Making Charitable Contributions

Since charities ask for larger and more frequent donations from the public these days, soliciting by mail, telephone, television, and radio for example, they should be checked out before you donate money or time. Here are some tips on how to maximize your charity dollar and avoid scams.

Here are some basic, common-sense suggestions for avoiding rip-offs in making charitable contributions:

• Do not contribute cash. All contributions should be in the form of a check or money order made out to the charity-never to the individual soliciting the donation.
• Do not be misled by a charity that resembles or mimics the name of a well-known organization--all charities should be checked out.
• Ignore pressure to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.
• When appropriate, ask for written descriptions of the charity's programs and/or finances, especially if the intended contribution is substantial.
• If you have any doubt about the legitimacy of a charity, check it out with the local charity registration office (usually a division of the state attorney's general office) and with the Better Business Bureau (BBB).

Related Guide: Please see the Financial Guide: FRAUDULENT CHARITIES: How To Protect Yourself.

Tip: You should, of course, keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.

Related Guide: Please see the Financial Guide: ADVANCED CHARITY TECHNIQUES: Maximizing Your Deductions.

Giving Your Time

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself:

• Make sure you are familiar with the charity's activities. Ask for written information about the charity's programs and finances.
• Be aware that volunteer work may require special training and the devotion of a scheduled number of hours each week to the charity.
• If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Tip: Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

Mail Solicitations

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

• The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal bring tears to your eyes but tells you nothing about the charity's functions, investigate it carefully before responding.
• It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
• Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal-as a lottery operated by mail.
• Appeals that include surveys should not imply that you are obligated to return the survey.
• Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.

Caution: Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.

Public Education Solicitations

If you respond to mail appeals, you should be aware that certain charities consider this to be a significant part of their educational budgets. In a recent survey, half of 150 well-known national charities included their direct mail and other fund-raising appeals in their public education programs. This practice makes fund-raising drives look like a smaller part of a charity's expenses than they are. These 75 charities allocated $160 million of their direct mail and other appeal costs to public education programs.

Example: A charity whose purpose is to combat cruelty to animals uses direct mail to raise funds. The cost of a nationwide direct mail campaign is $1 million-much more than the $200,000 the charity has budgeted for its program of research grants. This embarrassingly high allotment for fund-raising costs can be significantly reduced if the direct mail pieces include some information about cruelty to animals. Since the information is considered educational, the charity calls it a program expense and allots half the cost of the mailing to public education, thus reducing fund-raising expenses from $1 million to only $500,000, and bumping up program spending from $200,000 to $700,000.

The line between pure fund-raising and genuine public education activities is not always clear. However, if the charity is confident that the fund-raising appeal truly serves its educational purposes, it should be willing to disclose this fact in the appeal. This disclosure allows donors to make an informed decision about whether to support the activity.

Telephone, Door-To-Door, And Street Solicitations

When you are approached for a contribution of time or money, ask questions - and do not give until you are satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

• Ask for the charity's full name and address. Demand identification from the solicitor.
• Ask if the contribution is tax-deductible.
• Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.

Caution: Contributions to tax-exempt organizations are not always tax-deductible.

• Do not give in to pressure to make an immediate donation or allow a runner to pick up a contribution.
• Statements such as "all proceeds will go to charity" may mean money left after expenses, such as the cost of fund-raising efforts, will go to the charity. These expenses can be big ones, so check carefully.
• When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20% of the amount you pay.
• If a fund raiser uses pressure tactics- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

Sweepstakes Appeals

Sweepstakes mailings, used by businesses for many years to promote their products, have recently become popular with charities. Here are some points to consider when reviewing a sweepstakes appeal.

• The sweepstakes mailing should clearly disclose that no contribution is necessary to participate.
* If you wish to participate, read the sweepstakes promotion and direct mail contents carefully. Your entry may be discarded if the rules are not followed to the letter.
• If the charity sweepstakes promotion says you are a pre-selected winner, you will usually receive a prize only if you respond to the sweepstakes. Most "pre-selected winners" receive just pennies per person.
• Both donor and non-donor sweepstakes participants must have an equal chance of winning a prize.

