In 2017, just before Thanksgiving, a heartwarming story hit the news. A young woman from Philadelphia named Katelyn McClure had run out of gas on the highway and found herself stranded. Luckily, a homeless veteran named Johnny Bobbitt happened to be nearby, and in an act of selflessness, he gave McClure his last twenty dollars to buy gas.
After making it home safely, McClure wanted to express her gratitude so she set up a GoFundMe page to help Bobbitt get back on his feet. The story spread quickly online, and the pair drew national attention. Good Morning America called Bobbitt a “Good Samaritan” and and hailed McClure for her “honorable deed.” In response to this publicity, thousands contributed to the GoFundMe, raising an incredible $400,000 for Bobbitt.
It was a wonderful story. The only problem was that it was a complete fraud, fabricated to sound sympathetic. In reality, McClure spent most of the funds on herself, buying a BMW and gambling in Atlantic City.
To be sure, these sorts of things are rare. But they serve as a reminder to be cautious when making charitable contributions. Below are eight steps I recommend to vet an organization before writing a check:
1. Status. If you don’t have prior experience with an organization, your first question should always be: Is this an actual charity? A good starting point to sniff out fraud is the IRS’s Tax Exempt Organization Search Tool, which will tell you if an organization is a registered non-profit. (Note that donations to political candidates, parties and lobbies are not tax deductible, so they won’t appear in this database.)
2. Structure. Many charities are structured as feeder organizations, collecting donations and then distributing them out to other charities. While there is nothing wrong with this per se, it does add a layer of overhead expenses, leaving less to be used for actual charitable work. So ask yourself whether this is the most efficient way to support the causes you care about.
3. Use of funds: In general, when charities raise money, they use it one of three ways: to support operations; to fund a capital project, such as a new building; or to add to their endowment. Each has its merits, but when you make a gift, think about how the organization will be using it. And, if your gift is large enough, keep in mind that you can attach restrictions.
4. Financial health: Is the organization on solid footing? If you’re not sure, check its tax return, called a Form 990. These are available publicly, and can find them in a variety of places online, including the Foundation Center website. Or, if you use a donor-advised fund like Fidelity’s, they often provide access to 990s. Note that religious institutions are exempt from filing 990s, but in lieu of that, they should provide some sort of financial report. (If an organization doesn’t offer any kind of financial disclosure, I see that as a deal breaker. I wouldn’t support an organization that refuses to tell donors how their money is being used.)
5. Efficiency: Assuming you are able to access a financial report, examine how the organization spends its money. In particular, you want to see how much is spent on marketing and executive salaries vs. actual on-the-ground charitable work. A Form 990 won’t tell you everything, but it does include executive salaries, which is often a good indicator of the organization’s fiscal habits.
6. Financial trends: What has been the trend in revenue and expenses? Are contributions growing or shrinking? And on the expense side, are expenses growing more slowly or more quickly than revenue? While the numbers may not tell you everything, you could use them as a basis for asking questions of the charity’s staff.
7. Governance: In addition to scrutinizing top executives’ salaries, look closely at their qualifications. Who runs the organization and how long have they been in place? What has been the trend in revenue and expenses under their leadership compared to prior administrations?
8. Fair dealing: In the past, I used to participate in an annual charitable event until I discovered on their Form 990 that the organization was paying out a seven-figure sum for “management expenses” to a family-owned firm. Was there anything improper going on? Maybe not—but it’s impossible to know. When charitable dollars are involved, I think it’s reasonable to insist on absolute transparency.