more »
Rodney R Reece
Guest

Recently a memorial fund was set up for my nephews burial, over 3000 dollars was collected through different benefits for his family through BOK. But come to find out they never received any funds, He died in Mexico and the family he was with paid to have him brought back to the USA and kept almost all of the funds raised for funeral expenses. What is the best way for them to have this investigated for fraud. The memorial site created stated it would go to the family of the deceased but did not.

Amanda
Guest
Hi Greg! Fantastic article! I was hoping to get your opinion if you don't mind providing it. I am a member of a national 501(c)3 organization that operates multiple chapters (primarily connecting members via online forums) in almost every state without a separate EIN#. Those chapters then arrange local group activities for its members and holds local fundraisers to support their group functions. This fundraising is conducted on behalf of their locally recognized chapter name, not the parent organization. Up until recently, the parent group has been fully supportive of the local groups retaining most of the funds (aside from… Read more »
Amanda
Guest
I work for a non-profit school…I handle their E-rate applications and always used an anonymous National School Lunch Program form to show proof that we qualify for a high percent of free & reduced lunch. We are an urban school and for those reasons we are at a 90% discount rate. We recently adapted a new lunch program to our school and the director of the program is over protective of the forms and refuses to give me a copy so that I can submit for discounts. She claims "it is illegal" for her to give me any copies even… Read more »
Nicole
Guest

I have a question.Can the church refuse to give a copy of the financial report to a member?

Bryan
Guest

If a church solicited funds for a project overseas and the donation were made as a direct result of and to that solicitation, can the church then go and change the use of those funds to a building repair project..even through was a direct solicitation for use elsewhere?

Karen
Guest
This is exactly the type of information I'm looking for – thanks! I recently resigned from a 501(c)(3) nonprofit after attempts to correct what I – and other members of the staff – perceive as misuse of restricted funds that were explicitly solicited for and intentionally donated for specific projects. In the last 6 months, the executive director and board president have transferred more than $600K and $300K from two accounts that contained these funds to pay for operational expenses well beyond a 7-10% allocation for administrative costs of the project. Included are expensive travel and dinners, event tickets for… Read more »
Jan Hubbard
Guest
So glad I found this blog. The NFP organization that I work for does re-hab for affordable housing. We had a donor give our re-hab crew a check for $200 and then said, "Take your crew out for dinner on us". Our Executive Director said the money had to go into the operating funds. The rehab crew said it was designated funds and was to be used for the expressed purpose. Also, we have many people give money at Christmas time to buy gifts for children in our poverty area. Truth is, Christmas time is when we get more than… Read more »
Dan Clum
Guest

Our Church approved a budget. Once the mortgage was paid off, the cash used for the monthly mortgage was put into a saving account for future porjects. Since last month's offerings were low, can the Church use the amount in the savings account for general operations to pay bills?

Tashe
Guest
My group puts on an annual event in which an international spiritual person visits our city as part of his national tour to 25 or so cities across the US. We solicit donations to pay for this annual event in our city, as do all the other cities on the tour. We are not legally organized, just a group of people who put on the event, but there is a national organization that is a registered 501c3 non-profit. Our local group does not fall under the umbrella of the 501c3, so in order for donors to receive tax receipts for… Read more »
Terry
Guest
Hello my wife is treasurer for the local youth football league and has been for 3 years. The president last year decided to use funds to fix a needy parents vehicle ( a loan which han not been repaid) without board knowledge. Simply directing my wife to co-sign a check to pay for such. He then decided he was going to start his own charitage foundation and use league funds to finace his foundation. he borrowed $2000 to buy a very large amount of football player cards. He has repaid $600 but has taken a year to repay even that… Read more »
Dawn
Guest
Greg I thank you so much for this site and the work you've done here. As a board member on a non-profit it is beyond helpful in times of "confusion" 🙂 So Greg, here's my question…I sit on the board of a large charity (501c3). In a recent meeting it came to my attention for the first time that the entity has been "borrowing" from temporarily restricted funds. These funds come from two sources. One is a specific solicitation held during an auction to fund scholarships for programs. The solicitation is very specific to the scholarship fund (ie raise your… Read more »
Joe
Guest
Greg, excellent stuff. I am on the Board on a Baseball Travel team open to the Public. A few questions arose. Can the officers collect a small salary? Also fundraising. Two part question. Leys say you live in Chicago and there is a tournament in Texas. Can you fundraise for the tournament – specifically state you are raising money for airfare and hotel stay/along with tournament fees, would this be a problem with the IRS and the 501c3 designation? Lets say you fund raised for your General Fund and were not specific as to what the monies would be spent… Read more »
Rita
Guest

I work with several non-profits. One of them has a donor who gives to the organization and designates the funds to go directly to a family member who is having financial problems. I think this is illegal use of a non-profit and could cause us to lose our non-profit status. Am I right and where can find the answer so I can prove it to the directors.

S Walden
Guest

I am the bookkeeper for a very small non profit ministry. Is it legal for the director to use the non profits funds for covering personal expenses such as medical insurance, home equity loan, personal residence utilities?

S Walden
Guest

Additional information for above question: The director (pastor) is not currently receiving a salary from the ministry, they simply write checks out of the non-profit’s checking account for personal bills.

