How can you be> sure your charitable contribution is making a difference and not simply bloating the salaries of the charity s executives? You can do your own reconnaissance on the Web. A few steps will help you make much better decisions about which charities really deserve your money. But be prepared: What you discover may infuriate you. Many charities actually put a small percentage of contributions toward their stated cause. By doing your homework, you can weed these out and you may even come up with a new list of worthy charities you previously wouldn t have 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 (again, unless we are talking about your kid's soccer team). 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 actually do what you think they do, do it with some degree of skill and prudence, and 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 more than 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). The site may also give you the scores and star ratings for charities 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. But it's a good place to start for bigger outfits.
3. Check Out the Charity's Form 990
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 Form 990, from many charitable entities. To find the Form 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, Mass.) 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, look on Form 990 for the charity 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 the same form, also look for 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. 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 the "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.
Your next stop should be at the list of the charity's officers, directors, trustees and key employees, and how much they collected in salary and related goodies also on this form. For my money, I don't want to see large numbers here.
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 in how heartily you pull out your checkbook.