With all the charity horror stories in the news, how do you know if a charity is a scam or spends a huge amount of its donations on raising money and paying its staff?
It’s actually not too hard to do quick research on most charities. There are five sources of information about many charities: Guidestar, Charity Navigator, the Combined Federal Campaign (the government's on-the-job charity drive), the Better Business Bureau's Give Wisely website, and Charity Watch.
- The basic source of information about nearly every charity in the country is Guidestar.org. For years it has received the annual tax forms that charities file with the IRS (called 990 reports).
You can find out if a charity is a “501-c-3” public charity (which means donations to it are tax deductible) by going to the Guidestar.org website. At the top you can enter the organization’s name. You can do this without registering with the site, but you’ll get more information by registering, which is a very simple process. You’ll get email from Guidestar but it isn’t overwhelming.
Once you’ve entered the organization’s name, you’ll get a list of possible matches. Many charities have very similar names. It’s important to make sure you know the exact name of the charity you’re researching. If you’re not sure of the exact name, sometimes knowing the state in which it operates will help.
Click on the organization’s name. Then click on “Tax Forms (Forms 990)” on the right side. Click on the most recent year. The 990 form can be very long and offputting. But you can learn a lot by focusing on just a few pages, as we explain (How to read a charity’s 990 tax form).
This includes the organization’s total revenue over the most recent two years, its total expenses, what it pays its highest compensated employees and contractors and how much it spends on overhead (management plus fundraising expenses).
You can also buy a Guidestar report on a particular charity, but that costs $125 per report. If you’re thinking about making a very large donation or grant to a charity, buying a report may make sense. But for most of us, the free 990 report can tell us much of what we would like to know.
- Another source of information about more than 8,000 charities is CharityNavigator.org. This nonprofit organization has examined the accountability and transparency of many charities, mostly national and international charities but now some local charities as well.
Charity Navigator gives each charity a one to four-star rating. You can read a free report on any charity it has reviewed. But while it has now looked at more than 8,000 charities, this is still a very small percentage of all public charities, which totaled nearly 1.1 million in 2012.
You can start by putting in the organization’s name in the search box at the top of the home page. If it doesn’t come up, that doesn’t mean the organization is not a public charity. It just means it hasn’t been examined by Charity Navigator.
You can also search for charities reviewed by Charity Navigator by clicking on one of 11 categories (Animals, Arts, Community Development, etc.).
Its reports focus on two areas: a charity’s financials and its accountability and transparency. It tells you the charity’s fundraising and administrative expense percentage. It tells you if it has independent board members and a written conflict of interest policy, among other things.
Charity Navigator has a complex system for awarding points for each factor it examines. In relation to financials, it focuses on seven “metrics” (such as “primary revenue growth”). In relation to accountability and transparency, it focuses on 17 metrics (such as “process for determining CEO compensation”). Each metric is assigned a certain number of points. All of this is translated into a one to four-star rating for each charity.
As you might expect, not everyone agrees with the way Charity Navigator rates charities. It’s been the subject of a lot of controversy the past few years. Some think it focuses too much on a charity’s finances and transparency rather than what it is actually accomplishing, which is a much tougher thing to measure. Recently, Charity Navigator changed its criteria for reviewing a charity's finances. The biggest change is that it now looks at a charity's finances for the past three years, not just one year. Most think this is a good change: sometimes the timing of one large gift or grant can greatly change a charity's overhead percentage in a particular year.
While Charity Navigator's ratings still don't address what a charity is accomplishing, they do sometimes put a spotlight on charities that appear to fall short on the issues of accountability or finances. Recently it examined the Wounded Warrior Project, a young charity that has had phenomenal growth, raising questions about the amount the charity was actually spending on fundraising. Soon we’ll be reporting more on Charity Navigator and on the Wounded Warrior Project controversy.
- Another way to screen charities, especially many local charities, is to focus on those that are part of the federal charity drive, the Combined Federal Campaign. All these charities must meet 10 accountability standards, such as being recognized by the IRS as a public charity and having an annual audit. All charities on this website must meet these standards.
Even if you don’t work for the government, you can search “CFC” charities by going to the national CFC website. If the charity comes up, you know it has met the CFC’s basic standards. You can get basic information about more than 20,000 charities, including a short description of what they do and the percentage they spend on administration and fundraising. Most are local charities, which are seldom reviewed by national rating services such as Charity Navigator. (When you do a search, do not use apostrophes. For example, use “A Childs Hope Fund,” not “A Child’s Hope Fund.)
- Still another source is the Better Business Bureau’s Give Wisely website: Give.org. It has reports on 1300 national charities, looking at whether each charity has met 20 standards that cover Governance and Oversight, Measuring Effectiveness, Finances, and Fundraising and Informational Materials. Charities that meet all 20 standards can display the BBB’s “Charity Seal” of approval, though to do so they must pay a licensing fee.
Many local Better Business Bureaus rate local charities (more than 10,000 local charities have been rated). You can find a link to local and statewide BBBs that have rated local and statewide charities.
To find out if a national charity has been rated by the BBB, you can search on its name or go to an alphabetical list of all 1300 charities.
- A very useful source of information -- though only for 600 national charities -- is Charity Watch, which calls itself "America's most independent, assertive charity watchdog": CharityWatch.org. To its credit, Charity Watch raised questions about Planet Aid, a large international charity working in Africa, before a recent Center for Investigative Journalism report raised big questions about this charity, which has yellow clothing donation boxes all over the country. However, only some of Charity Watch's reports are available to the public. To see all of them, you have to pay $50 for an annual membership.
Charity Watch tries to go beyond simply examining a charity's tax returns, instead also looking at its audited financial statements. It explains that "audits often include information" that is not reported on a charity's tax return.
Charity Watch also doesn't accept that direct mail and telemarketing expenses can be considered at least in part as program expenses. Instead, Charity Watch assumes that all direct mail and telemarketing expenses are fund-raising expenses. In many cases, this change greatly increases the percentage a charity is spending on overhead.
Charity Watch's alert about Planet Aid concerned how it allocates its expenses for collecting and processing donated clothing. The charity said these expenses were part of its program, not its fund raising, even though the donated clothing -- often sold in Africa -- was generating a lot of money for the charity ($41 million in 2014). Planet Aid said these expenses constituted its "program" because it also has a recycling mission. Charity Watch believes that, given the value of used clothing, most of the clothing given to Planet Aid would not end up in landfills but would instead be given to other charities or taken to local recycling centers.
Charity Watch also focuses on another tactic used by some charities, which declare the value of donated goods, such as medications or food, as part of a charity's expenses. This in turn lowers the percentage the charity spends on overhead. If donated goods only constitute some of a charity's program expenses, this isn't a problem. But Charity Watch believes these donations are sometimes overvalued and that they constitute a very large percentage of some charities' total program expenses.
All of these rating services provide useful information. They help you know that you’re not giving your money to an organization that will spend most of it on large salaries and fundraising expenses. But despite the many media stories about charity scandals, the vast majority of charities are very responsible about how they use their resources.
There are many other ways to decide which charities to support other than whether it gets a good rating from a charity rating service or has very low overhead. For more on how to decide about which charities to support, see Don’t assume that efficiency equals effectiveness.