Charitable Giving's Efficiency Problems

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Charity golf outings can also be tricky. Cindy Morgan, an actress who was featured in the 1980 comedy Caddyshack, organized a celebrity tournament in 2006 to raise money for Illinois families of soldiers deployed in Iraq—but ended up losing money. According to court documents obtained by the Chicago Tribune, vendors sued Morgan for nearly $100,000 in unpaid debts. Morgan, who says the suits have since been resolved, says that in hindsight, she should have signed up corporate sponsors and other donors before announcing the event. "It's important that you have more than just passion," Morgan says. "You have to treat this like a business. It was a real eye-opener."

Such experiences illustrate the value of studying a charity's finances before making a financial donation. One place to start is the Web sites of independent watchdog groups, such as Charity Navigator and the Better Business Bureau's Wise Giving Alliance, which provide tips for donors as well as lists of the most financially "efficient" charities. Charity Navigator includes studies of different charities. It also ranks every charity in its database, giving each group one to four stars.

The Wise Giving Alliance gives visitors to its Web site a list of the benchmarks that a well-run nonprofit should achieve—such as spending no more than 35% of contributions on fund-raising. It also provides individual evaluations of charities, such as whether a charity meets all of the Alliance's 20 standards of accountability.

Check Their IRS Filings

If you'd simply like to peruse a charity's IRS forms (which a charity must file to qualify for nonprofit status), GuideStar will provide each charity's most recent IRS 990 forms, which are filed annually, to individuals who complete the free registration process at its site. IRS filings older than three years are available for a fee.

Be forewarned: Many of the 990s can be voluminous—a typical one for a large charity can run 30 to 60 pages. But on line 1 of the first page, you'll find total contributions during the past year, and total fund-raising expenses show up on line 15. At its Web site, GuideStar provides a tutorial on how to interpret the tax filings. And if you don't find the forms for a particular charity at GuideStar, you can ask a charity, in writing, to send you a copy of its Form 990 filings for the past three years. Under law, all nonprofits that derive a significant portion of their revenue from outside donors must provide copies of 990s to the public on request.

For their part, some charity executives say would-be donors should be careful when comparing the tax filings of various nonprofits, because not all groups use the same accounting methods. For instance, the St. Petersburg Times reported in early June that Tampa General Hospital Foundation netted only 10¢ on the dollar on its 2006 events, but Robin DeLaVergne, the foundation's executive director, contends that it actually did much better. The reason? The foundation included in its revenue only ticket sales for charitable fund-raisers, DeLaVergne explains; additional contributions from donors went into a separate category. The foundation appears to have lost more than $32,000 on its 2007 events, but DeLaVergne insists the group actually earned nearly $675,000. "The IRS understands, but other people don't," she says. "They're really not able to look at this and get the correct picture."

Charity Navigator's Miniutti acknowledges that charities interpret IRS requirements for Form 990 in different ways—which leads outsiders to draw different conclusions. But she says the IRS is scheduled to release a new, more detailed Form 990 for the 2008 tax year, which she thinks "will remedy a good deal of the confusion."

Holden is an intern in BusinessWeek's Atlanta bureau.