Reporting Fraud

Legal Reference: 26 U.S.C. § 7206 (Filing False Tax Returns)

Filing false statements on IRS forms, including Form 990, can lead to felony charges. Non-profits that knowingly file inaccurate information face penalties of up to $250,000 in fines and 3 years imprisonment for responsible parties.

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Credit Card Fraud

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Legal Reference: 18 U.S.C. § 1344 (Bank Fraud)

Using organizational credit cards for personal expenses can constitute bank fraud, a federal offense. Additionally, this violates IRS regulations regarding private inurement (26 U.S.C. § 501(c)(3)).

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Donation Diversion

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Legal Reference: 18 U.S.C. § 1343 (Wire Fraud) and 26 U.S.C. § 501(c)(3)

Redirecting donations intended for charitable purposes to personal use violates both wire fraud statutes and tax regulations. This is particularly serious when donation solicitations specify particular uses. Penalties can include civil liability for the diverted funds.

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Payroll Fraud​

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Legal Reference: 18 U.S.C. § 1341 (Mail Fraud) and IRS Regulations

Intentionally reporting inflated working hours or salaries on tax forms and payroll records constitutes fraud. For non-profits, this also violates regulations concerning reasonable compensation.

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Failure to Pay Prevailing Wage/Minimum Wage

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Legal Reference: Fair Labor Standards Act (29 U.S.C. § 201-219)

Misclassifying employees as independent contractors to avoid wage requirements violates federal labor laws. Religious organizations are not exempt from FLSA minimum wage and overtime requirements.

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Private Benefit/Inurement

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Legal Reference: 26 U.S.C. § 501(c)(3) and IRC § 4958

Tax-exempt organizations must operate exclusively for exempt purposes, not for private benefit. Inurement occurs when net earnings benefit insiders (e.g., directors, officers). Penalties include revocation of tax-exempt status, excise taxes on disqualified persons (25% of excess benefit), and additional 200% tax if not corrected promptly. Directors who knowingly approve such transactions may also face penalties.

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Restricted Donor Fraud

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Legal Reference: Uniform Prudent Management of Institutional Funds Act (UPMIFA) and 18 U.S.C. § 1343 (Wire Fraud)

Violating donor restrictions is both a state law violation and potentially federal wire fraud if solicited online. Nonprofits must honor donor restrictions on gifts and maintain proper accounting for restricted funds. Beyond criminal penalties, this can result in civil litigation from donors and regulatory action from state attorneys general.

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Embezzlement

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Legal Reference: 18 U.S.C. § 666 (Theft from Organizations Receiving Federal Funds)

Embezzlement involves the fraudulent appropriation of property by a person to whom it has been entrusted. For nonprofit leaders, this can include using donated funds for personal purposes. The intent to later return the money is not a valid defense against embezzlement charges.

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Record-Keeping

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Legal Reference: 26 U.S.C. § 6001 and IRS Regulations

Tax-exempt organizations must maintain detailed records to substantiate income, expenses, and activities. Failure to maintain adequate records can result in loss of tax-exempt status, imposition of excise taxes, and personal liability for directors. The IRS requires records to be kept for at least 3 years, and longer (7 years) for certain types of transactions.

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Failure to Report Other Income

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Legal Reference: 26 U.S.C. § 61 and § 6662

All income from whatever source derived must be reported to the IRS. This includes cash, merchandise sales, and other revenue sources. Even non-willful underreporting can result in accuracy-related penalties of 20% of the underpaid tax.