Nonprofit or charitable organizations have Tax-Exempt Status because the organizations serve a public good or provide a benefit to society. These organizations are also allowed to solicit donations from people with the promise that the money will be used to do something that will provide some type of benefits to society.
Unfortunately, in some cases, the money that a nonprofit obtains is not used properly in accordance with the purpose of the organization. If money donated or given to the nonprofit is used to enrich insiders with a leadership or employment role in the foundation, this is referred to as a Private Inurement. There are penalties associated with a Private Inurement and it is important for those who operate a nonprofit to speak with an experienced attorney to make sure they are not breaking the rules regarding what they can do with the organization’s money.
What is a Private Inurement?
When a Nonprofit applies for Tax-Exempt Status, it must state a purpose other than making money. There are certain types of organizations that the Internal Revenue Service (IRS) will give nonprofit status to, such as religious organizations, organizations to further the arts or education, and charitable organizations. In every case, the IRS will allow Tax-Exempt Status only if the nonprofit plans to use the money it obtains to serve some type of broader purpose that is good for the public.
All money the Nonprofit takes in must actually be used to fulfill the purpose that was specified when the organization was started. No money, or assets, can be used to provide a private benefit to anyone involved with the Nonprofit. This includes the founders of the foundation; those who contributed money to it; and those who work for it.
For example, if the founder or manager of a Nonprofit uses money that was donated to the organization to buy a car for himself or to pay his mortgage, this would be an example of Private Inurement. If a contributor or a donor to a nonprofit made a $10,000 donation but then the nonprofit bought him a $10,000 car, this would also be an example of a Private Inurement. Even those who donate to a charity or nonprofit cannot use the money they have gifted to the organization for their own personal purposes, as the money is Tax-Exempt and it is supposed to be used for the nonprofit’s goals.
When Private Inurement occurs, the consequences will vary depending upon the situation. In many cases, the IRS will simply impose monetary sanctions or penalties. In other situations, however, the IRS May revoke the Tax-Exempt Status of the Nonprofit. Revocation is a much more serious consequence and it is not as common. News of the Private Inurement can also affect donations, causing people to no longer trust the nonprofit and to be reluctant to donate as a result.
It is important to ensure that Private Inurement does not occur if you are running a nonprofit. Speak with an experienced nonprofit lawyer at Lotzar Law Firm, P.C. for help understanding the rules for nonprofits and ensuring that expenses are legitimate in accordance with the law.
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