Non Profits Under Scrutiny

Staff Reports

Eastvale – Local nonprofits have been under scrutiny and a lawsuit is being filed this week, which has opened a can of worms in compliance and liability. Some non-profits have reportedly experienced mishandlings of their finances, refusals to release tax records, and non-filings of IRS documents. A local Chamber is now being sued and other non profits are being requested to show their finances.

The local Chamber of Commerce is being sued this week as legal documents were completed and were ordered to be filed. The exact amount and the defendants, which are the board of directors for refusing to pay and respond, will be released once the suit has been filed in court. Releasing the names of the board members personally being sued prior to the filing would be considered “third party disclosure.” After the filing all information will be released as it will then become public record, and the lawsuit will lead to subpoenas of their finances.

“The board members are covered under their Directors and Officers (D&O) insurance,” said a local agency who insures non-profits. “They will be fine as long as they have the required insurance. If a non-profit is running without D&O, they can be assuming personal liability.”

Incorporated non-profits are usually not personally liable unless neglect or specific harm is inflicted. But other ways a nonprofit board member might be held liable include:

  • When a board member directly injures someone on purpose
  • When a board member guarantees a loan or other business debt for the nonprofit which then defaults on that loan or debt
  • When a board fails to make sure that the organization deposits payroll and property taxes or files mandated tax returns.
  • When a board member engages in fraudulent activities or does something illegal or just plain reckless that causes harm, or mixes up nonprofit and personal funds.

As long as the nonprofit is incorporated and board members do nothing “bad,” they should be fine, however, serving on the board of an unincorporated nonprofit.

Board members, in that case, are not protected the way they are in an incorporated nonprofit. These types of nonprofits are more common than you might think, so check the organization’s incorporation papers before agreeing to serve on a board. If you are already involved in an unincorporated nonprofit, consider the pros and cons of incorporating.  You and your fellow board members might sleep better if you took the steps to become incorporated.

Just to make sure that no legal actions slip through the cracks of incorporation law, most experts do recommend that nonprofits purchase Directors and Officer (D & O) liability insurance to protect against certain kinds of lawsuits and other types of litigation.

Local non profits are many, and all must have a 501 (c) (3) status granted by the IRS. A specific rule on nonprofits is that the debt follows the entity.

So who is qualified to be a nonprofit? According to the Internal Revenue Service (IRS), the Exempt Organizations Select Check (Publication 78 database) provides a partial listing of organizations that have been recognized by the IRS as eligible to receive tax-deductible contributions. For information on other organizations that have been recognized by the IRS as tax-exempt organizations, you may call IRS Customer Service at 877-829-5500. You can also contact them through any of the other methods described in Publication 557. This information can be found at A contributor can also check an organization’s exemption letter, which states the Code section that describes the organization and whether contributions made to the organization are deductible.

The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to apply for exemption individually. For more information, see Publication 4573Group Exemptions. Subordinate organizations exempt under group rulings are not separately listed in the Select Check (Publication 78 database); see Eligible Donees Generally Not Listed in Publication 78

According to the IRS, you have the right to inspect and obtain a copy of a tax-exempt organization’s:

Annual information returns (e.g., Form 990);

Exempt status application materials; and

Notice of status under Internal Revenue Code section 527(i),

In person at the organization’s principal office, or its regional or district offices, during regular business hours. Unrelated business income tax returns filed by organizations exempt under Code section 501(c)(3) are also available. You may also request copies of such materials in writing. The organization may charge a reasonable fee to cover copying and mailing costs.

You are entitled to inspect or receive a copy of any annual return for three years from the date the return was required to be filed (or, for an amended return, from the date it was filed). For more information, see the IRS’ frequently asked questions on public disclosure, the final regulations, or Disclosure Requirements at

For exemption application materials, you are entitled to inspect or receive a copy of the organization’s exemption application (Form 1023, 1024, or other document required to be filed), any papers filed in support of the application and any determination letter issued by the IRS with respect to the application.

Stay tuned for our print edition to print the public record and our online version for updates, and an ongoing investigation highlighting local non profits and their compliance to IRS laws.


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