We are in the process of starting to sort out a mess of a situation. We have many opinions and are awaiting word as to if our status may be revoked (YIKES!!!!!).
In a nut shell, we made a donation to a scholorship fund set up in memory of a long time counselor in our school. He passed away last year and a fund was set up for providing a high school senior with a scholarship meeting a certain criteria. Thought we were doing good. However the IRS prohibits us as a 501 c 3 from donating to a private shareholder or individual. Seems this donation could fall under this criteria. This donation appeared as a line item on our budget and was approved last May, prior to my taking office as president. We did all fundraising with the expressed intent of funding this year's approved budget.
Now we are trying to sort out the fallout of this event. Turns out a fund we have maintained for years to aid disadvantaged children within our school with fees etc may also be in violation for the same reason. The IRS isn't being very helpful (as in they are really mean).
We have engaged a tax attorney who specializes in not for profit tax law, but this is going to cost a fortune and I am really hoping we could just go to the IRS explain the situation and correct as needed. There is some provisions for a complete IRS audit and allowing time to come into compliance but it comes with penalites. I have mixed feelings about opening our books to the IRS but there isn't any intentional violation occuring, and our books are always opened to any member who wishes to see them.
TIA for any insight anyone can offer. Let's just say that words have been flying on the board and everyone is ducking for cover. I know we never intended to break any law and will do everything in our power to make this right. But I fear for the future of this very successful PTO because of misguided generosity.
As a 501(c)(3) you can definitely award scholarships to individuals as long as it's in line with your mission. I'm not clear if you are having a concern because you gave a scholarship or if you gave money to an individual/private entity to be used as scholarships. If it's the latter, then it could be a problem. Giving it another charitable org would be okay; dispensing it yourself would be okay (assuming you had published, fair criteria for awards.)
I would think the the disadvantaged children's progam would be another form of scholarship or grant. Again, as long as it's part of your purpose and you have fair, impartial criteria by which eligible people can apply, that should be fine.
Sounds like much ado about nothing. I can't think of a parent group in this area that does not have some funds set aside to cover lunches/field trip fees/miscellaneous emergencies for disadvantaged kids in the school. I know ours is listed as a specific item in our tax return, and it has never been a problem. I don't really see where the scholarship thing would be an issue, either. How much money out of your total budget was spent on these things, and what prompted all this angst?
There are loads of charitable organizaitions set up just to help disadvantaged kids. As JHB said, if it's in your mission statement in some fashion, then it doesn't sound like a problem. Yes, you can set up a grant program,too. Call the IRS again, and again if you get a wishy-washy answer. Some reps are better at others, but all are there to help you. This shouldnt' cost a penny to "sort out".
Since you're a 501c3 and have managed the fund for years, it must have been reported on your annual 990, so the IRS has already been made aware - with apparently no issues.
Come back after you've talked to the IRS again and let us know what they say. We can all learn together.
I also think this is making a mountain out of a molehill. But a key question will be the donation to the "scholarship fund". If that wasn't set up under a charitable organization and it was a sizeable amount (relatively), there could be some questions. It may still not be a problem, but that answer would help.
Thanks so much for the responses. It is a mountain out of a molehill, although our donation did turn out to be against the rules of the IRS because of the type of organization they are set up as. They are working to correct that and hopefully we should be able to support them in the future. The IRS actually has rules for correcting these issues without penalty. The amount of money we are talking about here in relation to our entire budget is relatively small (we are lucky to have money to burn currently). Our total budget is in the $50K range per year and we have a balance of over $100K because we were paid back by the district for a rather large playground purchase we made. The amount of the donation is $500 and the amount to our We Care fund is around $1K per year and we add as needed.