Caution: For a national campaign, the probability of winning the big prize may be quite low. Some campaigns involve mailings of a half-million to ten million or more letters.

Caution: If you are considering a donation, check out the appeal as you would any other request for funds. Does it clearly specify the programs your gift would be supporting? Do not hesitate to ask for more information on the charity's finances and activities.

Charity Thrift Stores

Since all charity thrift stores do not necessarily operate the same way, it is important to find out if the charity is benefiting from thrift sales. There are three major types of thrift store operations:

• Conduit-type shops run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
• Thrift operations are represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of "rehabilitation through employment."
• Charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store or (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed stores for an agreed-upon amount.

Tip: The fair market value of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the going rate for comparable items. If you are donating directly to a for-profit thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Tip: Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party, an independently managed thrift store, ask what the charity's share will be.

Tip: Sometimes the charity receives a small percentage, e.g., 5 to 20% of the gross or a flat fee per bag of goods collected.

Fund-Raising Dinners, Variety Shows, And Other Events

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

• Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
• Your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the fair market value of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.

Tip: If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

Caution: Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.

• Watch out for statements such as "all proceeds will go to the charity." This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20% or less of the price paid.

• Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

Caution: It has happened that the number of children eligible to receive free tickets has been limited or transportation has not been arranged. So, in effect, free tickets given to the few needy children who attend the event are paid for many times over by businesses and individuals who purchase tickets.

Charity-Affinity Credit Cards

You may receive an offer to apply for an affinity credit card bearing the name and logo of a particular charity. Sometimes offered exclusively to an organization's donors or members, these cards are issued by banks and credit card companies under agreements worked out with individual charities. These cards are just like other credit cards, but the specified charity gets some kind of financial benefit.

All affinity credit cards are not created equal. Offers vary in terms of how the charity benefits as well as the terms of the credit agreement with consumers. So check the terms carefully!

Caution: Consider the specific terms as you would any credit card offer: the amount of the interest rate/finance charges, the amount of the annual fee, if any, the amount of late fees and over-the-limit fees, if any, and the length of the grace period, or amount of time after which finance charges begin to accrue on any unpaid balance.

The charity usually receives a benefit in one or more of the following ways:

• The charity receives a certain percentage of each purchase or a specified amount every time the consumer makes a purchase with the card,
• The charity receives a certain dollar amount every time a new customer signs up for a card, or
• The charity receives a portion of the annual renewal fee for the card.

Caution: Make sure the promotional literature states exactly how the charity benefits. For example, one affinity card offer declared that a specified national charity would receive half of one percent of all transactions made with the card (that works out to 5 cents for every $10 worth of purchases). If the financial benefit for the charity is not spelled out, ask.

Caution: Contributions made by a bank and/or credit card company through the use of an affinity credit card are not deductible to consumers as charitable donations for federal income tax purposes.

Remember also to consider your interest in the charity and not to hesitate to seek out more information on the charity's programs and finances.

Charity/Business Marketing

The following points should be kept in mind when considering promotions that partner charities and businesses:

1. Charity/business marketing campaigns should clearly disclose the actual or estimated portion of the purchase price that will benefit the specified cause. Without such information, you cannot know how much of your purchase will aid a charity participating in such a campaign.
2. Read the disclosure carefully. Some charity/business marketing campaigns have an expiration period (for example, ten cents goes to the charity for all purchases made until October 31.) If there is no disclosure, be aware that the amount that goes to the charity is usually between one and ten percent of the retail price.
3. In schemes during the Gulf War, business made no arrangements with the named charity and no contributions were given. Various items and services were sold with the false promise that a donation would be made to the USO or other organizations helping members of the armed services or their families. Similar advertising abuses commonly occur in the wake of hurricanes, floods and other natural disasters.
4. Some advertisements falsely imply the existence of a direct connection between the consumers' purchase and the charity when, in fact, the charity was guaranteed a "flat" contribution regardless of the level of the resulting purchases.

