Granting Money from a U.S. Charity or Church to a Foreign Individual or NGO: Substantial Risks and Best Practices
Many times, conducting charitable work necessitates broadening an organization’s reach, which often in turn requires working outside of the United States. Unfortunately, while these endeavors are exciting, they are complicated and risky for the churches and nonprofit organizations who are involved. Of the many types of risks involved, one of the primary areas involves fundraising and donating money abroad. This is particularly important for an organization to consider because it can implicate, and possibly endanger, the organization’s tax exemption. For example, if the U.S. charity is in the habit of granting or transferring funds from their United States accounts to foreign individuals or foreign entities, such activity—while it may be essential to ministry— unnecessarily increases their legal liability exposure. This problem can be avoided by implementing some basic, IRS-mandated reporting requirements to document the use of funds.
Recently, an Oregon charity was prosecuted in federal court for violation of these anti-terrorist type nonprofit regulations. Organized in 1994, it supported poor children and orphans in the Middle East. It raised and funneled millions of dollars to numerous foreign entities and individuals to help better the lives of these poor and orphaned children through food, shelter, education, clothing, and healthcare. Even though the prosecution could not prove that any of the funds were funneled to suspected terrorists or related organizations, the violations of Homeland Security laws and regulations were sufficient for the federal court to assess fines and penalties against the organization high enough to put it out of business and to convict its founder, who was sentenced to 5 years of probation and fined $50,000. This case and others popping up like it serve as a powerful example of the complex laws and regulations that churches and nonprofits face for any foreign activity, whether collecting and sending contributions for foreign relief and development efforts, sending short and long term missionaries abroad, sending money and resources to foreign NGO’s, or compensating foreign pastors to spread the gospel in their countries.
This Article does not exhaustively address all legal issues related, tangentially or not, to these practices, but focuses on the major liabilities that would threaten tax-exempt status. In June 2012, Christianity Today and Brotherhood Mutual Insurance conducted a survey of about 1500 churches of all sizes that found that over 70% of the churches were involved in foreign outreach efforts in various ways. Of those surveyed, only 58% partnered with mission arms of denomination or associations of churches in any manner, while the remainder partnered with other churches or did it themselves. Numerous churches did it directly because of easy and affordable global transportation and communication through internet and other social media and because of the hands-on excitement of seeing change abroad. Churches now regularly connect directly with foreign individuals and organizations, bypassing the seasoned mission organizations, to send teams, money, and resources overseas. Unfortunately, the lack of knowledge of the complex U.S. and foreign laws and the onsite verification and documentation needed to comply with the strengthening U.S. tax-exempt, finance, and anti-terrorist laws are exposing these churches and mission organization to increasing significant liability and even criminal violations.
1. Examples of how a U.S. charity or church may transfer money overseas, including practical pitfalls of loose financial policies when international projects and international ministry are at stake.
There are several ways that funds from U.S. donors to U.S. charities end up in foreign mission hands for use on the field. The following three methods are most common and generally involve a type of missionary finance account.
- Sending money to a missionary employed by the organization to allow them to function in any variety of settings, including everything from purchasing a car, partnering with and sending funds to other mission groups, and even giving money from their account to support a national (whether or not a believer). These may be processed as “Expense reimbursements” as well. Example: Missionary wires $1,000 to a foreign national in the Philippines to support his ministry, and now wants to be reimbursed by the employing organization.
- Sending money through a church or U.S. charity to a foreign national working in a foreign country, without any approvals or documentation to confirm and verify charitable use.
- Sending money to a “partner” foreign NGO without any grant agreement, reporting, or control over the NGO and no verification of charitable use of the money.
- Sending money to a foreign NGO and/or foreign national without checking the proper anti- terrorist lists.
2. LEGAL CONCERNS
The primary two issues are whether a U.S. charity would endanger its tax-exempt status or violate anti-terrorist laws by giving a charitable deduction to a donor for the donor’s money either that the U.S. charity receives and then transfers to support an individual who is NOT otherwise employed by or commissioned by the U.S. charity, or that the charity passes through or grants to a foreign entity or individual.
Sending money overseas to individuals without documentation proving use for exempt purposes endangers a U.S. charity’s tax- exempt status with the IRS.
The danger of a U.S., tax-exempt organization giving funds directly from a donor to a foreign individual (or an entity, see section b below) is that it may violate the rules that granted tax- exempt status in the first place. Under 26 C.F.R. 1.501(c)(3)-1(a)(1), in order for an exempt organization to remain exempt under 501(c)3, then it must both be organized and operated exclusively for one or more of the exempt purposes; failing either the organizational or operational test can invalidate tax exemption. If more than an insubstantial part of the organization’s activities are not in furtherance of its exempt purposes, it is not tax-exempt.
