What State Authorities Oversee Charities? And What Do They Want?

As the end of 2016 approaches, many charities may be thinking about year-end reports. And while an annual report to donors is an important aspect of development, organizations shouldn’t forget about the reporting requirements to governmental authorities. In addition to filing a Form 990 with the IRS, organizations need to be cognizant of what they need to file with their state regulators.

For many charities, state regulatory filings are somewhat of a mystery: who are these regulators, what do they require, and what happens if we haven’t complied? Earlier this year, the Urban Institute and Columbia Law School issued its analysis on State Regulation and Enforcement in the Charitable Sector to try to answer these questions in broad terms. It’s an insightful look into a system that is often opaque.

Several issues identified in the report can help nonprofit leaders understand how to communicate with their state authorities. First, you should know who regulates charities in your state. Typically, the attorney general and/or the secretary of state have authority for registration and enforcement. Sixty percent of states have divided the oversight of charities into more than one office. But regardless of where it is housed, oversight is usually hampered by a lack of resources: 52 percent of states have less than three full-time-equivalent staff working on charity regulation and enforcement.

Most states require charities to register if they are soliciting funds within that state. Some states, such as New York, publish the resulting registry online, which allows the public to search for information about registered charities. The extent of the required registration varies. For instance, some twenty-two states require charities to file audited financial statements, but in most of those states, the requirement only applies if the organization has enjoyed a certain level of revenue (most commonly $500,000). 

Solicitation registration isn’t the only time charities should communicate with their state regulators. Certain life cycle events—mergers, asset sales, dissolutions, and amendments to articles of incorporation—may require the charity to provide notice to the attorney general.  A downloadable Legal Compendium of such notice requirements—along with other state-by-state-detail—is available through the Urban Institute. 

Nonprofits may start to worry upon realizing that they have not abided by their regulatory requirements. Certainly, the organization should take steps to become compliant, but while doing so, you should take comfort that the vast majority of situations appear to be resolved informally. According to Pace University Law Professor James Fishman, if the violation is an unintentional failure to register, the typical resolution is simply for the charity to make a timely correction (with perhaps a minor fine). Frauds, governance failures, and other more serious violations will obviously lead to different outcomes.