Disaster Appeals

The tragedy of a flood, massive fire, hurricane, earthquake, or other disaster always triggers an outpouring of public support and concern. During such crises, watch out for fraudulent appeals by some who see disasters as an opportunity to take advantage of American concern and generosity.

Examine your options instead of giving to the first charity from which you receive an appeal. There will be a variety of relief efforts responding to the diverse needs of disaster victims. Be wary of appeals that are long on emotion and short on what the charity will do to address the specific disaster.

Caution: Ask how much of your gift will be used for the crisis and how much will go towards other programs and to administrative and fund-raising costs. And find out what the charity intends to do with any excess contributions remaining after the crisis has ended.

Check with organizations before donating goods for overseas disaster relief. Most groups involved in overseas relief will not accept donated goods since purchasing goods overseas is often less expensive and more efficient. If a charity accepts donated items, ask about their arrangements for shipping and distribution.

Some charities change their program focus during a crisis in order to respond to the changing needs of disaster victims. Do not assume the charity will carry out the same activities throughout a crisis situation.

Police And Firefighter Appeals

In reviewing such appeals, potential donors should be aware of the following points.

• Many different types of police and firefighter organizations exist. Some are charities that operate educational or youth programs. Others are labor organizations, fraternities, or benevolent associations that provide benefits to members.
• Your gift may not be deductible. Police and firefighter organizations can be tax exempt under different sections of the Internal Revenue Code. Only some of them are eligible to receive deductible charitable donations.
• Do not make assumptions based on the name alone. The words "police" and "firefighter" in the organization's name do not necessarily mean that representatives from your local and/or state police or fire departments are members. In fact, the organization may not have any police or firefighter members.

Caution:

• Ask about any affiliations the group might have with other organizations. Some groups operate as a lodge or chapter of a larger organization. Others are independent associations of local, state, and/or federal law enforcement officers.
• Do not believe promises that your donation will "give you special treatment" from your police or firefighters. If such suggestions of threats are used, contact your state attorney general's office and your Better Business Bureau.
• Ask how your contribution will be used and what programs and activities it will support. Do not hesitate to ask for written materials on the police or firefighter group's programs and finances.
• Groups offering legitimate help to your police, firefighters, and community will welcome your questions and encourage your interest.

Child Sponsorship Groups

Not all sponsorship programs are alike. Sponsored donations usually benefit a project for an entire community (for example, medical care, education, food) and not the sponsored child exclusively. Some groups believe this is the most effective way to make significant and lasting changes in a child's living conditions. Other organizations do give a certain amount of the contribution directly to the sponsored child. Before deciding to participate in a sponsorship program, you may want to consider the following:

• Do you know how children are assisted (i.e., through a community development project operated by the charity or through an affiliated project that the group funds)?
• Can you commit at least several years to a program in the form of financial assistance and letter-writing?
• The child will not be your adopted child in any legal sense, and you will not be able to make any demands on him or her.
• Do you agree with the overall philosophy of the organization (e.g., any religious focus a program might have)?

Tip: Contact other child sponsors to get a sense of their overall satisfaction with the organization.

A Charity's National Office and Its Affiliates

While some organizations are a single entity under one name, others may be a network of local affiliates or chapters. If you give to a local chapter or affiliate, do not assume your donation will be spent locally. Nor should you assume that a chapter's operations are fully controlled by the national office.

