Creative Consumer: Real Intentions, Fake Charities

It's that time of year. Tax forms have started arriving in mailboxes. And that may have you thinking about ways to offset your tax bill.

Donating money is one way to do it. Giving to charity should make you feel good and help a good cause. But beware -- there are fake charities out there. And even real charities may make poor use of your donation dollars.

Experts estimate 10 percent of donations are misused. Americans are generous, so that 10 percent is a number in the billions of dollars. That's why you shouldn't write a check until you've checked out the charity.

Here's the thing: There's no law requiring that any particular percentage of your contribution must go toward the cause. Poorly run charities may spend your money on executive salaries and additional fundraising instead of on charitable programs. In addition, for-profit solicitors who raise money for charities may keep most of the cash and give only a tiny percentage to the organization you intended to help. It's perfectly legal.

That's why you need to do your homework -- especially if you're prepared to make a generous gift. Charity watchdogs say at least 60 percent of the money a charity raises should go toward its stated mission. More is even better. You can ask the charity itself what portion of its proceeds actually does some good, but you may not get a straight answer. Some charities have been known to count telemarketing and direct mail campaigns as "educational" efforts.

Instead, check out the charity by contacting your state government and a private watchdog group. Many states require charities to register and provide basic information about their finances to operate legally in the state. Usually the office of consumer protection, the department of agriculture or the secretary of state carries out this function.

Some private groups scrutinize charities too. The BBB Wise Giving Alliance is probably the best known and now bestows a seal of approval upon charities that meet certain strict standards.

As you do your research, beware of charities that play the "name game." Counterfeit charities often assume names and logos that are very close to those of reputable, established charities. Often they just change one word –like "society" instead of "foundation." If a charity name seems a little "off" to you, check it out. If you receive a telemarketing solicitation, hang up and look up the number of the well-known charity yourself. Call and see if that charity is currently soliciting by phone.

Lori R. was livid when she received a call from a group with a name very similar to that of the American Diabetes Association. The caller asked for money. Lori gave him a piece of her mind instead.

You see, Lori's on the board of the American Diabetes Association. For years, she's had to inject herself with insulin to avoid losing her sight, her kidneys – even her limbs. She says the pin pricks no longer hurt, but it does pain her to know that fake charities are stealing money from her cause. One footnote: sure enough, the group that contacted Lori was under investigation by the government for fraudulent solicitation.

Charities that lend their names to for-profit enterprises are another twist you need to be aware of. The charities figure it's money they wouldn't have gotten otherwise, but donors need to realize that often only a minuscule amount of money makes it to the charity.

Again, that's perfectly legal.

For example, I once investigated gumball machines with charity logos on them. I found one machine labeled with the name of a charity that had gone under years before. Of course, the for-profit vendor was still collecting the coins. I got a hold of a copy of another charity's vending contract. The charity rented out its name for $1.25 a month per machine. The vendor made about $110 per month per machine! Of course, a quarter isn't a big investment and you get a gumball for your money. But charities also lend their names to big-ticket businesses like used car dealers who run donation programs.

Not only do you need to make sure your donation is legitimate, you may want to be sure your tax deduction is legitimate. Often fake charities brag that they're tax exempt. That just means they don't have to pay taxes. Just because a business is tax exempt, doesn't mean your contribution is tax deductible.

Other ploys: unscrupulous operators may go on and on about having a "tax ID number." Meaningless! For-profit and non-profit companies both have to have tax ID numbers. Fake charities may also print "keep this receipt for your records" on their paperwork to give the impression you're going to get a tax break. Don't fall for it. The IRS could prosecute you for claiming a fraudulent deduction.

For that matter, even if the IRS really has granted non-profit 501(c)(3) status to a group, that's no indication of quality. The IRS doesn't have the time or staff to really scrutinize those who apply for charity status. I once investigated a company that earned 501(c)(3) status. The IRS overlooked the fact that the founder was a convicted felon who kept most of the group's money for himself and didn't even register with the state as required by law.

To be a savvy consumer…

KNOW THE SIGNS:

Be alert to names that sound slightly "off." Same goes for logos.

If a group refuses to send you written information, that's a bad sign.

If the person soliciting your contribution can't answer basic questions about the organization, be wary.

If you receive a thank you note or an invoice for a contribution you never pledged to make. That's a classic tactic. Don't fall for it.

Solicitors who pressure you to give on the spot are not to be trusted. The need will still exist after you've done your homework.

Charities that offer to send a courier or private shipper to pick up your contribution may be trying to avoid mail fraud laws.

QUESTIONS TO ASK:

What's the full name, address and phone number of the charity?

Do you work directly for the charity or are you a paid fundraiser? If paid, what percentage does your company keep?

What will my contribution be used for?

Can you send me literature about the charity and a financial statement so I can decide whether to give?

Is my contribution tax deductible?

Are you a 501(c)(3) organization?

DO YOUR HOMEWORK:

Before you give, make sure the charity is registered with your state, if required. Some tiny charities and church groups do not have to register.

Also check with one of the private watchdog groups that monitors charities. The BBB Wise Giving Alliance's Web site is www.give.org. You can find the American Institute of Philanthropy at www.charitywatch.org.

The state or a watchdog group should be able to tell you if the group is a bonafide 501(c)(3). If not you can check with the IRS by going to www.irs.gov and looking for publication number 78. Or call the IRS customer service number, (877) 829-5500.

Make your payment by check or credit card, so there's an independent record of your gift. Never use cash.