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
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.
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
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
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 Codeís requirements; it does not judge charitiesí
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.
Tip: IRS publication 78, the "Cumulative List of Organizations,"
is an annual list of tax-exempt organization eligible to receive deductible
contributions. Contact the IRS (800-829-1040) for information on where to
obtain this list.
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 charityís 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:
- Put your complaint in writing. Clearly explain the problem and what specific
action you want taken by the charity to resolve it.
- 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).
- File your complaint with your local Better Business Bureau. Complaints about
national charities can be directed to the Council of Better Business Bureauís
Philanthropic Advisory Service. 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.
- 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 generalís office. In addition, the U.S. Postal Inspection
Service investigates charges of false representation and violations of the mail fraud
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.