Many different types of relationships can exist between a charity's national office and its chapters. Here are three possible relationships chapters:

1. The national office performs certain functions, such as developing educational or fund-raising materials but does not supervise affiliates. In this case, the local chapters are incorporated separately from the national office and each applies for its own tax-exempt status from the IRS. Each local chapter's programs and fund-raising is under the control of the chapter's local board of directors. To support the national office, the local affiliates purchase materials produced by it or send it a small percentage of their locally collected funds.
2. The organization's national office and affiliates function as one centralized unit under the control of a national board of directors. All income and expenses are channeled through the national office. In this case, the chapters are not separate legal entities and have only limited authority, as stated in their charter agreements with the national office.
3. Most national/chapter relationships fall somewhere between the two extremes in the preceding two paragraphs. In such a case, both the national office and the local affiliates share some level of authority. Local chapters may or may not be separately incorporated, but all have their own governing boards, some of which share control with the national office. The charity may have statewide affiliates that perform functions at the state level. With this structure, there is usually a fund sharing or dues formula between the local affiliates and the national office.

Caution: The bottom line for you is that, depending on the organization's structure, the local affiliate may carry out different activities from those of the national office. It is important to inquire about this difference. In addition, donors may want to identify how much of a local affiliate's contributions are spent on local programs.

Caution: When considering a donation to a local chapter, it is wise to check out the chapter separately.

Government and Non-Profit Agencies

• Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
• Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
• Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

You must keep records to prove the amount of the cash and noncash contributions you make during the year. Which records you must keep depends on the amount of your contributions and whether they are cash or property contributions. New recordkeeping requirement were established for all contributions made after January 1, 2007. You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution, bank records (such as a cancelled check or bank statement containing the name of the charity, date and the amount) or a written communication from the charity.

This Financial Guide discusses which records you must keep.

Cash Contributions

Cash contributions include those paid by cash, check, electronic funds transfer, debit card, credit card, or payroll deduction. You cannot deduct a cash contribution, regardless of the amount, unless it is substantiated by one of the following:

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
2. A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
3. Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Cash Contributions of $250 or More: You can claim a deduction for a contribution of $250 or more only if you have an acknowledgement of your contribution from the qualified organization or certain payroll deduction records. If you made more than one contribution of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that lists each contribution and the date of each contribution and shows your total contributions.

To determine whether a contribution is $250 or more, do not combine separate contributions. For example, if you gave to the church $25 each week, your weekly payments do not need to be combined. Each payment is a separate contribution. The acknowledgment must be written and state whether you received any goods or services in return. If something was received in return, a description and good faith estimate of the value of the goods or services must be included.

For payroll deductions, the payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization. If the pay stub, Form W-2, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution.

Noncash Contributions

For a contribution not made in cash, these general rules apply:

The records you must keep depend on whether your deduction for the contribution is:

1. Less Than $250
2. At least $250 but not more than $500,
3. Over $500 but not more than $5,000, or
4. Over $5,000.

Amount of contribution. In figuring whether your contribution is $500 or more, combine separate contributions of similar items during the year. If you received goods or services in return, reduce your contribution by the value of those goods or services. If you figure your deduction by reducing the fair market value of the donated property by its appreciation, your contribution is the reduced amount.

Deductions of Less Than $250

If you make any noncash contribution, you must get and keep a receipt from the charitable organization showing:

1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property.

A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the information in (1), (2), and (3) will serve as a receipt. You are not required to have a receipt where it is impractical to get one (for example, if you leave property at a charity's unattended drop site).

Additional records. You must also keep reliable written records for each item of donated property. Your written records must include the following information.

1. The name and address of the organization to which you contributed.
2. The date and location of the contribution.
3. A description of the property in detail reasonable under the circumstances. For a security, keep the name of the issuer, the type of security, and whether it is regularly traded on a stock exchange or in an over-the-counter market.
4. The fair market value of the property at the time of the contribution and how you figured the fair market value. If it was determined by appraisal, you should also keep a signed copy of the appraisal.
5. The cost or other basis of the property if you must reduce its fair market value by appreciation.
6. The amount you claim as a deduction for the tax year as a result of the contribution, if you contribute less than your entire interest in the property during the tax year. Your records must include the amount you claimed as a deduction in any earlier years for contributions of other interests in this property. They must also include the name and address of each organization to which you contributed the other interests, the place where any such tangible property is located or kept, and the name of any person in possession of the property, other than the organization to which you contributed.
7. Any conditions attached to the gift of property.

