Why vetting matters
Donors give to make a difference. Vetting nonprofits reduces the risk that a gift will be misused, spent inefficiently, or fail to reach intended beneficiaries. Beyond avoiding scams, due diligence helps you: protect tax benefits, align gifts with personal values, and increase the long-term impact of your giving. Federal oversight and third‑party evaluators provide useful data, but the donor’s judgment—guided by a repeatable process—is the final safeguard (IRS; Candid; Charity Navigator).
A practical, step‑by‑step due‑diligence checklist
Follow this checklist before you make a meaningful gift. Use it for one‑off donations and as part of your policy for recurring or large gifts.
- Confirm legal and tax status
- Verify the nonprofit’s tax‑exempt status using the IRS Tax Exempt Organization Search (TEOS). The TEOS lists organizations recognized as 501(c)(3) and whether they are currently revoked or inactive (IRS, 2025).
- For international charities, confirm registration and legal standing in the host country and consider third‑party vetting (see “Special cases” below).
- Review recent financials
- Obtain and read the organization’s most recent IRS Form 990 (or 990‑EZ/990‑PF where applicable). The 990 shows revenues, program expenses, fundraising costs, and key staff compensation. Candid/GuideStar, Charity Navigator, and the organization’s website are common sources for 990s (Candid; Charity Navigator).
- Look for trends: stable or diversified revenue, reasonable reserves, and program‑to‑overhead ratios consistent with their mission.
- Evaluate program effectiveness
- Ask for logic models, measurable outcomes, and past impact reports. Good nonprofits report both outputs (what they do) and outcomes (the change those activities produced).
- Seek independent evaluations, randomized trials, or third‑party impact assessments when available.
- Assess governance and leadership
- Confirm an active board with diverse expertise. Check for conflicts of interest policies and independent oversight.
- Review executive compensation for reasonableness relative to organization size and peer groups.
- Check transparency and accountability
- A transparent nonprofit publishes audited financial statements, Form 990s, a conflict‑of‑interest policy, and impact reports. If these are not readily available, request them.
- Understand fundraising practices and costs
- Compare fundraising expenses to dollars raised (fundraising efficiency). High fundraising costs can be acceptable during capital campaigns or growth stages—context matters.
- Talk to stakeholders
- Contact past beneficiaries, volunteers, and local partners. Firsthand feedback often reveals operational strengths or weaknesses that numbers alone do not show.
- Document your decision
- Save copies of 990s, correspondence, impact reports, and any consultant evaluations. Good recordkeeping supports tax deductions and future reviews.
How to verify tax status and read Form 990 (practical tips)
- Use the IRS Tax Exempt Organization Search (TEOS) to confirm that the organization is recognized and tax‑exempt. The tool indicates if an organization’s status was revoked or if it filed required returns (IRS.gov, 2025).
- Key Form 990 sections to review:
- Part I: Summary (quick snapshot of size and activities)
- Part III: Program Service Accomplishments (what they claim to achieve)
- Part VIII: Statement of Revenue (revenue streams)
- Part IX: Statement of Functional Expenses (program vs. admin vs. fundraising)
- Schedule R: Related organizations (watch for hidden networks)
- Schedule B: Large contributors (not always public for privacy reasons)
Interpreting program vs. overhead: Aim to understand how much of each dollar reaches the program. Don’t apply a rigid percentage rule—context matters. High overhead may be justified by necessary investment in fundraising, compliance, or program development.
Key metrics and what they mean
| Metric | Why it matters | Reasonable range / notes |
|---|---|---|
| Program Efficiency (program expenses/total expenses) | Shows portion of resources applied to mission | Higher is usually better; context matters (30–80% depending on mission and life stage) |
| Fundraising Efficiency (cost to raise $1) | Helps evaluate cost of growth | Lower is better; early‑stage orgs may have high costs |
| Operating Reserves (months of expenses) | Liquidity buffer and stability | 3–12 months recommended depending on risk profile |
| Revenue Diversity | Reduces dependency on a single donor or government contract | More diversified funding lowers risk |
| Impact Measurement Frequency | Shows commitment to measuring outcomes | Annual or multi‑year evaluations preferred |
Common red flags and misconceptions
Red flags:
- Missing or outdated Form 990s and audited financials.
- Board made up of family or lacking independence.
- Unexplained related‑party transactions or excessive executive compensation.
- Refusal to show basic program outcomes or to share audited statements.
Common misconceptions:
- Overhead alone does not equal waste. Investment in staff, monitoring, and development can increase long‑term impact.
- Bigger does not always mean better. Small, well‑targeted organizations can deliver outsized results.
Real‑world example (anonymized)
A client considered a six‑figure gift to a local shelter. The 990 appeared to allocate 60% of expenditures to administration, which initially raised concern. A closer review showed major one‑time investments in shelter renovations and a new intake database that temporarily inflated administrative costs. The organization also supplied third‑party impact data showing improved rehoming rates. The client chose to split the gift: part to operations and part restricted to program expansion, with reporting milestones. This approach reduced risk and aligned incentives.
Special cases and large gifts
- Donor‑Advised Funds (DAFs): If giving through a DAF, vet the recommended grantee the same way you would direct gifts. The sponsoring organization handles the paperwork, but you retain responsibility for recommending effective grantees.
- Gifts of stock, real estate, or business interests: These gifts require additional legal, tax, and valuation due diligence. Consult a tax advisor and get written acceptance from the nonprofit before transferring complex assets.
- International giving: Check local registration and consider intermediary organizations with established compliance programs. Be aware of sanctions and foreign corrupt practices risks.
How to document donations for tax purposes
- Keep donation receipts that show the charity’s name, donation date, and amount. For contributions over $250, obtain contemporaneous written acknowledgment (IRS rules).
- For noncash gifts, get a qualified appraisal for gifts over $5,000 when required, and complete Form 8283 where applicable (IRS guidance).
- For more on documentation and deduction limits, see our guide on [What Documentation You Need to Support Charitable Deductions](
