Published January 13, 2015
Here's how to make sure your donations are put to good use, instead of funding some executive's bloated salary.
You probably know that donating to charity can be good for your wallet. Gifts made to IRS-approved charities offer generous tax breaks (within certain limits).
But in all likelihood your donation is about more than just your tax bill. It's also about assisting in a cause you believe in. And chances are that cause isn't paying some executive's bloated salary or padding some huge endowment fund. Sadly, a lot of charitable contributions are used for exactly that purpose.
Even the slow-moving IRS recognizes there's a problem: It's beginning a campaign to audit charities that appear to be mainly interested in lining their leaders' pockets and plumping up their investment portfolios. That's welcome news, although it will probably take years to bear fruit.
But there's no need to wait. You can already do much of the reconnaissance needed on your own just by using the Web. Trust me, just a few extra steps will help you make much better decisions about which charities really deserve your money. Let me warn you: What you discover may infuriate you. But ultimately, you may just come up with a new list of worthy charities you never would have previously considered.
1. Look for an IRS-Approved Charity
Your first step is to verify that the charity is an IRS-approved nonprofit (tax-exempt) organization.
Tax-exempt status is good for two reasons. First, it means your contributions are tax deductible. You generally cannot write off donations to non-IRS approved organizations. (So forget about deducting that contribution to your kid's soccer team.) Second, all IRS-approved charities must jump through at least some hoops to become eligible to collect tax-deductible contributions. And while the IRS is far from perfect in weeding out bogus organizations, gaining tax-exempt status is a little like earning the Good Housekeeping Seal of Approval.
Tax-exempt charities are listed in IRS Publication 78. The list is updated continuously and is available online. Organizations that fail to supply the required annual tax returns are delisted. Ditto for the few that manage to lose tax-exempt status due to exceptionally bad behavior.
Purported charities that don't make the cut with the IRS are very unlikely to deserve your support (unless we are talking about your kid's soccer team again). So remove them from your list and move on.
2. Use the Internet to Refine Your List of Candidates
The next step is to collect some basic information about charitable purpose, efficiency of operations and financial strength. Do this to make sure the charities you're considering: (1) actually do what you think they do; (2) do it with some degree of skill and prudence; and (3) are fiscally sound enough to be around for a while.
The Web site Charity Navigator can be a huge help here. The site (which is itself a tax-exempt charity) rates over 3,000 of the largest charities by measuring the percentage of revenue spent on executing programs and services (the higher the better). Charities are also evaluated based on their financial strength. Each organization is then given a numerical score and a star rating (four stars is tops). Helpfully, Charity Navigator also gives you the scores and star ratings for some other charities that are considered to be in the same peer group as the one you're looking at.
One downside of Charity Navigator: You can't use it to find information about smaller local charities. Also, in my opinion, Charity Navigator's ratings can sometimes be misleading (more on that later). But it's a good place to start.
3. Check Out the Charity's Form 990
Believe it or not, the very best way to find detailed financial information on charities is to comb through the returns most of them are required to file annually with the IRS.
Specifically, most charities file what's called a Form 990 (Return of Organization Exempt From Income Tax). These returns are public information, which is good news for potential donors. (However, churches, church-related groups and very small charities with under $25,000 in annual revenue are not required to file Form 990, which is why it's often difficult or impossible to gather reliable financial information on these entities.)
One way to access charity tax returns is through the Web site GuideStar. This site collects financial data, including Forms 990, from a whole bunch of charitable entities. To find the Forms 990 for a particular organization, you must register (it's free) and then conduct an "Advanced Search." It helps to have the organization's exact legal name (or close). For instance, I found out through trial and error that the official name of "Harvard University" (the famous institution in Cambridge Massachusetts) is actually "Harvard College." Who knew?
Once you've gained access to the most recent Form 990 filed by the charity in question, you may be amazed at all the things you can learn. Of course, since we're talking about IRS forms with a bunch of numbers on them, it's not easy going for the uninitiated. Here's a guide:
First, take a look at the number on Line 18 near the bottom of Page 1 of Form 990. It shows the organization's excess or deficit for the year. In essence, this is the outfit's operating profit or loss. Please don't be naive enough to think tax-exempt "nonprofit" organizations are somehow prohibited from making a profit. Nothing could be further from the truth. Many large charities earn very hefty annual profits because revenues (from donations, income from investments and so forth) greatly exceed expenses. How you feel about "nonprofits" being hugely profitable is entirely up to you. As an old-schooler, I personally like to see expenses that are pretty darned close to revenues.
On Line 21 of Page 1 of Form 990 (the very last line on that page), you'll find another important number. It's the charity's net assets (total assets minus total liabilities) as of the end of the year in question. This figure is the organization's net worth as of that date. You may be surprised to learn it can be in the billions.
For instance, the aforementioned Harvard College had a net worth of $21.3 billion as of June 30, 2002. That's a lot of dough! Once again, how you feel about charities being worth billions is for you to decide. Personally, I don't feel very good about it. But that's just me.
The next stop on your exciting tour of Form 990 is Page 2, where you'll find Part II, "Statement of Functional Expenses." This revealing little schedule tells you how much was spent on various categories for the entity's program services (the activities for which the charity allegedly exists) and for general and administrative costs (better known as overhead). Obviously, what you would like to see here are program expenses that appear to be consistent with the charity's stated purpose. You would also like to see modest spending on overhead. That said, don't be shocked if you see the opposite.
For instance, in its fiscal year ending on June 30, 2002, the American National Red Cross spent $1.16 billion on employee salaries. Spending on actual disaster relief assistance for individuals was only $608 million. Of that, $479 million was for Sept. 11 assistance. This spending occurred only after the media put loads of heat on the organization. During the preceding fiscal year (the one ending on June 30, 2001), the Red Cross spent $1.04 billion on employee salaries and only $149 million on actual assistance for individuals.
Despite all this seemingly damning evidence, Charity Navigators gives the Red Cross a four-star rating, largely because of the organization's financial strength (which after a point, becomes more of a negative than a positive in my view). This is why I think doing your own research is highly advisable, especially if you're contemplating major gifts.
Your next stop should be Page 4, Part V, of Form 990. Here you'll be excited to find a list of the charity's officers, directors, trustees and key employees and how much they collected in salary and related goodies. For my money, I don't want to see large numbers here. But if you look at the American National Red Cross you'll discover a whopping 4,593 employees earned over $50,000 in the fiscal year ending on June 30, 2002. Even worse, the organization's departed president collected $1.57 million in severance benefits after she was forced out in reaction to the public-relations debacle about donations after Sept. 11.
I don't mean to pick on the Red Cross here. The real point is, you owe it to yourself to become acquainted with a charity's financial practices before you give it any money. Just a little bit of extra effort can make all the difference.