Avoiding Financial Scams

Fraudulent Charities: How To Protect Yourself

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.

Table of Contents

  • How the States Regulate Charities
  • How the IRS Regulates Charities
  • How to File a Complaint
  • Government and Non-Profit Agencies

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.

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 fundraiser.

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

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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

Use the Tax Exempt Organization Search Tool on the website to find information about a tax-exempt organization’s federal tax status and filings.

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.

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.

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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, 3033 Wilson Blvd, Suite 710, Arlington, VA 22201. 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.

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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.

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