Quick overview
Charity due diligence is the process donors use to verify that a nonprofit will use gifts responsibly and effectively. It combines simple document checks, performance questions, and trust signals to reduce the chance your contribution is wasted or mismanaged. In my practice advising donors and small business clients for over 15 years, a brief due diligence review often prevents poor giving choices and significantly improves impact.
Why this matters now
Online fundraising and social media have made it easy to give impulsively—but also easier for fraud and mission drift to hide behind persuasive stories. Performing due diligence protects your financial interests, aligns donations with your values, and helps nonprofits that are genuinely effective. Authoritative sources to start with include the IRS Tax Exempt Organization Search (for tax status and Form 990s) and charity evaluators like Charity Navigator and Candid/GuideStar (for ratings and documents) (IRS; Charity Navigator; Candid).
Practical, step-by-step due diligence checklist
Follow these steps for a defensible, efficient review. You don’t need to be an accountant—use public records and a few targeted questions.
- Confirm legal status and registration
- Search the organization by name or EIN on the IRS Tax Exempt Organization Search to confirm 501(c)(3) or other tax-exempt status and view recent Forms 990 (IRS: Tax Exempt Organization Search).
- Verify the nonprofit is registered for solicitation in your state if your state requires it (state charity regulators often publish registries).
- Read the most recent Form 990 and annual report
- Key items to look for: mission statement, program expenses vs. fundraising/admin expenses, executive compensation, related-party transactions, and the presence of an independent audit or financial review.
- Watch for inconsistencies between the mission described on the website and the programs funded on the 990.
- Evaluate financial efficiency and sustainability
- Program expense ratio: many evaluators consider a higher percentage of spending on program services as positive (commonly >60–70% viewed favorably), but context matters—new organizations or those scaling up may show higher overhead temporarily.
- Fundraising efficiency: evaluate fundraising costs relative to dollars raised but avoid over-penalizing organizations investing in responsible donor development.
- Operating reserves and revenue diversification: look for an operating reserve (months of operating cash) and multiple income sources (grants, earned revenue, donations) to assess sustainability.
- Check governance and leadership
- Board composition: independent board members, clear conflict-of-interest policies, and evidence that the board actively oversees strategy and finances are positive signals.
- Executive compensation: compare CEO pay to organizations of similar size and mission; large outliers deserve questions.
- Inspect impact and program outcomes
- Look for clear, measurable outcomes—not only activity counts. Program evaluations, outcome metrics, and third-party evaluations are strong signals.
- Ask for recent impact reports or evaluation summaries; effective organizations can point to results, not just outputs.
- Transparency and communications
- Does the charity publish audited financials, an annual report, donor communication policies, and privacy practices? Transparent organizations are easier to verify.
- Ask direct questions before you give
- How is success measured for the program I care about? Can you provide recent outcome data or an evaluation?
- What percentage of my donated dollar goes to direct services vs. fundraising/administration?
- How do you measure long-term impact and what are current challenges?
- Use third‑party evaluators and registries
- Charity Navigator and Candid/GuideStar provide ratings, access to financial forms, and context (Charity Navigator; Candid/GuideStar).
- Consumer-focused guidance on charitable giving is available from the Consumer Financial Protection Bureau (CFPB) for donor protection considerations (CFPB).
- Consider donation method and tax implications
- Gifts of stock, donor-advised funds, and qualified charitable distributions have tax and logistical differences—if tax benefits matter, consult with a tax advisor. See our guide on giving stock vs. cash for tax considerations and practical steps.
Red flags that warrant caution
- No recent Form 990 or refusal to provide financials on request.
- Grossly disproportionate executive compensation or large unexplained related-party transactions.
- High and rising fundraising costs with little program growth.
- Vague or inconsistent mission language; inability to describe outcomes or provide evidence of impact.
- Aggressive pressure tactics (unsolicited calls, threats of limited-time opportunities) or requests for cash only.
How to interpret ratios and benchmarks (context matters)
Numbers are useful but need interpretation. For example, a program expense ratio above 70% is often considered healthy, but a new charity or one investing in growth may show lower program percentages as it builds capacity. Conversely, a charity with a very high program ratio but no financial reserves could be at risk in an economic downturn. Look at trends across multiple years, not just a single snapshot.
Questions to ask board members or staff (sample script)
- Who on the board is responsible for financial oversight and how often do they review audited statements?
- Can you share a recent program evaluation and the next steps based on findings?
- How do you measure cost per outcome (e.g., cost per student served, cost per household stabilized)?
In my practice, asking these direct, specific questions quickly separates organizations that have thoughtful measurement and governance from those that do not.
Donor strategies based on due diligence outcomes
- If you confirm strong governance and impact, consider multi-year commitments or operational support (unrestricted funds) to increase long-term effectiveness.
- If the charity is promising but lacks capacity, consider restricted gifts for specific needs (e.g., evaluation capacity, staff training) or connect them with pro bono expertise.
- If you find significant concerns, redirect gifts to vetted organizations in the same field. Our overview of broader charitable giving strategies can help determine alternatives (see Charitable Giving).
When to escalate concerns
If an organization appears to be engaging in fraud or intentional misrepresentation, report it to:
- The state charity regulator (Attorney General or Secretary of State in many states), and
- The IRS if tax-exempt status concerns exist (IRS: Charities & Nonprofits).
Resources and trusted sources
- IRS Tax Exempt Organization Search and guidance on Form 990 (irs.gov/charities-non-profits)
- Charity Navigator (charitynavigator.org) and Candid/GuideStar (candid.org or guidestar.org)
- Consumer Financial Protection Bureau — consumer guidance on donating safely (consumerfinance.gov)
- For tax and practical considerations when giving non-cash assets, see our guide on Giving Stock vs. Cash: Tax and Practical Considerations.
Common donor mistakes and how to avoid them
- Relying solely on emotion: Don’t skip basic checks for finance and governance even when moved by a story.
- Overemphasizing single-year ratios: Look at multi-year trends and the charity’s context.
- Assuming size equals effectiveness: Some small, well-run nonprofits deliver outsized impact compared with large organizations that are high-profile.
Final tips from practice
- Make due diligence a short habit: a 30–60 minute review using the IRS search and one evaluator often yields a clear picture.
- Keep a short internal checklist or template of questions you ask every charity to make comparisons consistent.
- Consider pooled giving or fiscal sponsorship if you want to support emerging grassroots groups while reducing risk.
Disclaimer
This article is educational and not personalized tax, legal, or financial advice. Verify tax implications and complex legal questions with a qualified advisor. Information cited from the IRS, Charity Navigator, Candid/GuideStar, and the Consumer Financial Protection Bureau was current as of 2025.
Internal links
- Learn broader options and planning tactics in our Charitable Giving overview: https://finhelp.io/glossary/charitable-giving/
- For asset-based gifts and taxes, see our Giving Stock vs. Cash guide: https://finhelp.io/glossary/giving-stock-vs-cash-tax-and-practical-considerations/
Author note: In my 15+ years advising donors, a short, disciplined due diligence routine both increases giving confidence and amplifies charitable impact. Uphold curiosity when evaluating outcomes—good charities welcome it.
