If a donor requests a refund of their donation, should you give it to them? The recent donor refund by the Girl Scouts, in response to a donor’s stipulation that their $100,000 donation could not be used for transgender girls, sparked an outpour of new donations supporting the Girl Scouts stance on inclusivity. The decision was a public relations gold mine for the organization, but not all donor refund requests are the same. Several factors should be considered before returning a donor’s gift.
Donor Restrictions
If a donor restricts their gift for a specific charitable purpose or time period, the organization must comply with those restrictions. Remember that donors cannot restrict their donation for a specific person or non-charitable purpose (ie. “these funds must be used to help my neighbor who was in a car accident”). If the organization already has a community support fund or scholarship program established, the donor can restrict their gift for that program or pool of funds, but they cannot specify a person to receive those funds. If the organization accepts the terms, and then realizes later that it can’t comply, it should first ask the donor for written permission to use the gift for another purpose. If the donor doesn’t agree, you should refund the donation.
In any campaign where a charitable organization is asking for donations to support a specific activity, all funds raised in that campaign are considered restricted unless otherwise indicated. Unrestricted donations are generally preferable, but campaigns for a specific purpose are often more compelling for donors. It’s a good idea to make the restriction broad enough to ensure the organization can comply. For example, an organization raising funds for a new building might want to specify in the marketing material that donations made may also be used for ongoing building maintenance. That way, if the organization raises more money than necessary for the building purchase/construction, the excess can still be used for its intended purpose without having to contact each donor and request permission to modify the terms of the restricted use.
Community Impact
If a donor does not place restrictions on their gift at the time of the gift, it is considered unrestricted and available for use however the organization sees fit. A true donation is an irrevocable transfer of interest in property or funds, and charitable organizations have no obligation to refund unrestricted donations or abide by restrictions placed on donations after the gift was completed. However, as we saw in the Girl Scouts situation, refunds might be a good way to rally public support for the organization’s mission or maintain a good relationship with key donors, depending on the reason for the refund request. The timing of the restriction in the Girl Scouts case is unclear based on what has been in the news, but it seems likely that the restriction closely followed the donation. If the restriction had been placed years later, the result may have been different.
Courts have generally ruled in favor of charitable organizations when donors request a refund of an unrestricted gift, stating that the purpose of charitable organizations is to further public interest, and a return of funds to the donor could negatively impact the financial health of the organization and the public interest it serves. If an organization gives money to an individual for a non-charitable purpose (ie. returning an unrestricted donation) that could easily be viewed by the IRS as a private benefit from charitable funds, which can jeopardize the exempt status of the organization.
Donor Refund Policy
A written policy that outlines an organization’s terms for donor refunds can be a useful tool. If there are clear guidelines to ensure all donor refund requests are treated fairly, the organization can mitigate the risk of improper refunds. The policy should address the donor intent, purpose of the refund, amount of the refund and the impact on the organization’s financial health and donor relations.
The policy should also address the method for refunds. Refunds should always be returned in the same form as they were given, whenever possible. Beware of donors who want you to make a refund to a different address or credit card number. A scam a few years ago involved a “new donor” who would give $5,000, then claim they intended to give $500 and request that the $4,500 difference be refunded to a different credit card since the original one had been cancelled.
Donor refunds are a sensitive subject that should be handled on a case-by-case basis. Requests should be given proper consideration from the perspective of financial health, donor management and public opinion before a decision is made. Most importantly, document restrictions and releases of restrictions in writing, track spending to prove how restricted funds are used, and document in writing why a donation is or is not being refunded in every situation.
