Avoid Scams - How To Test Whether A Charity Is Legit

Written By
Paul Tracy
Updated January 16, 2021
Just as retailers depend on Christmas shoppers to hit their yearly sales goals, charities receive a substantial amount of their annual contributions during the holidays.
About 40% of charitable donations from individuals come between Thanksgiving and Christmas, said Sandra Miniutti, a vice president at Charity Navigator, a watchdog group that evaluates charities. That's why charities are more actively seeking donations right now and why you need a plan to make sure you give wisely.
If you choose to give your hard-earned money to a good cause, you deserve to know that it won't be squandered -- and that you aren't getting swindled. The sad truth is that scammers wouldn't bat an eye about taking advantage of your goodwill. Read on to learn how to find the facts you need before you donate.
Whether requests for money come through email or postal letters, phone calls or in person, it's important to know that the charity you're giving to is legitimate and is using the money for its stated purpose -- not spending the bulk of its budget on administration or hosting parties for big-wigs.
"I don't think donors should ever hesitate to say no" to a request for money on behalf of a charity, Miniutti said.
Instead of giving in to calls from telemarketers or getting out your wallet outside of a grocery store to give to a charity you know nothing about, she recommends proactive research before picking a few good charities you want to help during the holiday season.
While Charity Navigator and CharityWatch, another watchdog group, don't have statistics on how many fraudulent charities are scheming to take your money, they recommend asking a few questions to determine if the organization is a fake, or at least if it follows the rules by which most legitimate charities abide. Here are eight questions to ask before you reach into your pocket:
1. Does most of the money go to the program's services? If 75% of an organization's expenses are on its services, then it's doing a good job spending its money where it's needed, Miniutti said. Daniel Borochoff, president of CharityWatch, said the number can be closer to 60% going to charitable programs.
A good charity spends 15% or less of its budget on administration and 10% or less on fundraising, Miniutti said.
2. Does it raise money efficiently? According to Charity Navigator's ranking of the 10 most inefficient fundraisers -- charities that spent more than 50 cents for every dollar raised and devote more than 40% of their budgets to fundraising -- the worst offender was Heart Support of America, which had only a penny left for its charitable work for every dollar it raised. Charities must spend money to make money, but most don't exceed 10 cents for every dollar raised, Miniutti said.
3. Does it rely on telemarketers? Getting hit up for money outside of a store by a guy in a Santa suit is one thing, but a call from a telemarketer is a red flag that the charity isn't legit. Because up to 95% of the money telemarketers collect goes to their business, that leaves only 5% for the charity, Miniutti said. Charity Navigator has this advice for how to handle a phone call from a charity.
4. Is the charity open about what it does and where its money goes? Ask about how it reports results and ask for its Form 990, which federally tax-exempt organizations must file with the IRS with information on its mission, programs and finances.
"If they avoid giving it in any way, that's the first red flag," Miniutti said.
Look into whether the organization was granted tax-exempt status under section 501(c)(3) of the Internal Revenue Code by using the Exempt Organizations Select Check that the IRS offers. Some states and other groups also provide information on which charities have tax-exempt status.
5. Is the CEO's pay too high? For a charity with more than $1 million in revenue, the median pay for the chief executive officer is $130,000, Miniutti said. The average pay for CEOs of the charities that Charity Navigator evaluates is $150,000. A competitive salary is necessary to hire and keep CEOs of multimillion-dollar organizations, but it should be in line with similar-sized groups in similar work that are in the same regions of the country.
"If you're a donor and it doesn't feel right, you should be able to call the charity and ask about the pay," she said.
The CEO of the American Heart Association earns $602,529 annually, making it the worst-run charity in relation to its executive's pay. It's not a good sign if more than 40% of a charity's budget goes to costs such as fundraising and administration.
6. Does it sound like another charity? A charity that doesn't use much of its money for its stated purpose may take on a name similar to a legitimate charity so it can confuse donors, Borochoff said. The Breast Cancer Research Foundation is legit, he said, but the Breast Cancer Relief Foundation is trying to copy the name.
7. Will you get credit for a taxable donation? Knowing whether a charity is approved by the IRS is one way to know if you're entitled to write off a donation on your tax return. But be sure to get a receipt and keep it, Miniutti warned, because IRS rules are changing.
For example, if you pay $250 to go to a charity gala, IRS rules say it won't be tax deductible if the money went to pay for the dance and didn't fund the charity. The receipt must detail how much money went to costs, with the remainder allowed for tax deductions.
8. Does the charity bombard you with social media requests? Scams through Facebook and other social media are rampant during the holidays, partly because it's so easy for criminals to set up fake Facebook pages and ask for money, Miniutti said. Don't click on those requests. Instead, go directly to the charity's website if you want to give. Charity Navigator has other tips for avoiding online scams, among them not responding to email solicitations and being wary of people who contact you online claiming to be a victim.
The Investing Answer: It may be difficult to ask all of these questions of a charity to which you're inclined to donate, but at least start by looking up its tax-exempt status and asking for its Form 990 so you can see where its money goes. That's the easiest way to check if the charity is legitimate and it will help prevent you from giving on a whim when a stranger asks for money.
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