Therefore, a donor can receive a tax deduction under IRC 170 (c)(2) only for donations or contributions to a corporation, fund, or foundation that is created or organized in the United States and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. If an organization gives donor funds to an individual in a foreign country, these purposes may be violated, and the IRS is very particular about how organizations must prove they avoid any kind of violation.
Consequently, a charitable organization is not precluded from making contributions to the support of individuals, “provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized.”1 To ensure this occurs, the IRS requires “adequate record and case histories” that must substantiate the following:
1)The name and address of each recipient;
2)The amount distributed to each recipient;
3)The purpose for which the aid was given;
4)The manner in which the recipient was selected; and
5)The relationship, if any, between the recipient and members, officers, or trustees of the organization; a grantor or substantial contributor to the organization or a member of the family of either; and a corporation controlled by a grantor or substantial contributor.2
All of these records must be able to be substantiated upon request by the IRS.3 These records must be maintained by the organization itself, and cannot be delegated to an individual who runs the program, or to another entity that receives the support or aid.
For example, in Private Letter Ruling 201001024, the IRS denied 501(c)(3) tax-exempt status to an allegedly nonprofit organization because the organization did not keep records of the eligibility of students who were receiving their aid. The organization sent stipends to students enrolled in a separate, foreign school, but relied on the School to keep records of the students’ eligibility. Moreover, the organization relied on a foreign national who ran the school program to ensure compliance in other areas, such as ensuring that the funds were not given directly to anyone who would be involved in terrorist activities as noted on the OFAC SDGT list (Office of Foreign Assets Control Specially Designated Global Terrorist).
Just like the entity in PLR 201001024, the U.S. charity would be in danger of losing their tax- exempt status for sending money to ministry “partners” overseas and failing to:
- Check the OFAC SDGT list before transferring money overseas; or
- Keep records showing that the U.S. charity determined who is eligible, under articulable standards that align with the U.S. charity’s charitable purpose, to receive money.
Similarly, in Private Letter Ruling 200945068, the IRS denied tax exemption to an organization that claimed it was helping poor students in a foreign country by providing funds directly to the students. The IRS looked at several telling factors showing the organization was not tax-exempt either in purpose or in practice. First, the granting organization did not independently assess each student’s need. The funds were disbursed individually by the organization’s Director. Second, the granting organization was not run as a tax-exempt entity and did not maintain adequate records showing it was indeed tax-exempt. In fact the authority for the granting organization’s operations was mostly delegated to foreign individuals and entities, including the Director of the Board. Third, the granting organization was not able to prove that it gave grants to students based on specific tax-exempt criteria. The granting organization used vague, uninformative, and contradictory criteria and could produce no documentation proving their grants were done solely and exclusively for exempt purposes, including when they were the subject of random spot checks.
Another practical way to show control is not only to have proper documentation, proper verification of charitable use, and proper legal review, but to charge a reasonable fee (typically 5-10%) to the donations that come from donors to foreign nationals. This demonstrates a tangible element of control from the granting organization, showing that they are not acting as a pass-through.
Once again, a U.S. charity or church is similarly in danger of losing their 501(c)(3) tax-exempt status if they practice any of the following:
- Allowing funds kept in the U.S. charity in the U.S. to be transferred directly to nationals or foreign NGOs without reporting and without authorization;
- Allowing funds to be given to individual recipients without documentation showing that the U.S. charity used criteria based on their exempt purposes for selecting the recipient; or
- Allow donors to earmark their donations for a foreign national who has not yet been approved/selected by the U.S. charity to receive ministry funds, and to allow those funds to slide through without any other proven control for exempt purposes.
…WANT TO READ MORE? The full-length article provides 12 more pages of in-depth analysis of IRS and other rules for working internationally, including the legal issues surrounding the common practice of granting money to NGOs or other foreign organizations. The article concludes with some practical action steps for your organization so that it can pursue its mission overseas without endangering its tax-exempt status. If you are operating in these areas and would like further advice, please contact Daniel Hebda, Esq. at email@example.com or Jessica James at 703-771-4671 to purchase the full article and discuss how we can help address your specific concerns.
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers at firstname.lastname@example.org, or Daniel Hebda at email@example.com or Justin Coleman at firstname.lastname@example.org for legal advice that will meet your specific needs..
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