Can a U.S Non-Profit Organization lose its Tax-Exempt Status by Sending Funds to Foreign Organizations?

There are several ways that funds from U.S. non-profits can be sent to foreign organizations.  However, U.S non-profit organization may be exposing themselves to risks and possible dangers of losing their tax-exemption status.

The plain and simple answer is yes, unless the organization follows proper protocol’s mandated by the Internal Revenue Service (“IRS”). There are several ways that funds from U.S. non-profits can be sent to foreign organizations.  However, U.S non-profit organization may be exposing themselves to risks and possible dangers of losing their tax-exemption status. In order for an exempt organization to remain exempt under 501(c)(3), 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.

Control and Discretion of Transmitted Funds

Being in control of where funds are going is an important factor for tax-exempt purposes. A 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. Where a domestic organization transmits funds to a foreign organization without knowing precisely how the money could be spent, is where that little discretion and control may deviate from tax-exempt advantages, even where funds are promised to be for “humanitarian purposes.” A U.S. charity or church is similarly in danger of losing their 501(c)(3) tax-exempt status if they practice the following, such as, allowing funds kept in the U.S. charity in the U.S. to be transferred directly to nationals or foreign non-governmental organization 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 allowing 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.

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If you have a non-profit charitable organization registered with the IRS, and would like to know more about sending funds to foreign charities, do not hesitate to contact one of our experienced attorneys at EPGD Business Law. EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

Categories: Tax Law

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