Deductions of At Least $250 But Not More Than $500

If you claim a deduction of at least $250 but not more than $500 for a noncash charitable contribution, you must get and keep an acknowledgement of your contribution from the qualified organization. If you made more than one contribution of $250 or more, you can have either a separate acknowledgement for each or one acknowledgement that shows your total contributions.

The acknowledgement must contain the information in items (1) through (3) listed under Deductions of Less Than $250, earlier, and your written records must include the information listed in that discussion under Additional Records.

1. It must be written.

2. It must include:

• A description (but not necessarily the value) of any property you contributed,
• Whether the qualified organization gave you any goods or services as a result of your contribution (other than certain token items and membership benefits), and
• A description and good faith estimate of the value of any goods or services described above. If the only benefit you received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgement must say so and does not need to describe or estimate the value of the benefit.

3. You must get the acknowledgement on or before the earlier of:

• The date you file your return for the year you make the contribution, or
• The due date, including extensions, for filing the return.

Deductions Over $500 But Not Over $5,000

If you claim a deduction over $500 but not over $5,000 for a noncash charitable contribution, you must have the acknowledgement and written records described under Deductions of At Least $250 But Not More Than $500. Your records must also include:

1. How you got the property, for example, by purchase, gift, bequest, inheritance, or exchange.
2. The approximate date you got the property or, if created, produced, or manufactured by or for you, the approximate date the property was substantially completed.
3. The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. This requirement, however, does not apply to publicly traded securities.

If you are not able to provide information on either the date you got the property or the cost basis of the property and you have a reasonable cause for not being able to provide this information, attach a statement of explanation to your return.

Deductions Over $5,000

If you claim a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, you must have the acknowledgement and the written records described under Deductions Over $500 But Not Over $5,000. In figuring whether your deduction is over $5,000, combine your claimed deductions for all similar items donated to any charitable organization during the year.

Generally, you must also obtain a qualified written appraisal of the donated property from a qualified appraiser.

Qualified conservation contribution. If the gift was a "qualified conservation contribution," your records must also include the fair market value of the underlying property before and after the gift and the conservation purpose furthered by the gift.

Out of Pocket Expenses

If you render services to a qualified organization and have unreimbursed out of pocket expenses related to those services, the following three rules apply.

1. You must have adequate records to prove the amount of the expenses.
2. You must get an acknowledgment from the qualified organization that contains a description of the services you provided and a statement of whether or not the organization provided you any goods and services to reimburse you for the expenses incurred. If so, the statement must include a description and good faith estimate of the value of any goods or services (other than intangible religious benefits). If the only benefit you received was an intangible religious benefit, you must receive a statement stating this; however, the acknowledgment does not need to describe or estimate the value of an intangible religious benefit.
3. You must get the acknowledgment on or before the earlier of: (a) The date you file your return for the year you make the contribution, or the due date, including extensions, for filing your return.

Car Expenses. If you claim expenses directly related to use of your car in giving services to a qualified organization, you must keep reliable written records of your expenses. Whether your records are considered reliable depends on all the facts and circumstances. Generally, they are reliable if you made them regularly and at the time you incurred the expense.

Your records must show the name of the organization you were serving and the date each time you used your car for a charitable purpose. If you use the standard mileage rate of 14 cents a mile for 2011 and 2012, your records must show the miles you drove. If you use actual expenses to complete the deduction, your records must show the costs of operating the car for charitable purposes only.

Related Financial Guide: ADVANCED CHARITY TECHNIQUES: Maximizing Your Deduction

Related Financial Guide: CHARITABLE CONTRIBUTIONS OF PROPERTY: Maximizing the Deduction

By knowing the many ways that charities are regulated, both by the states and the IRS, you can better protect yourself against fraudulent charities and know that your charitable contribution will be properly used for the intended purpose. And if you do fall prey, you should know how to complain most effectively.

