How Do You Know Your Favorite Charity Isn't a Scam?

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By Jason Notte

NEW YORK -- Making charitable donations can be philanthropically rewarding, but only if your money actually reaches those who need it.

Earlier this year, the Federal Trade Commission noted that about $187 million in donations went to a group of four cancer charities that were nothing but a slush fund for one family. The FTC says that 97 percent of donations were used by family members to pay for cars, gym memberships, luxury cruises, college tuition and high-salary jobs for other family members. The Cancer Fund of America and Cancer Support Services in Knoxville, Tennessee, the Breast Cancer Society in Mesa, Arizona; and the Children's Cancer Fund of America in Powell, Tennessee, not only bilked donors out of millions, but binged on money that other charitable organizations could have put to good use.

Contacted by TheStreet for this story, a receptionist for The Cancer Fund of America and its subsidiary, Cancer Support Services, declined comment on behalf of the organization. The Breast Cancer Society directed TheStreet to this official statement, denying any wrong doing and demonstrating a focus on other charitable efforts to avoid legal entanglements. The Children's Cancer fund site has disappeared, and its number is no longer in service.

%VIRTUAL-pullquote-Some of the fraud stuff that has gone on is because of a lack of oversight by donors. They haven't done their homework and they haven't done their due diligence.%Equally unfortunate was that, according to Friedman partner Amish Mehta, a quick look at the IRS database of charitable organizations, the charities' Form 990 submissions or charity clearinghouse websites would have told donors just how suspicious those charities were. Mehta points out that the New York State Attorney General's office considers administrative costs equalling 35 percent of total donations or less ideal for a charitable organization, though Mehta says that cost for operating expenses should more ideally be capped at 20 to 30 percent.

"That topic [charity fraud] continues to come up," Mehta says. "Some of the fraud stuff that has gone on is because of a lack of oversight by donors. They haven't done their homework and they haven't done their due diligence."

Shomari Hearn, a certified financial planner and vice president at Palisades Hudson Financial Group in Fort Lauderdale, Florida, notes that online resources including Guidestar and Charity Navigator can help potential donors determine home much of their gift is going to the cause and how much goes toward administrative costs. Those sites draw much of their information from the charities' 990 forms and explain what your donation pays for in fairly simple terms. From there, a little help from the IRS and a bit of legwork can help determine whether or not a charity meets your needs. "Even if it is a charity that has been in existence for many years, it is worth verifying that the organization's tax-exempt status has not been revoked," Hearn says. "Second, I recommend conducting a quick online search of the charity's name to see if there are any stories of improprieties by the organization."

A charity's biggest red flag is either not registering as a 501(c)3 tax-exempt institution or having that designation revoked. Mehta notes that while contacting the IRS and performing simple online searches for the charity in question can work, it may also be worth your time to contact the Better Business Bureau and see if it has received any complaints about the organization. It may seem like a whole lot of steps just to give money away, but for private or family foundations with sizable sums at their disposal, the only way to make sure a charitable organization fulfills the foundation's mission statement is to vet it thoroughly.

"If the foundation is determined that it wants to give to that charity, hopefully the foundation has grant-giving guidelines and parameters established to vet various charities," Mehta says. "Hopefully there's a board for that foundation, because it's helpful to get different perspectives, present a challenge and provoke some thought and within the foundation."

Another approach that both individuals and charitable foundations may want to consider is something they should already be doing with their other non-charitable investments: diversifying and balancing. That offers donors some protection if a charity turns out to be fraudulent or simply changes course and no longer meets the needs of the donor. More importantly, especially when considerable donations are involved, diversification can prevent any one individual or foundation from giving too much to an organization and "tipping" it from a public charity to a private foundation of its own.

"501(c)(3) organizations have to have a broad range of support among the people they receive money from," Mehta says. "If they receive money from a single or limited source of avenues, they could jeopardize their public charity status. That charity can become like a conduit for a charitable foundation."

However, the most important rule to apply when tracking down a charitable organization is to do your homework.

While your threshold for administrative cost may vary from those of your advisers, it's always good to know that your money is going to help the cause and isn't just lining the pockets of the folks on the phone or someone with a boat named after a shell charity.

"As a rule of thumb, if administrative and fundraising expenses, such as compensation to executives and fees to telemarketing firms, account for more than 25 percent of an established organization's annual revenue, I would avoid these organizations in favor of a charity that uses at least 75 percent or higher of their revenue on program expenses," Hearn says. "You want to know that the majority of your donation is being used to fund the programs and services the charity was established to deliver."
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