The best way to determine if your donation is used in a timely and effective manner and by a legitimate charity is to do your homework before making a charitable contribution. Here we review some resources and best practices to help you know your gifts are being used as you intended.
When a natural disaster or emergency strikes, many open their hearts and wallets, wishing to support relief efforts that provide aid and assistance. Determining which charities will use your donation effectively, however, is not a simple task. The following are factors to consider and best practices for making charitable donations.
In the event of a natural disaster or emergency, your first instinct might be to find a way to support relief efforts that provide aid and assistance.
Do Your Homework
Emergencies and disasters bring out the best in people and, unfortunately in some cases, the worst. It is not uncommon to receive solicitations from organizations you may not be familiar with in times of need. In fact, even during the best of times, weeding through what can seem like an endless array of charities can be a bit daunting. There are over 1 million registered with the Internal Revenue Service (IRS). The best way to determine if your donation is used in a timely and effective manner by a legitimate charity is to be proactive and do your homework before making a charitable donation.
Donors can research a charity before donating by reviewing the charity’s authorized website. Consider a charity’s programs, track record, size, and capacity. Determine if the organization provides the types of services and support needed for this emergency or disaster; if they provide services in the geographic locale requiring aid; and if the organization is an IRS-qualified 501(c)(3) charity or a religious organization. If you are uncertain of the answers to these questions, contact the charity. There are also a number of independent organizations and government agencies that can provide rating and additional information to help you make the best decision.
Charity Review Resources
Independent assessments of charitable organizations and tips on charitable giving are available at the following:
- Charity Navigator, www.charitynavigator.org, provides resources and ratings on approximately 9,000 nonprofit organizations based on financial health and transparency.
- Charity Watch, www.charitywatch.org, rates approximately 600 charities that have received over $1 million annually in public support and have been in existence for a minimum of three years. It also seeks to expose nonprofit abuses and advocates for donors.
- GiveWell, www.givewell.org, provides resources and ratings of nonprofit organizations, reviews a smaller number of charities, and assesses programmatic activities.
- Guidestar, www.guidestar.org, provides tax returns and financial information on over 1.8 million IRS-recognized tax-exempt organizations.
- Better Business Bureau's Wise Giving Alliance, www.give.org, evaluates approximately 1,300 national charities based on 20 standards.
There are a number of government resources to help prevent fraud and help donor relief efforts.
- IRS, www.irs.gov/charities-non-profits
- The National Center for Disaster Fraud (NCDF), www.justice.gov/disaster-fraud, was established by the U.S. Department of Justice in response to the high incidence of fraud surrounding relief efforts for victims of Hurricane Katrina. Disaster fraud generally includes fraudulent charitable solicitations, price gouging, contractor and vendor fraud, property insurance fraud, and forgery.
- Donors can also check with the state regulatory authority for nonprofit organizations, usually the state attorney general or bureau of charitable organizations.
Boots on the Ground Theory
A best practice is to support established organizations with experience and a track record of providing the support services needed and in the affected area. These organizations typically have the knowledge and infrastructure to provide effective services. Additionally, they will likely have relationships with local government and other nonprofits to help provide accurate information and better coordinated resources.
Give Directly to Charity
Writing a check directly to the organization or donating on its authorized website are the most effective ways to be sure the charity receives your donation. Be cautious of telemarketers who often receive a portion of donations as a fee for their services. You want your full donation to go directly to the charity, not a professional fundraiser. When giving online, verify you are truly on the charity’s authorized, legitimate website. Most charities’ websites addresses end in .org.
Scam Alert: A common scam is the creation of fake web pages for legitimate charities, often using names similar to the charity’s name. According to Charity Navigator’s Tips for Giving in Times of Crisis, over 4,000 bogus fundraising websites were created to steal the identity and donations of unsuspecting donors in the aftermath of Hurricane Katrina. The organizations listed on the Charity Review Resources and Government Resources sections above, provide resources to review and assess charities.
Make Sense with Your Cents
Most charities request unrestricted financial support in the immediate aftermath of an emergency. This means the money you donate may be used for another purpose. Many charities establish funds to respond to specific disasters and emergencies.
If you prefer your donation to be allocated to a specific relief effort, specify it. If you want to support a specific purpose, such as animal welfare or caring for senior citizens, specify that as well.
