How to tell a good charity from a bad one

By Liz Pulliam Weston

"Better giving" guides purport to tell you five easy ways to spot a phony charity. Unfortunately, many of these guides are almost as bogus as the ersatz nonprofits they try to warn you against.

There often are no easy ways to tell the good guys from the bad guys. Even nonprofits that aren't outright frauds may go to great lengths to conceal how they spend their money. And the watchdogs that are supposed to help us decide typically have vastly different ideas of what's acceptable practice and what's not.

We'll get to some practical solutions to the problems, but here are just some of thorniest issues you face:

• Most charities pretend they don't fund-raise. You want the bulk of your donation to go to a charity's programs -- not its administrators or fund-raisers. To that end, the better-giving guides typically suggest you ask for the charity's Form 990, the IRS form that is supposed to detail how contributions are spent. Yet 64% of the Forms 990 studied by the General Accounting Office in 2002 listed no fund-raising expenses at all. Charity watchdog Daniel Borochoff has reviewed thousands of these forms, and he says many charities misreport their fund-raising as "program development," "public education" and other misnomers. As the public becomes more sophisticated about the need for low fund-raising costs, the charities get craftier about hiding them. "That phone call that interrupts your dinner could be called a program service," said Borochoff, president of the American Institute of Philanthropy.

• Regulation is perilously thin. The IRS doesn't audit many charities, and the staff responsible for handling 990 forms has dropped 15% even as the number of forms filed has grown, according to the GAO's report. State regulation is a patchwork quilt, and there are few restrictions on how charities spend their funds. In fact, the Supreme Court recently decided that for-profit fund-raisers can legally keep almost all the donations they get in a charity's name, provided they don't actively lie about how much is actually going to the nonprofit.

• Even the good guys screw up. Charities that have reasonable fund-raising and administrative expenses still manage to blow it now and then. Critics excoriated the American Red Cross when the charity revealed plans to divert money from its Sept. 11 fund to other causes; the charity ended up changing its policy so the money would benefit only victims and their families. The United Way also has had its high-profile embarrassments, including a CEO convicted of defrauding the charity in the early 1990s and a finance officer who recently pleaded guilty to embezzling $1.9 million to pay for quarter horses.

• Sometimes the watchdogs don't agree. The Better Business Bureau's Wise Giving Alliance says the Shriners Hospitals for Children met its standards, but Borochoff's AIP gave the charity a failing grade for continuing to raise funds while sitting on enough cash to pay for almost 14 years' worth of programs. The BBB Alliance thinks it's OK for a charity to maintain such an endowment to smooth out unpredictable swings in giving; Borochoff doesn't think a nonprofit should hit you up for money before spending what it's got. Charity monitors also disagree about how much fund-raising should cost. AIP won't give a high grade to charities that spend more than 25% on raising money, while the BBB Alliance thinks 35%, and sometimes more, is reasonable.

Do these difficulties mean that you get to sit on your wallet this holiday season? Hardly. Legitimate charities need your money, and most of us feel some obligation to give back a little of our good fortune each year.

Keeping your cash in good hands

If you have the time and inclination, there are plenty of ways to check out a charity, and I'll give you some suggestions below. If you're in a hurry, though, here's a down-and-dirty giving guide that will all but ensure you don't give money to the wrong folks:

• Hang up on telemarketers. It may seem convenient to give over the phone, but it's a bad idea in so many ways. Not only can you be easily scammed giving your credit card number to a stranger, but any charity that pays telemarketers is probably spending too much on fund-raising.

• Ignore pleas to help cops and firefighters. Oh, this piece of advice is really going to turn some cranks. But scams abound in this corner of the fund-raising world. As Borochoff points out, it's not the old days when the widows and children of these public servants were routinely left penniless. These days their benefit packages are typically some of the best around. If you really have your heart set on helping your local fire fighters or cops, be proactive: Take the time to call the department, find out if it has an official foundation or benevolent fund, and send your money there. If you want to deduct your donation, make sure you're not sending money to a union lobbying group or a fund that benefits specific people.

• Avoid car donation charities. This is another really awful idea for virtually everyone except the for-profit junkyards and auction houses that process the cars -- and that benefit handsomely from your donation. The charities receive as little as $100 per car and that great write-off you think you're getting may only serve as a red flag to the IRS, which believes too many taxpayers are exaggerating the value of their donations. Of course, you may not get a write-off at all -- only people who itemize their deductions can take a tax break from donating their cars. That means most taxpayers aren't eligible, since they take the standard deduction.

• Pick from the AIP's "Top Rated" List. The AIP is probably the hardest to please of the charity watchdogs. While you can't get its complete Charity Rating Guide online, you can see which charities received the highest grades (A+ through B).

Still reading? If you've hung around this long, you may have the tenacity needed to thoroughly investigate a charity on your own. But don't expect the process to be simple.

How you can investigate on your own

Your first step is to make sure you know the charity's exact name and the address of its headquarters. It's easy to get confused by sound-alike names. For years, I thought Save the Children was the sponsorship charity that flunked watchdog standards, when, in reality, it's Feed the Children that ran afoul of the AIP. You wouldn't want to confuse the Cancer Fund of America, which recently settled a fraud lawsuit with the state of Vermont, and the Cancer Research Institute, which gets high marks from charity monitors.

A genuine charity or law-abiding fund-raiser should be willing to send you the information you request, and most will send you its latest IRS Form 990 on demand, as well. If it balks, you can pretty much strike it from your list of potential beneficiaries.

"A legitimate charity will be happy" to provide information about itself, said Bennett Weiner, chief operating officer for the BBB Alliance. "The questionable ones won't. They just go on to the next caller."

How to get charity data quickly and cheaply

Charities are allowed to charge a nominal fee to copy their 990s. If you want a cheaper or faster look, here are a few places to try:

• GuideStar has data on more than 850,000 IRS-recognized nonprofits and posts 990 forms for many. Access to 990s is available with free registration.

• The California Attorney General has online records for many charities and commercial fund-raisers.

• The IRS doesn't have Form 990s available online, but you can write to its Ogden, Utah, service center and request them, Weiner said. While you're waiting for the report to arrive, you can check Publication 78, to make sure the charity is properly registered as a tax-exempt entity.

As I've noted, you may not get the straight scoop about fund-raising from a Form 990, but you should be able to see in general how a charity says it is spending its money -- and how much it pays its top five officers.

Borochoff also recommends asking the charity for a copy of an audited financial statement. These, he contends, are tougher to fudge than a 990, although they also may be tougher for a layperson to decipher.

What if you decide you could use some help? Here are some possible sources:

• AIP's Charity Rating Guide gives letter grades (A through F) to 500 of the better-known nonprofits and is available for $3. Send the check to the American Institute of Philanthropy, P.O. Box 578460, Chicago, IL 60657.

• The BBB Alliance for Wiser Giving has reports for more than 600 charities on its Web site. As I said, the BBB standards are often looser than AIP's, and there are no letter grades: Charities either meet the BBB standards or they don't.

• GuideStar offers financial summaries and other data to help consumers investigate and compare charities, but it is not a charity watchdog. GuideStar's position is that donors can use its databases to decide for themselves.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.