Should You Give Through Crowdfunding Websites?

There have been a lot of reports in recent days about a homeless veteran who alleges that a New Jersey couple spent more than $400,000 they had raised on his behalf on the crowdfunding website GoFundMe. 

The case raises a good question: How safe are the campaigns on crowdfunding websites? The answer is that you're taking your chances when you respond to these online appeals.

There are plenty of cases of alleged fraud on crowdfunding websites, such as the one I mention in a story I wrote for Consumer Reports. In that instance, an Iowa woman was placed on probation after she pleaded guilty to misrepresenting that her daughter had cancer.

Even if a crowdfunding site has a policy to protect donors from fraud, it can be difficult to determine whether the money has been used for the advertised charitable purpose.

And there are other considerations. Donations to crowdfunding campaigns typically aren't tax deductible. And when you donate through these sites, a portion of your contribution is siphoned off for fees charged by the sites and credit card processors. In the U.S., for instance, GoFundMe currently charges 30 cents per donation and a processing fee of 2.9 percent. 

Another issue is the possibility that a campaign will raise far more than actually is needed, whether it's to pay for an operation for a pet, help a family recover from a fire or anything else. What happens to the extra money? That's typically not a question with charities, which focus on a broad range of needs.

Of course, there's no guarantee that real charities will spend their donations effectively either, and there have been plenty of reports about abuse and outright fraud by nonprofits. And charities often have plenty of overhead expenses, including for fundraising and administrative functions, that can seriously reduce the amount that goes to save the whales, protect the environment, help the needy, fight disease or any other cause. 

But real charities at least have some accountability. Typically, they're required to file federal tax returns, so-called federal form 990, that show, among other things, how much they raise and how they spend their money. Charities also provide independent audits and annual reports. Beyond that, many national nonprofits and regional groups are evaluated by three major charity watchdogs, the BBB Wise Giving Alliance, Charity Navigator and CharityWatch. Charities also are closely regulated by the states. Finally, nonprofits that have been around for a while have established track records that can demonstrate how effective they are at addressing their charitable missions, not so with a temporary crowdfunding  that appeared overnight.

Of course, donating to a charity isn't necessarily as gratifying as giving to a crowdfunding campaign, in which you'll likely know the exact individuals or project your money is supporting. But charities have expertise in identifying the greatest needs within a given cause, and they divide their resources so that they help more just one person or project. 

What to Do

The safest and most effective way to give is to a nonprofit group that meets the standards of the charity watchdogs, especially if you're hoping for a tax deduction.

If you want to give to a crowdfunding campaign, use your judgment. Find out exactly who is raising the money, how it will be used, the amount that's needed and, if possible, what will happen to any excess donations.

One way to be confident that your gift is going to a good cause is to give to campaign that's been set up for someone you know, such as a relative or friend whose needs you're sure about. But even then, you probably can give directly and avoid the fees. Another option is look for a campaign that's being overseen by a trustworthy third-party, such as a local civic group.