The California Attorney General’s Enforcement Powers Over Social Welfare Organizations

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Every nonprofit in California must register with the state attorney general’s office. The purpose of registration is to assist the state’s efforts to monitor nonprofits’ compliance with the rules that underpin their tax-exempt status. Nonprofits that are organized as social welfare organizations under Section 501(c)(4) of the Internal Revenue Code can have questions about how the attorney general’s enforcement power works.

California has given its Attorney General, and specifically the Attorney General’s Charitable Trusts Section, broad authority to monitor the affairs of nonprofits in the state. The overarching goal of the Attorney General’s monitoring function is to ensure that charitable funds are used in furtherance of their organizations’ stated purpose. The AG looks for signs that an organizations’ funds are being used primarily to benefit private individuals. In some cases this can create questions about the validity of the organization’s tax-exempt status, and in extreme situations it can also give rise to charges of fraud against the organization’s managers.

The AG’s oversight role over a social welfare organization begins almost at the same time as the organization is formed. All social welfare organizations in California must register with the Charitable Trusts Section within 60 days of being organized. This registration must be renewed each year or the organization will not be allowed to carry out fundraising activities or spend donors’ money. Among other things, the renewal process requires organizations to disclose information about how the organization’s money has been spent over the previous year.

The AG will conduct audits of organizations that are flagged during its review of the reports it receives as well as other sources of information, including complaints from the public. During an audit representatives from the AG’s Legal and Audits Unit will closely scrutinize an organization’s records for signs of wrongdoing. A social welfare organization’s activities will be examined for a range of potential violations of nonprofit law, including self-dealing transactions by the organization’s leadership, or evidence that a substantial portion of the organization’s funds has been used for activities other than the organization’s stated mission.

Any organization facing an audit should seek legal counsel as soon as possible. If an audit identifies areas of material noncompliance the AG may bring legal action against the organization and its leadership, with the possibility of criminal penalties for serious violations.

The Church Law Center of California helps social welfare organizations achieve their goals while complying with state and federal requirements. We can help your organization meet its obligations to the state with the goal of avoiding the distraction of an unnecessary audit. We can also help clients work through audits to ensure that the auditors’ questions are answered accurately. Call us today at (949) 689-0437 or reach out to us through our contact page.

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