No doubt about it -- Americans are generous. Seventy percent to 80 percent of us contribute to at least one charity each year, says the American Association of Fundraising Counsel.
However, if you've ever found it difficult to figure out exactly how the organizations that solicit support are using your funds, you're not alone. Seventy percent of the people surveyed by the Council of Better Business Bureau's Wise Giving Alliance said it was hard to know if a charity is legitimate and operates ethically.
With a bit of legwork, you can determine which charities are most likely to use your contributions prudently. As a starting point, you'll want to verify that an organization actually is a charitable group. Not all nonprofit groups are charities. Many trade and lobbying organizations, for instance, are nonprofit groups, but not charities. While you can support these groups, your donations are not tax-deductible.
For more information on charities, check out these sites:
990 proofTo find out if a group is a charity, you'll want to see its Form 990. The charity files a Form 990 with the federal government. This financial report provides information on the organization's tax status and programs, and shows how it is using its funds.
Charities are required to provide Form 990 when requested, although they can charge a reasonable fee for it, says Daniel Borochoff, president of the Chicago-based American Institute of Philanthropy.
One exception: Churches, synagogues and other places of worship generally do not need to file Form 990.
Don't be misled by organizations providing what's known as a "tax ID number." These numbers do not show that an organization is a charity; they're simply IRS-required employer identification numbers. Michael Nilsen, public affairs manager with the Association of Fundraising Professionals in Alexandria, Va., says he would be suspicious of any group whose members tried to use its tax ID number to gain your support.
Also take a discriminating look at the organizations' marketing materials.
"Watch out for appeals that make you cry vs. think, or if they go on about the problem, but don't tell you what the charity is doing," says Bennett Weiner, chief operating officer with the Wise Giving Alliance. Solicitations for contributions should accurately convey the work the charity is doing.
Checking the numbersHow can you tell how effectively a group uses its resources? Again, Form 990 can help, as it shows how much the group spent on programs, administration and fundraising activities.
However, the forms can be overwhelming. Those submitted by national charities often run dozens of pages, and the charities typically have more than one.
Borochoff recommends asking for the organization's combined audited financial statement, which includes financial information on all of an organization's entities. Many states require audits from charities that receive more than $100,000 in donations.
However, charities are not required to release audits. If that's the case, you can get one from your state; typically you would contact the secretary of state or attorney general. However, this is likely to be an involved process. In addition, you may want to re-think your support of an organization that won't provide a financial statement. Reputable charities should encourage your interest in them.