This week, the former treasurer of a high school volleyball booster club pleaded guilty to sealing nearly $10,000 from the organization. When sentenced, she could face up to six years in prison. But this was not her first offense. In early 2013, she was arrested for embezzling allegedly $170,000 from her former employer. She pleaded guilty, and was sentenced to ten years of probation and ordered to pay more than $156,000 in restitution.
Embezzlement is a crime that is widespread among booster clubs from coast to coast. Behind each incident of embezzlement, you will find several common factors. Here are four:
The Internal Revenue Service exempts booster clubs and other nonprofits from paying taxes as long as they register as 501(c)(3) organizations. Without this exemption, booster clubs could owe 15 ~ 25% of their income in taxes.
However, this exemption has significant implications. The IRS requires booster clubs to distribute funds equally to all students, regardless of their individual participation in fundraising activities. So, is it advantageous for a booster club to register with the IRS as a 501(c)(3)?
What Should Booster Organizations Do?
Booster organizations should take advantage of the tax-exemption offered by the IRS under section 501(c)(3). The booster leader’s top financial priority is to operate in full compliance with the guidelines provided by the IRS. I am neither an attorney nor an accountant. However, I have learned these five essentials while leading a booster organization:
Last week, we saw that the IRS prohibits booster clubs and other nonprofit organizations from operating with individual student accounts. Instead, booster clubs must operate from one general account, and distribute funds to benefit all students equally. Now, let’s take a moment to consider why.
The IRS Generates Revenue for the Federal Government
The IRS’s primary function is to generate revenue for the federal government. Since section 501(c)(3) exempts booster organizations from paying taxes, the IRS leaves a considerable amount of revenue “on the table.” Without the exemption, you could owe 15 ~ 25% of your organization’s income in taxes. When you think in these terms, the IRS’s stringent guidelines begin to seem more reasonable.
But it doesn’t stop there. Let’s illustrate additional tax implications associated with student accounts. Consider that a booster organization sets a fair share of $300 per student. Tyler’s family writes a $300 check to satisfy his fair share at the beginning of the year. Megan, on the other hand, works fundraising events through a partnership with the local university. Throughout the course of the year, Megan earns enough through fundraising to satisfy her fair share.
Perhaps the greatest challenge you’ll face as a booster club leader is achieving annual fundraising goals. You’re always seeking new ways to motivate students and parents to participate in fundraising activities. To hold each family accountable for their “fair share” of the overall fundraising goal, many booster clubs have implemented individual student accounts. The trouble is, this violates IRS guidelines for nonprofit organizations.
Leadership Essential #15: A booster organization must distribute funds equally to all students, regardless of their individual participation in fundraising activities.
This excerpt from my book, The Booster Leader, 35 Leadership Essentials for a Thriving Booster Organization, explains why the IRS does not allow nonprofit organizations to operate with individual student accounts. Additionally, you’ll see the severe punishment the IRS dealt to three booster clubs for operating with individual student accounts.