In our daily operations, we come across and partner with quite a bit of nonprofit organizations. We also come across a lot of people who visit us and are eager to support us by making personal donations. Yet, we also find these supporters are not always asking the right questions. These donors are well-meaning and very appreciated by us, and we’re glad to offer an opportunity for them to direct their charitable gifts into our organization, where it goes to what we believe the best use. Still, we see the song-and-dance story of the organization outweighing the meat behind the scenes. (It’s a good thing we’re good at both!) Both, in fact, are crucial to a nonprofit’s success.
From our experience, we have some advice to offer potential donors, whether those donations are for us or for another organization.
Before we start, a great watchdog resource for donors is GuideStar. Not only does it provide assistance for such things as “questions to ask”, but you can also search any IRS-registered organization (see #1 below for delineations of “nonprofit organizations”). Here’s the one for us! (It looks like they haven’t updated the info since the year ending 2010.)
Since, in this scenario, you are considering directing your hard-earned money into a well-meaning organization, it is most prudent to do some research on your own. You are, in effect, a grantor. Grantors typically and regularly ask for the type of information we recommend. Here’s what we’d suggest:
1. Ask the organization for proof of their non-profit status. For charitable organizations, the letter they should return to you is an “IRS designation letter”, which will state that the organization is designated as a 501(c)(3) charitable nonprofit organization. You can even check for yourself online at the IRS website if an organization’s status is current. Here’s ours!
A soccer team selling donuts outside the grocery store, for instance, may very accurately describe themselves as a “non-profit.” In this sense, they mean the income they bring in through game ticket sales is used to further the team by buying, for instance, equipment and performing field maintenance. In the end, the money after expenses (assuming there is some left) does NOT go to the coach or any one person or family. This organization would not require to be registered with the IRS, and therefore is not regulated to more likely assure appropriate use of funds. It’s not that you shouldn’t buy the donuts at their fund-raiser.
The point is that declaring yourself an agent of a nonprofit does not necessarily mean that is the legal and organizational reality. An IRS-designated charitable 501(c)(3) non-profit organization simply means it is “organized and operated for purposes that are beneficial to the public interest” with the organization’s income (through grants or fees-for-services) used not for the benefit of the owners or key employees (or key employees’ families). These organizations do not pay income or sales taxes (but still pay some taxes such as employment taxes).
2. Ask to see their financial records. You may perceive this as obtrusive at first thought. But requesting copies of the organization’s three most recent Form 990s is not an unrealistic request (every major grantor already requests both the IRS letter and financial records). The willingness (or not) and timeliness (or not) of the organization to provide this information should tell you a lot about the organization. In addition, the Form 990 itself in most cases has a lot information, including where the organization receives money from (including names of major donors and amounts given) and the compensation of key staff and board members. Note: organizations that have gross receipts of under $200,000 and total assets at end of year of under $500,000 are able to file the 990EZ (short form), which requires less information to be disclosed. In addition, organizations recording under $50,000 in gross receipts in the tax year are able to file the 990-N (AKA e-Postcard), which simply declares the receipts are under the maximum allowed and the organization is still operating. If you receive a 990EZ or 990-N, you may wish instead to request a “profit and loss statement” and/or “balance sheet” for the most recent years. You shouldn’t feel the organization is any less qualified to receive your donation if the full Form 990 is not available; for instance, our Habitat for Humanity affiliate files the 990-N. But, you should be aware those organizations are required to reveal less information than larger organizations. Even still, it’d be safe to say that due to the size of the organization a higher percentage of your donation goes directly to programming.
3. Look for accountability and transparency. According to most expectations, effective organizations should spend 75% on programming and 25% or under on fund-raising* and administration fees. Never assume the IRS tracks the financials of an organization (in fact, they only may do so during an investigation). Similarly, don’t assume other donors/grantors are tracking their donations either. Many foundations that donate to organizations don’t have the time or know-how to investigate results of the grants they provide; most often in the case these foundations take the word of the organization.
Many organizations internally prepare annual reports that they post on their website or are available by request. These often highlight the achievements of the organization in the past year with feel-good photographs along with graphically presenting financial information. Look for statements like “out of every dollar, 93 cents goes directly to the people we serve.” Then, take it a step further and investigate that number deeper. How does it compare to similar organizations? How does the organization determine if an expense is direct or not? Be sure to take this report with a grain of salt; it is, after all, in most respects a brief overview and marketing piece. But, with this in hand, you should feel confident to ask more detailed questions. Beware of creative wording. An example would be if you sought to support the search for a cure to cancer. In this case, “cancer awareness” becomes distinctly different than “cancer research”.
*Here’s an example of a giant red flag: SPCA International’s program “Baghdad Pups” raised $14 million in 2010 yet spent only 3.5% on grants to animal shelters and to bring back stray war zone animals (why strays anyway?). The rest was spent on paying a single vendor to fund-raise.
Beyond these three most important suggestions resulting in tell-tale results, we agree with GuideStar that you should spend a lot of time on the organization’s website. Look for listings of board members, key employees, and advisory board members; look for postings of financial information; find out information then follow up with an in-person visit or phone call. Ask direct questions and expect direct answers. Most nonprofit organizations started with a defined need and emotionally-engaged torch-bearer. Beware of emotional stories that serve to distract you. The key staff deals with the programming and finances every day; there would be no reason the organization’s representatives would be unable to provide prompt and detailed responses.
Another good resource for larger organizations is Charity Navigator. This website also allows for free search of charities and provides tips to donors.
We hope this can be a solid start towards you becoming an informed donor. We welcome your questions regarding our organization.
Below you’ll find links to pages on our website that discuss disclosures we discussed above.
Key staff (Epicenter) and board members
PACT’s IRS Form 990 for 2011, 2010, 2009
FY 2011-2012 Profit and Loss Statement for Epicenter division alone
Epicenter 2011 Annual Report
FY 2011-2012 PACT Status Report presented to Green River City Council