The best way for many donors to select charities to support is to obtain first-hand knowledge about them by volunteering. If you are unable to do this, you can turn to on-line charity evaluation websites like Charity Navigator, GiveWell, and GuideStar to obtain information and data on how efficiently the charities they evaluate spend the money they raise. Another tool in appraising nonprofits is to scrutinize a charity’s IRS Form 990.
It is no longer enough for charities to claim success by touting the number of clients they serve or the number of days of service they have provided. Performance matters. Terms like “social impact,” “evidence-based models,” “return on investment,” “result-orientated services,” and “performance metrics” are increasingly commonplace in the vernacular of the nonprofit sector. The vast majority of corporate and foundation funders have made it clear that charities must provide evidence of their effectiveness in order to be considered for funding.
IRS Form 990 or 900-EZ is an informational return that the majority of federally tax-exempt charities must file annually with the IRS. It provides the IRS with an overview of the organization’s mission, programs, governance, and detailed financial information. It includes a section that allows for the charity to list its accomplishments in the previous year to justify continuing its nonprofit status.
The 990 is especially important since the federal law doesn’t require nonprofits to produce any sort of standard annual report. In fact, except for special circumstances, the law does not require nonprofits to undertake financial audits by independent accountants
To secure a copy of a charity’s 990 form type in “XYZ Charity 990 Form” in the query box in your preferred search engine and you will usually find multiple ways to access the charity’s 990. Forms for 1.8 million nonprofits can be found at GuideStar (www.guidestar.org). You can also ask a charity for its 990.
Charities are required to make its last three years’ Form 990s available to a member of the public upon request, either by mail or at its principal office.
Following are some tips to help get the most out of a nonprofit’s 990 form.
1. Be on the lookout for missing blanks on key lines in the form. If something important is missing ask about it.
2. Scrutinize the charity’s sources of income. Look for a diversity of income support. Over reliance on any one revenue source is not good.
3. Be cognizant of extraordinary gains or loses. Substantial loses may be the result of heavy investments that went bad and could reflect an imprudent investment strategy or a tendency to overstate the value of real property or other tangible assets, with resulting losses when these items were sold.
4. Carefully review how the charity spends its money. Red flags should go up if less than 70 percent of funds go for programs. There can be reason for a single year aberration, e.g., up-front fundraising material for a capital program or for the purchase of new fundraising software. These should be one time, not annual, costs.
5. Beware that accounting rules allow charities to allocate a portion of fundraising expenses to program services if they claim a public education benefit. This is particularly prevalent among charities that engage in direct mail fundraising utilizing commercial fundraisers. Commercial fundraisers maybe paid a flat fee or percentage of donations collected. It is not unusual to find contracts that provide that the fundraiser will retain 50-90 percent of the net proceeds after all fundraising expenses are deducted. Obviously, this is a huge red flag.
6. Determine what the charity spends on possible compensation of officers or directors, lawyers, consultants, accountants and travel expenditures to conferences and meetings. Attention should be given to expenses that are totally claimed to be program services and no allocation is made to management and general or fundraising.
7. Beware if a charity has a negative fund balance. A continual negative fund balance will threaten a charity long-term existence.
8. Ascertain whether the charity engages in political lobbying, has unrelated business income, is related through common membership, trustees, officers, etc. to other exempt or nonexempt organizations. None of this information is necessarily bad but warrants further inquiry.
9. Review multiple years to make sure that you are not being misled by a single, atypical yearly report or an anomaly. To dig deeper you might compare the charity’s Form 990 with its annual report and audited statements.
In the end your goal should be to uncover charities that are effectively and efficiently achieving their mission and that are spending funds prudently, honestly and in accordance with all statements contained in its materials and in its fundraising appeals.
Reviewing an organization’s IRS Form 990 is not a replacement for first-hand observations, or the evaluation of individuals you respect, or the evaluations done by GuideStar, the BBB Wise Giving Alliance and Charity Navigator.
Many of the problems nonprofits address are extremely difficult to deal with, e.g., addictions, homelessness, illiteracy etc. In an article in the New York Times entitled “Two Paths for Charitable Giving: From the Head or From the Heart,” Gene Tempel, the founding dean of Indiana University’s Lily Family School of Philanthropy, pointed out that those concerned about accountability “will be most disappointed if they have unrealistic expectations on what is possible.”
Measurements should matter when it comes to charitable giving, but one needs to recognize that often times the best of intentions and efforts do not always produce results in the short-run. Sometimes failures can be a necessary step in the process of solving what appear to be intractable problems.
Irwin Stoolmacher heads the Stoolmacher Consulting Group, of Lawrenceville, which for the last 30 years has assisted more than 100 nonprofit organizations in the areas of fundraising and strategic planning.