This article was updated on November 16, 2022.
How to verify charitable status
The Internal Revenue Service (IRS) requires funders to verify the 501(c)(3) status of grantseekers. To verify that an organization is recognized as a 501(c)(3) tax-exempt organization by the IRS, visit the search tool for the IRS’s database, which contains a list of tax exempt organizations. (Note that organizations exempt under 509(a)(1) or 509(a)(2) may not appear in the database. This may apply to certain religious organizations, small organizations, organizations covered by a group ruling letter, or organizations based outside the United States.) Project Streamline’s Due Diligence tool provides more information on the legal requirements of due diligence.
Resources on Sourcing and Diligence
- The article "Philanthropic Sourcing, Diligence, and Decision Making: An Equity-Oriented Approach" offers practical sourcing and diligence guidance for donors who want to increase their contributions to social change efforts.
- "Resource List: Philanthropic Sourcing and Diligence" compiles articles and reports on nonprofit sourcing and diligence over the past 20 years.
When donating to international organizations, funders must perform an equivalency determination on the status of the organization to see if it holds its country’s equivalent of 501(c)(3) status. This applies only to US donors, who must comply with the IRS’s legal due diligence requirements. NGOsource provides a guide to equivalency determination and Project Streamline’s Due Diligence tool also covers categories of international organizations that may not require an equivalency determination.
Foundations and other funders must also ensure individuals and organizations have not been sanctioned by the US government, before making grants or providing financial support. The Office of Foreign Assets Control at the US Department of the Treasury maintains a list of individuals and organizations who have been sanctioned in some way. This includes individuals and organizations who are designated as terrorists or narcotics traffickers.
Another group of tax-exempt organizations falls within the 501(c)(4) category. 501(c)(4) organizations can advocate and lobby for political causes, including endorsements of political candidates, as long as political advocacy is not their primary activity. To determine 501(c)(4) status, visit the IRS’s search tool.
What can you find in an Annual Report
An annual report often includes a financial overview, including a breakdown of revenues and expenses, changes over the past year (such as investments in infrastructure or the sale of assets), and sources of income. Annual reports are created by the nonprofit and often provide more detailed information on their financial situation and program impact. Search for annual reports on Candid’s GuideStar database or the nonprofit's website.
All nonprofits with gross receipts above $50,000 are required to file an IRS Form 990 (or 990-EZ). The Form 990 is publicly available and may be found on the organization's page or on nonprofit databases such as GuideStar. (Note that the database may not be comprehensive.)
Why don’t they have a 990?
Some smaller or newer organizations are fiscally sponsored, which means that they are projects or organizations that do not have tax-exempt status. Rather, a larger 501(c)(3) receives donations on their behalf and transfers the funds through a “grant” to them. These donations are filed in the 501(c)(3) fiscal sponsor’s Form 990. Fiscal sponsors will list their fiscal sponsorships in their 990s and some may even provide itemized donation information for their fiscal sponsorees. The easiest way to find financial information about a fiscally sponsored organization is to search the sponsor’s Form 990.
A Form 990 can help you answer questions such as: “How much income did the filer receive and from what sources?” and “Who are the filer's board members?” For a guide to reading a Form 990, see “Highlights of IRS Form 990.”
All organizations with an annual revenue over $750,000 are required by the US government to have a certified public accountant perform a financial audit and write a memorandum on internal controls—more familiarly known as the management letter. Some states also have their own audit requirements.
The financial audit is a tool that will help you to assess the organization’s financial security based on its financial statements, and policies and procedures. The financial audit includes footnotes prepared by the auditor to help you interpret the balance sheet, income statement, and cash flow statement. The footnotes pertain to significant accounting policies and often help to explain issues such as in-kind donations, the relative liquidity of assets, etc. For example, a food bank may appear to have $3.5 million in revenue, when $3 million of that consists of in-kind food donations that cannot be used to support the organization’s payroll and facilities.
An organization will receive a management letter if the auditor has comments for the board or financial management team. It is common for nonprofits to receive at least one comment. The comments are classified as “deficiency,” “significant deficiency,” and “material weakness,” and will give you a sense of the areas in which the organization can improve.
- “Deficiency” generally indicates that the organization has made minor mistakes in its financial processes. These comments signal areas for improvement or issues where the auditor has identified potential for error, even if no errors have occurred yet.
- “Significant deficiency” generally indicates that the organization has made more serious errors or has received more than one comment. It is important to note that the auditor has the right to increase all “deficiency” ratings to “significant deficiency” if the organization receives more than one comment of any kind. By asking respectful questions of the organization, try to understand if the comments add up to a larger issue with the organization, or if they note problems that are not related to one another.
- “Material weakness” generally indicates that the organization lacks financial capabilities. These comments are sometimes noted if an organization has to issue a restatement for an accounting error made in a previous year. A “material weakness” is a significant problem and it would be worth engaging the organization in an extensive discussion.
Note that it may be helpful to request management letters over several years in order to evaluate whether the organization has taken steps to address past deficiencies.