Giving to a charity is a worthy objective. However, for you and society to get the maximum benefit from your contribution, you need to give wisely and make sure that your contribution serves the intended purpose.

Related Guide: Please see the Financial Guide: CHARITABLE CONTRIBUTIONS: How To Give Wisely

If you aren't completely knowledgeable about your intended charities, you should review their operations and practices before giving. Even if the charity is a household name, its practices may be wasteful. For example, a major part of its receipts from contributors may be used not for charitable purposes but to pay an outside fundraiser.

Unfortunately, many charities go beyond wasteful practices and are outright frauds. This Financial Guide will discuss how the various states and the IRS regulate charities to minimize the abuses in this area and explains how to files a complaint against a phony charity.

How the States Regulate Charities

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State). State government agencies do not approve charities. However, they do require charities to follow certain regulations.

Most states have registration and licensing rules requiring charities to file certain basic information, such as the official name, principal address, and purpose of the organization. This requirement generally applies to most charities, whether national or local, that solicit in the state.

Annual reporting is also a common state requirement and generally involves the filing of the charity's financial statements. In many cases, a copy of the charity's federal tax return (IRS Form 990) is accepted by the state as fulfilling its annual reporting requirements.

Planning Aid: For more information on general businesses and their practices, see Better Business Bureau.

Note: Churches and other religious organizations, as well as small charities that receive contributions below certain levels, are frequently exempt from state registration and annual reporting requirements.

Some states have specific regulations for professional fund-raisers used by charities. They may require the fund-raiser to register with the state and put up a bond ranging from $2,500 to $50,000 to reimburse the state for any fines and/or penalties imposed on the fund raiser.

Tip: Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.

How the IRS Regulates Charities

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes. The IRS looks at these documents in terms of whether they meet the Code's requirements; it does not judge charities' worthiness.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition. When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a Determination Letter formally notifying it of its charitable status. Older charities may have a 101(6) ruling, which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual income do not have to apply to the IRS for exemption.

Related Guide: Please see the Financial Guide: ADVANCED CHARITY TECHNIQUES: Maximizing Your Deductions

Tip: IRS Publication 78, the "Cumulative List of Organizations," is an annual list of tax-exempt organization eligible to receive deductible contributions. Visit the IRS website for more information.

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location. These three publicly available documents are:

• Form 1023: the application filed by the charity to obtain tax-exempt status.
• IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
• Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general's office) may also have a copy of the charity's latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity's application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. Although the charity is not required to provide photocopies of the return, it must have a copy on hand for public inspection.

How to File a Complaint

Complaints about charities are uncommon. However, if sweepstakes prizes, membership benefits, the charity's magazine, or ordered merchandise is not received, donors may need to file complaints. Donors may also be concerned about duplicate mailings from the same charity or may wish to remove their names from the charity's mailing list.

Here is how to file a complaint:

1. Put your complaint in writing. Clearly explain the problem and what specific action you want taken by the charity to resolve it.
2. Include copies of all applicable documents with your complaint (for example, copies of canceled checks for merchandise ordered, copies of mailing labels in case of duplicate mailings, or copies of problem appeals).
3. File your complaint with the Better Business Bureau online or by mail: BBB Wise Giving Alliance, 4200 Wilson Blvd., Suite 800, Arlington, VA 22203. Complaints can also be filed with government agencies, such as your state attorney general's office. Many states have consumer protection agencies and special offices to regulate charities.
4. If your complaint involves activities not in accordance with the organization's tax-exempt purposes (for example, misappropriation of funds) contact the IRS, as well as your state attorney general's office. In addition, the U.S. Postal Inspection Service investigates charges of false representation and violations of the mail fraud statutes.

Government and Non-Profit Agencies

• Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
• Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
• Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.