Confirm the charity can use the funds for that purpose, especially if it is outside the scope of the charity’s normal services.
If tangible items are needed, charities will typically list these items on their website. It is best not to send or donate tangible items unless requested.
Think Both Long- and Short-Term Needs
Consider the likely duration of recovery efforts when deciding how to support relief. Donations are typically high in the immediate aftermath of an event when critical, immediate and often lifesaving help is needed. As stated by William M. Paton, author of Philanthropic Granting for Disasters, “Over a third of private giving is done … in less than the first four weeks of a sudden disaster and two-thirds within two months. This giving stops almost completely after five or six months.”
Providing support for longer-term needs can have significant impact. Depending on the emergency, it may take years to recover. Homes, businesses, schools, and infrastructure take years to rebuild. Many charities will have funds allocated for longer-term relief efforts.
Before donating, ask the organization how they will communicate the status of programs and services you are supporting. Most charities provide donors with periodic updates. Depending on the size of your donation, the charity may provide more frequent and detailed reports. If not, request them. Additionally, donors should periodically review the charity’s website to track their activities and progress.
The simplest and least problematic way to support emergencies and disaster relief efforts outside the United States and its territories is to give via a U.S.-based charity with international operations. IRS rules and restrictions affect the ability to deduct charitable contributions to non-U.S. organizations. Additionally, some countries impose restrictions on foreign aid and funds entering their country. Some countries may levy taxes and fines on the organizations accepting certain foreign donations.
If a foundation or individual is considering making a donation directly to a foreign charity, legal counsel should be consulted as the IRS has specific, restrictive rules in addition to individual country restrictions. Some donor-advised funds make grants to foreign charitable organizations with limitations. It’s important to confirm international grant-making policies and restrictions with the donor-advised fund sponsor.
Substantiating Your Donation
If you will seek a charitable deduction for your donation, you must comply with IRS recordkeeping requirements. For donations of less than $250, the IRS requires the donor maintain a record of the donation. This record can be either a written communication from the charity or a bank record of the transaction. The record must contain the name of the charity, date, and amount of the contribution.
If your contribution is over $250, you must obtain a written acknowledgement from the charity referred to as a contemporaneous written acknowledgment.
This written acknowledgment must include the name of the charity, the date and amount of the contribution and specify if the charity provided goods or services in exchange for the contribution. If goods or services were provided, the written acknowledgment must include a good-faith estimate of the value of those goods or services.
What is Crowdfunding?
Crowdfunding: "the practice of obtaining needed funding (as for a new business) by soliciting contributions from a large number of people especially from the online community.”
The use of crowdfunding is booming and is commonly used to aid victims of emergencies and disasters. In 2015, it is estimated over $34 billion was raised worldwide for both for-profit and nonprofit ventures via crowdfunding. Crowdfunding is a quick and simple way to raise funds when needed. However, there are some real risks, starting with the fact that anyone can easily create a crowdfunding fund. Additionally, these sites and funds are not regulated.
It may be difficult or not possible to confirm what happens to your money or how it is managed.
The use of crowdfunding raises particular concerns when charitable causes are involved. Charitable solicitation laws in many states do not yet specifically address solicitations via the internet, mobile technology, or crowdfunding. The IRS has provided little guidance.
Donors must be especially diligent and do their homework to understand who their contribution is benefiting and the resulting tax consequences if donating to a crowdfunding fund. There are several factors to consider before donating; the first and most critical is a careful review of the fund’s terms of service. Questions to ask include:
- Is the sponsor of the fund a charity or a third party?
- If the sponsor is not a charity, has the charity authorized the sponsor to raise funds on their behalf? Confirm with charity.
- Who is the beneficiary of the fund?
- When will funds be available to the beneficiary?
- How much of the money reaches the beneficiary?
- Who is controlling the money?
- What are the fees involved and how are they paid?
If the beneficiary of the fund is not a qualified charity, there may be gift tax consequences to the donor and income tax consequences to the beneficiary. There are specific circumstances when direct aid to victims of emergencies and natural disasters is allowed without tax consequences. Potential donors should contact their financial advisor with questions. Do not rely on a crowdfunding site for tax advice.
The best practice for charitable giving in an emergency or natural disaster is to be proactive, do your homework, and know the charity to which you are donating. Effective due diligence benefits both you and the cause you are supporting.
For more information, please contact your PNC advisor.