How to Donate Wisely and Avoid Charity Scams

The COVID pandemic, and now the war in Ukraine, continue to significantly impact the world and pull on the heart strings of many, leaving them searching for ways to help. In times like these, the number of organizations bidding for your donations generally increases. As urgent needs present, the decision to donate may be an emotional and quick decision. In the haste to contribute, it is easy to fall prey to scammers trying to take advantage of unsuspecting donors. If you are considering making a significant gift, it is important to research the charity to ensure your donations are reaching and helping those you desire to assist.

Individuals are regularly inundated by direct mail, emails, phone calls, crowdfunding sites, and other online giving platforms all competing for your charitable donations. Deciphering the quality of a charity is difficult and complicated, but there are a few simple ways to become more informed about the organization to which you are considering donating. When choosing a charity, consider the following before donating:

Research the legitimacy of the charitable organization by obtaining the Employer Identification Number (EIN): Any legitimate US charity must obtain an EIN from the Internal Revenue Service (IRS). Before donating, ask the charity for their EIN then visit the IRS website (IRS.gov) and use the Tax-Exempt Organization Search (TEOS) tool to confirm the tax-exempt status. The TEOS tool also allows you to also search by name, specific database, city, state or country. If the charity does not have an EIN, do not give without much more research.

Request information directly from the charity. A representative from the non-profit should be able to provide information on the charity’s goals, how many have benefited, and what the accomplishments have been over the last several years. Request literature, the latest annual report and a copy of the Form 990. The IRS Form 990 Series are informational tax forms that most (but not all) nonprofits must file annually. The form provides details about the organization’s finances and activities, including grants, fundraising fees, program revenue and employee salaries. Other helpful information can be found in the mission statement, the audited financial statements, and a list of the board of directors. These details are important to review, but charitable financial reporting can be difficult to analyze for donors who do not have a financial background. There are many services that take a deep dive into the non-profit’s financial reports and offer donors assistance in determining the strength of the organization. Details regarding these services are discussed later in this article.

Utilize IRS Publication 78 to determine the classification of charity and the allowable amount reportable on an individual tax return. Obtaining a recommendation from your tax advisor is important for this step, but if you want to investigate, utilize the Tax-Exempt Organization Search tool (referenced above) to search for the charity in Publication 78 data. The information is easy to find and will help confirm the gift will be classified as a charitable donation and determine the deductibility limitation. Charitable organizations are classified differently (e.g., a public charity, private operating foundation, supporting organization, or private foundation), and the type of organization and the use of the contribution will determine the deductibility limitation. Tax-Exempt does not always mean your donation will be tax deductible. Request the charity’s tax-exempt letter which will indicate its status with the IRS. If a charity does not have this letter, you cannot confirm your donation will be tax deductible. (Note: not all eligible donees are listed in this database).

Research a non-profit using a charity rating service. Rating charitable organizations is not a simple task. There are many factors to consider and not all non-profits are required to report the same information, making it difficult to compare apples to apples. Reviewing a charity by visiting a well-known charity watchdog rating service is helpful. There are numerous options available to investigate non-profits. The services are not all the same, but for the most part, each organization rates a charity on several aspects such as mission statements, governance, audited financial statements, tax forms, annual reports and transparent communications. The following are a few of the more popular watchdog services:

GuideStar (www.guidestar.org): GuideStar lists information on every nonprofit registered with the IRS as tax-exempt, as well as data on former nonprofits. The organization states it is the world’s largest source of nonprofit information, providing data on more than 900,000 public charities, over 100,000 private foundations and nearly half a million other exempt organizations in the United States. There are two versions of GuideStar. The free version provides basic information about the charity’s mission, EIN number, and contact information. For a fee, more detailed information is provided on the charity financials and operations.

Charity Navigator (www.charitynavigator.org): This organization uses a star rating system to rate hundreds of thousands of charitable organizations. It provides insights into a nonprofit’s financial stability, adherence to best practices for accountability and transparency and results reporting. The site is easy to use and offers additional information including several Top 10 Lists for the best and worst charities and helpful tips for donors. This site is supported by public donations. The company does not accept any advertising or donations from the organizations it evaluates. Some of the information can be accessed for free. For more detailed analysis, a registration fee is required.

Give.org (www.give.org): This organization is a part of the Better Business Bureau (BBB). Their mission is to verify the trustworthiness of publicly-soliciting charities. The company completes rigorous evaluations based on twenty BBB standards for Charity Accountability addressed in four areas: governance, results reporting, finances, and truthful transparent communications. According to the website, there is no charge to charities for the assessment, and the reports are freely accessible at Give.org.

CharityWatch (www.charitywatch.org): This company claims to be the only truly independent charity watchdog in the United States. The goal of the organization is to complete an in-depth analysis of the charity finances to provide donors with a clear understanding of how their cash donations are being spent. The service reports an independent grade, determines the percentage amount spent on programs relative to overhead, and calculates the cost to raise $100. Ratings metrics, governance, transparency, salaries, analysts’ notes, articles and alerts are also provided. This non-profit is supported from public donations. It offers two types of membership options for individuals. The free option provides access to reports for top-rated charities and allows you to save charities to your personalized list, while the paid option for a $50/month tax-deductible membership offers everything included with the free version along with unlimited access to detailed reports for over 600 charities.

With nearly two million non-profit organizations to donate to, deciding which organization to support can be a challenge. There are always scammers looking for opportunities to take advantage. Fortunately, there are no shortages of good charities providing great help to those in need. With a little time and research, donors can find an organization that successfully supports their desired impact or cause. Before making any charitable gifts, contact your tax advisor and your client centric team for assistance.