Refunding Contributions to a Giver

Since contributions must be irrevocable to qualify for a charitable deduction, there generally is no basis to return an undesignated or unrestricted gift to a giver. Requests from givers to return unrestricted gifts should be denied under most circumstances.

However, givers may contribute designated or restricted funds based on the anticipation that a certain event will occur. Their intent is to make an irrevocable gift that will be used for restricted purposes. For example, a ministry raises money for project A. However, an insufficient amount is raised and the ministry board abandons the project. What happens to the money that was restricted by givers for the project? If the givers can be identified, they should be asked whether they would like to remove the restriction related to their gift. Otherwise, the money should be returned to the givers. If contributions are returned to givers, a written communication should accompany the refund, advising givers of their responsibility regarding any charitable deduction that may have been taken. If the givers cannot be identified, the ministry may redirect use of the funds after making an announcement of the ministry’s intention to redirect the funds.

In some instances, after a giver makes a restricted gift to a ministry, the giver requests that the funds be transferred to a second ministry. This sometimes occurs when a deputized worker moves from one ministry to a second ministry and a giver who has given funds to ministry A asks for the money to be transferred to ministry B. It is within the discretion of ministry A to determine if the funds are retained by ministry A or a gift/grant is made to ministry B. A gift/grant by ministry A to ministry B is only appropriate if ministry B is qualified to carry out the giver’s restrictions. Each case should be reviewed on its own merits.

Ministries should have policies and procedures in place to address requests for the return of charitable donations. Significant gifts should ordinarily be returned only after a thorough review by knowledgeable advisors and perhaps after approval by the governing board.

Tax treatment for givers of refunded contributions.  In a letter to Rep. Kay Granger (R-TX), the IRS discusses the tax consequences to a giver who receives a repayment of a charitable gift that he or she made in an earlier taxable year plus interest on the repayment.

The IRS clarifies that the giver does not file an amended return for the year in which the donation was initially made. Instead, the giver must reflect the refund as gross income in the year the gift is returned and the interest as interest income. This presumes the taxpayer received the full tax benefit of the charitable contribution deduction when making a contribution to a qualified ministry.

This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.