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AGs, IRS Cracking Down On Crowdfunding Programs

The organizer of a crowdfunding campaign in response to a Minnesota police shooting will have to pay back $120,000, according to a settlement agreement with the Minnesota Attorney General’s Office. The funds will be distributed to local schools for paying off lunch debts of children in need, which was the original intent of the campaign.

Pamela Fergus organized an online fundraiser called “Philando Feeds the Children,” which was to raise money to pay down local students’ lunch debts but authorities allege she instead kept most of the donations.

The agreement, filed in Ramsey County District Court, also permanently bands Fergus from handling charitable funds. She will be required to make monthly payments of $200 for 20 months, then pay the balance of $111,600 by March 3, 2024, when she gains access to her retirement funds.

The Charities Division of the Attorney General’s Office sued Fergus in June 2021 for failing to properly spend all the money she raised in the name of Philando Castile. About $200,000 was raised to relieve student lunch debt for St. Paul Public Schools students but only about $80,000 was donated for that purpose. The fundraiser began as a one-semester, in-class service project for an undergraduate class taught by Fergus, a professor at Inver Hills Community College and faculty member at Metro State University, according to authorities.

Under Minnesota law, people who raise more than $25,000 or meet some other conditions must register and file specific paperwork with the Attorney General’s Office.

Castile was fatally shot by police during a traffic stop in July 2016 near St. Paul, Minn. He worked in the St. Paul Public Schools as a school cafeteria worker and often paid for lunches for students who owed money or could not afford to pay. The Philando Castile Relief Foundation, which focuses on paying for school lunch debt and addressing gun violence in the Minneapolis area, is a registered 501(c)(3) charity created in part from a civil settlement between Castile’s family and the city of St. Anthony.

The Internal Revenue Service (IRS) recently issued guidelines regarding tax treatment of money raised crowdfunding.

The crowdfunding website or its payment processor may be required to report distributions of money raised if the amount distributed meets reporting thresholds by filing Form 1099-K. If that form is required to be filed with the IRS, the crowdfunding website or payment processor must also provide a copy of the form to the person to whom distributions are made.

Prior to 2022, the threshold to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations. For calendar years beginning after Dec. 31, 2021, the threshold is met if, during a calendar year, the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations.

The American Rescue Plan clarified that crowdfunding websites or their payment processors are not required to file Form 1099-K with the IRS or provide it to the person to whom distributions are made, if contributors to the campaign do not receive goods or services for their contributions.

If a crowdfunding website or its payment processor makes distribution of money raised that meet the reporting threshold, and contributors to the campaign received goods or services for their contributions, then a Form 1099-K is required to be filed with the IRS. If the distributions are made to the crowdfunding organizer, a copy of the form must be furnished to the organizer. If distributions are made directly to individuals or businesses for whom the organizer solicited funds, Form 1099-K must be furnished to those that receive amounts that meet the reporting threshold.

Crowdfunding organizers and any person receiving amounts from crowdfunding should keep complete and accurate records of the fundraising and disposition of funds for at least three years, according to the IRS.

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