A donor asked for a refund. Now what?

What would your development staff do if a donor requested his or her donation be refunded? Requests for refunds are not uncommon, both for legitimate and fraudulent purposes. Whatever the situation, having a written plan in place puts your ministry, school, or college in a better position to respond appropriately.

Scam or legitimate request?

Some requests for refunds are scams. If you examine the details of a donation request and determine it to be fraudulent, report it to the applicable law enforcement agencies. If you conclude that the request is legitimate, consider the facts as you move forward.

Understand the different types of donations

Donations typically can be divided into two types:

Undesignated gifts – These donations are given for general purposes and, in most cases, are considered unconditional gifts. Which means a donor does not generally have a legal right to demand the donation be refunded.

Designated gifts – Sometimes, donors give gifts on the condition that the funds only be used for a specific purpose or with certain restrictions. For instance, a school alum may offer a large donation solely to help build a new athletic facility. If your organization has no plans to use a donation for its designated purpose, you may choose to decline the gift. If your organization accepts a designated donation but later cancels the specified project or decides not to use the gift for its designated purpose, the donor may have a right to a refund. Richard Hammar’s article, Refunds of Charitable Contributions, provides descriptions of these concepts.

Determining the type of gift is a key part of the refund review process. In many cases, the type of gift will dictate your organization’s response—but not always.

Develop a policy

There may be situations where your organization chooses to return a donation, even when a refund is not required. For example, an alum could make a large undesignated donation and then get laid off at work or diagnosed with a chronic illness.

To prepare for this possibility, develop a written policy that details the process for handling refund requests. Your policy might include:

  • A requirement that initial refund requests be submitted in writing.
  • The steps you’ll take to investigate for fraud.
  • A description of the decision-making process, the factors that will be considered, and the definition of who has decision-making power. For example, the donor may be required to present his or her appeal to the board of directors, the board could vote on whether to refund the donation, and other necessary steps. The policy should encourage decision-makers to consider each individual situation and the precedence a decision might set.
  • Addressing the tax implications of a refund. If your organization initially issued receipts acknowledging a donation, you’ll likely need to send amended receipts indicating that the donations were returned and the donor’s total donation for the year was reduced by the amount which was returned. Failure to do so would potentially indicate that the return of donations was instead a payment or benevolence to the donor. It’s also a good idea to obtain a signature from the donor stating the money was returned and that he or she is responsible for filing an amended income tax return if required.

As with any organizational policy, have your refund policy reviewed and approved by a local attorney. An attorney can help ensure the policy follows all applicable laws. Once the policy is approved, be sure to apply it consistently across each refund request.

More Resources from the Safety Library

Posted September 2021

The information provided in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.

 

 

Posted August 2021

2024 Brotherhood Mutual

2024 Brotherhood Mutual