Myrtie
Guest

We are a small committee that aids a university with its elder education program. We receive money for educational purposes from a 501C3 earmarked for the purchase of books. Can we ignore this desire by the donor? Can we embed this money into the general fund? Are we legally required to account for the spending of these funds?

Jon
Guest
Can a non-profit 501(c)(3) organization (Party A) accept donations solicited by a church (Party B) for a Senior Center (Party C). Party A and Party B worked together on an event held at the church and the pastor took up a cash offering for Party C but asked that any checks be made out to Party A and those funds would be donated to Party C. Party A has no problem depositing the checks into Party A’s account and making a donation to Party C in the amount of those checks. Do you see any issues with doing so?
Brian
Guest

My church has a pledge drive each year for the national denominations missions fund. During the drive we are encouraged both from the pulpit and via video provided by the denomination to pledge a yearly amount of giving. The donations are collected at the local church then sent to the national office. I recently learned that the pastor has taken those funds to help with operational expenses for the actual church. The way I understand the above information is that not illegal since the fund is nationally solicited?

Chris
Guest

This was an incredibly helpful article. I am struggling, however, to find this info on the IRS website. Where would I find the actual law/code so that I can keep it for reference?

Lance Geiger
Guest

I am the treasurer for a school booster organization. Recently there was a family in need that used to be part of our organization (still is in spirit). Some wanted to take some money raised from our organization to help this family. I said we couldn’t for the reasons you described in your article. Was I correct due to the fact the money was not going to what we solicited it for?

Alice Martin
Guest

Can a 501 C3 church refuse to give you a annual donors statement (tithes/offerings) of the cash contributions that you gave through out the year? And also, can they suggest to you, instead of giving your cash donations directly to the church, open up a personal checking account and put your tithes in it, and if the church needs to access it you have to let them. The account is suppose to be to help out if someone in the church has a need?

Murvyn
Guest
What if a fund-raising program becomes wildly successful and the organization is able to raise more money than expected — or planned for — to meet the monetary needs of the program? Scenario: Board designates a solicitation campaign (via Christmas caroling) to raise money for a medical mission overseas. Initial estimates set the goal at $4,000. The campaign is wildly successful and the organization is able to raise $6,000. Is the Board required to spend all the $6,000 raised all at once (towards the designated program). Or can the Board authorize the expenditure of $4,000 towards the program for this… Read more »
joe
Guest

SIR,

I just read a story where a child solicited contributions on the web, and used the funds to pay missed payments, avoiding forclosure. Is this legal? I remember someone doing this a few years ago and was prosecuted for mail fraud by the postal service. Which is legal? If it is legal, what keeps me from having my teen set up a nonprofit, collect money and pay off my house?

joe

janet
Guest

I am on the finance committee at our church. We have a general fund(checking account), a building/construction fund(savings), and a Youth/Family Life center building account(savings).
questions have been raised to the legalities of monies being transferred from the Youth/Family Life Building account into the general fund account. I was told the money could not be transferred because it is in a “Designated account”.

Ruth
Guest
I recently became president of a garden club with non-profit status. I am trying to establish a budget and make sure we are doing everything correctly. We have two fund raising events each year to raise funds for a horticulture scholarship and to support other gardening projects in the community. The first event is a plant sale where members contribute plants from their yards. In the past they have been given a receipt to fill out of what they determine the value of the donated plants (from their yards) to be. Should we be giving members a receipt for a… Read more »
Africa
Guest

I recently donated to support a friend’s mission trip to Africa. She instructed me to send the check directly to the church, made payable to the church. They said they couldn’t accept the donation because I put “Amy’s Africa Mission Trip” in the subject line (for my own memory purposes). They said there couldn’t be any indication of her name in order for them to accept it. Do you think that is legitimate and why would that matter?

David
Guest
Good afternoon Greg, I am am a new volunteer for a non profit organization 501(c)3. Over the past two years, the organization solicited donors through direct appeal (letters and emails) requesting donatoins for a specific purpose. The organization received contributions from the solicitations and it was later determined that the funds received were used for purposes other than the purpose outlined in the appeal letters and emails. The organization does not have adequate funds to cover the temporary restriction on funds (difference between amount received versus the amount expended for the purpose defined in the solicitation) Organizational management has sent… Read more »
Kimberly
Guest

I have a concern. I serve on the Board of a small nonprofit. We had a meet and greet (our first) in January and a few of the people gave checks to the organization. When the Co-Directors (husband and wife) had us send the tax acknowledgement, they changed the wording saying that “every effort would be made to use for the nonprofit but the funds may be used for something else”…. is this misappropriation?

ChristineMM
Guest

I wish you would write a similar post for when designated funds were solicited to buy an object and what happens to that physical object. Also if a person buys the object and donates it for a group to use and what happens if it is being used by others that were not “designated”. I’m talking about after the money is spent, not the cash flows.

Jim T
Guest
Our church had and is still in the midst of a Capital Funds Campaign. We have solicited donations specifically for this building fund with personalized envelopes with the name of our campaign printed on them. For three years the congregation has been giving to this building fund. With the economy being the way it is and offering down for over a year and a half, the staff was told that they have been taking monies that are designated for the building fund and using it to pay for overhead such as staff salaries and bills for over a year. When… Read more »
Jim T
Guest

Forgot to mention that the pastor did announce to the congregation from the pulpit one weekend that we were doing this. People complained to each other but no one brought their gripes to him.

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