Mission Trip Fundraising

March 2024 - If your church or nonprofit engages in short-term, summer mission trips, March often signals the beginning of fundraising projects.  Before you appeal for donations, it is important to review the rules of what the IRS calls “deputized fundraising”  making sure you have the proper policies and procedures in place to maintain compliance.  Failure to maintain compliance could result in the loss of your tax-exempt status.

Private Inurement and Private Benefit

To be tax-exempt under IRC §501(c)(3), an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. See IRC § 501 ( c )(3); see also recent IRS Private Letter Ruling 20230812.  The latter prohibition (italicized) is commonly referred to as Private Benefit. Generally, you can think of private inurement as a subset of private benefit involving “insiders” of the organization (founders, board members, CEOs, etc.). Private benefit refers to all other individuals.  The IRS strictly prohibits private inurement. Violation often results in a revocation of tax-exempt status.  There are limited exceptions to Private Benefit.

From the donor perspective, the rule is similar.  IRC §170(a) provides that a contribution is deductible only if it is made “to or for the use of” the charitable organization and not inure to the benefit of any private shareholder or individual.  As such, direct gifts to missionaries (short term or long term) are not tax deductible, even if the gift is used by that individual for religious purposes. Contributions are deductible if the gift meets two important tests outlined by the IRS for a practice known as “deputized fundraising.”

Deputized Fundraising

It is a common for churches to raise money for missionaries or short-term mission trips by highlighting the work of the individual missionary or focusing fundraising on “goals” of the individual participants.  Your church website may have a picture of the missionary family with an express solicitation for “The Smiths in Costa Rica.” Short-term mission trip participants may even use form letters to potential donors, explaining the need and soliciting funding to meet their individual “goal.”  Youth groups may use fundraisers like car washes and work days to raise money.  The benefits of this type of very personal fundraising are obvious. Donations increase when donors feel more connected to the person and more vested in the mission.  While this type of individualized or “deputized” fundraising may look like private benefit, the IRS allows it so long as it is done correctly. 

First, all contributions must meet the IRS Intended Beneficiary test.  All donations must be made to the qualified tax-exempt organization.  In the examples above, the check or the card transaction must be made to the church – not the individual.  The donation is treated like any other contribution to the church or nonprofit following the rules for acknowledgments etc. It is important to communicate to donors that the goal of the fundraising is to support the tax-exempt ministry of the church or nonprofit, not the individual. The money raised should always offset the reasonable expenses of the entire project, not the costs of an individual participant. While the IRS allows the organization to keep track of an individual participant’s fundraising goals, the amount of benefit that the participant receives must be reasonably related to the costs and expenses of the project, not the amount of funds raised (or not) by the individual. 

Second, donations must meet the IRS Control and Discretion test.  The donor must understand they are relinquishing the funds to the total discretion and control of the organization – in our example, the church, not the individual.  While the donor may preference the gift for an individual participant, missionary or project, the donor cannot restrict or “earmark” the gift requiring that it only be used or directed for a specific individual.  Policies should also clearly communicate to donors and participants that any excess or shortfall in funding is subject to the discretion and control of the organization. 

Application

To avoid donor confusion and participant confusion over deputized fundraising, best-practice requires the following:

·       A clear, well-written Donation Policy that governs gifts including deductibility of charitable contributions, exempt purpose, organization control vs. donor preferences, deputized fundraising (including goals, excess and shortfalls), and donation reports (acknowledgements).  This policy should be readily available through your website.

·       Procedures to address fundraising and support activities by participants that dovetail with the Donation Policy.

·       Donor solicitation and receipt materials (including fundraising participant form letters) must include clear language meeting the IRS Intended Benefit Test, the IRS Control Test and reference a readily available Donation Policy.

·       Policies and procedures for employee staff or missionary contractors participating in deputized fundraising programs to meet support needs.

This information is provided as a general guide to highlight critical business issues facing your ministry.  It should not be construed as professional legal, tax, or human resources advice or service. Every situation should be evaluated independently, and professional advice sought from a lawyer or tax professional.