How to Do Due Diligence on a Charity
- Author: Jeffrey Simmons
- Posted: 2024-10-02
The CARES Act gives taxpayers a $300 credit for charitable donations made in 2020, even if they do not itemize their deductions. As a result, there is zero downside to making charitable contributions up to this cap. However, not everyone knows how to vet a charity. There are countless stories of sham charities that contribute nothing and pay their executive handsome salaries and benefits. Here are five things to know about how to do your due diligence on charitable organizations.
What Is the Charity Asking For?
Look to see how the charity wants to receive their donations. They should offer multiple payment options. Two of them should include credit cards and cash. Accepting credit cards is one sign that the organization has at least been vetted to an extent by the credit card company. The problem begins when the charity is pressuring you to give them money by cash or gift card. This means that they want your money immediately, and there is little to no accountability or tracking for it.
Look Up the Organization's Financial Statements
A charity's financial statements should be on file with IRS and publically available for inspection. You can access them online. If the charity does not have a Form 990 publically available, this is an instant sign of trouble for a so-called charity. When you do get your hands on the Form 990, pay close attention to the composition of the board of directors. You want to see that the board is largely independent because that avoids the prospect of self-dealing. Also, try to review a copy of the charity's annual audit and financial statement. It will give you a sense of how the charity spends their money and how much of their collections actually are used for charitable causes.
Scrutinize the Charity's Expenses
Some charities end up taking a large cut off the top to pay their own expenses. This results in very little of the money raised actually going to the stated purpose of the charity. There are websites out there that will do this work for you. For example, Charity Navigator is a great website to use to learn more about a charity's financial. Charity Navigator will give each charity a score for their fundraising expenses and administrative overhead. They do the number crunching so you do not have to spend the time. You are looking for charities with high fundraising efficiency. However, these charity trackers do not cover every single charitable organization, so you may need to ask your own questions and ask for documents before you consider contributing.
Talk to Charity Representatives
You can also ask the difficult questions over the phone or in person in a conversation with the charity's representatives. If they will not make someone available to talk to you to answer your questions, it is the first sign that something is wrong with the nonprofit. It would show that they have something to hide. Make sure to ask very specific questions, and pay close attention to the answers that you receive. You are looking for specific answers to match your questions. The charity's representatives should have an intimate knowledge of the structure of the charity along with their financials. They should talk to you for as long as you want, giving you answers to all of your questions.
Do a Google Search
General awareness will also help you screen out charities that are a scam. There will be some news coverage if the organization has been involved in ripping people off or if they have very high expenses. These things always find a way to come to light eventually. If you are not able to find anything about a charity when you do a web search, that is another sign of a problem. Transparency is always the best thing, and if a charity is opaque without much coverage, it is a sign to stay away.
We are not saying that you need to become an expert in every single part of the charity's business, but you need to take the time to do your homework. This means that you should never give over the phone when you are cold called by the charity. Take their contact information and get back to them after you have had the time to do your own vetting. This will spare you from the risk of getting scammed by bogus charities.
