Born in the Philadelphia suburb of Havertown, Pennsylvania, Donaghy attended Cardinal O'Hara High School in Springfield, Pennsylvania along with three other NBA referees: Joe Crawford, Mike Callahan, and Ed Malloy. His father, Gerry Donaghy, was a referee at the highest levels of NCAA men's basketball for a long time. In 1989, Donaghy graduated from Villanova University with a degree in sales and marketing. While at Villanova, he played on the school's baseball team. According to the National Basketball Referee's Association, Donaghy participated and earned All-Catholic and All-Delaware County honors in baseball and All-Delaware County honors in basketball during high school, but then–Villanova baseball coach George Bennett contends that Donaghy did not play on the varsity team and that no records indicate that he was selected to the All-Catholic team in baseball or named to the All-Delaware County basketball team.
Donaghy married his wife Kimberly in 1995. They have four daughters. In September, 2007, shortly after the scandal broke, Kim filed for divorce.
On June 10, 2008, Donaghy's attorney filed a court document alleging, among other things, that Game 6 of the 2002 Western Conference Finals between the Los Angeles Lakers and Sacramento Kings was fixed by two referees. The letter states that Donaghy "learned from Referee A that Referees A and F wanted to extend the series to seven games. Tim knew Referees A and F to be 'company men', always acting in the interest of the NBA, and that night, it was in the NBA's interest to add another game to the series." The Lakers won Game 6, attempting 18 more free throws than the Kings in the fourth quarter, and went on to win the 2002 NBA Finals. The teams were not named, but the Western Conference Finals was the only seven-game series that year. The document claimed that Donaghy told federal agents that to increase television ratings and ticket sales, "top executives of the NBA sought to manipulate games using referees". It also said that NBA officials would tell referees to not call technical fouls on certain players, and states that a referee was privately reprimanded by the league for ejecting a star player in the first quarter of a January 2000 game. Stern denied the accusations, calling Donaghy a "singing, cooperating witness". Federal authorities investigated Donaghy's claims and found no evidence to support them. About this, AUSA Jeffrey Goldberg told the court, "...we’ve never taken the position that Mr. Donaghy has lied to us. But there is a difference between telling the truth and believing you’re telling the truth and finding out later that a number of the allegations don’t hold any water.”
Donaghy was one of three referees who worked the Pacers–Pistons brawl at The Palace of Auburn Hills on November 19, 2004, which ended in a fight between Pacers players and Pistons fans.
As a result of the betting scandal, Stern revised the guidelines on the behavior of NBA referees during the Board of Governors' meeting in 2007. Despite the labor agreement for referees, which restricted them from participating in almost all forms of gambling, it was revealed that about half of the NBA's officials had made bets in casinos, albeit not with sportsbooks. In addition, all referees had admitted to engaging in some form of gambling. Stern stated that "[the] ban on gambling is absolute, and in my view it is too absolute, too harsh and was not particularly well-enforced over the years". The gambling rules were revised to allow referees to engage in several forms of betting—though not on sports. There were several other referee-related rule changes made: the announcement of referees of a game was moved from 90 minutes before tip-off to the morning of the game, to reduce the value of the information to gamblers; referees received more in-season training and counseling on gambling; more thorough background checks were carried out; the league declared its intention to analyze the statistical relationship between NBA games and referees' gambling patterns for those games; and the interactions between referees and NBA teams were made easier and more formal.
According to the Associated Press, Andrew Thomas, the former county attorney for Maricopa County, Arizona, asked the NBA and FBI if Donaghy intentionally miscalled two Phoenix Suns road playoff games. The games in question occurred on April 29, 2007 versus the Los Angeles Lakers and May 12, 2007 versus the San Antonio Spurs. In a letter to Stern and FBI director Robert Mueller, Thomas said that Donaghy's conduct may have violated Arizona criminal law, and could face charges there.
On July 20, 2007, columnist Murray Weiss of the New York Post reported an investigation by the FBI into allegations of an NBA referee betting on games to control the point spread. It was revealed that Donaghy, who has a gambling problem, placed tens of thousands of dollars in bets on games during the 2005–06 and 2006–07 season and had been approached by low-level mob associates to work on a gambling scheme. Mike Missanelli of The Stephen A. Smith Show suggested that Donaghy had gotten himself into debt and tried to make it up by betting on games.
Donaghy claims that while imprisoned, he was attacked and threatened. He also claims that in November 2007 a man claiming to be an associate of the New York Mafia struck Donaghy with a paint roller extension bar, resulting in injuries to his knee and leg which required surgery. FBI SSA (ret.) Philip Scala and his colleagues scoffed at the notion a mobster harmed Donaghy in prison. Said Scala, "If organized crime wanted to hurt Donaghy, he wouldn't be around today."
Donaghy was released on a $250,000 bond and awaited sentencing on January 25, 2008. On June 19, 2008, the NBA filed a demand that Donaghy reimburse the league for the costs of his airfare and meals, complimentary game tickets, and other expenses, including $750 in shoes. Donaghy's lawyer said that this was the league trying to retaliate against Donaghy for his misconduct. A judge delayed sentencing to allow for more time to decide how much restitution Donaghy and two co-conspirators should pay the NBA for their roles in the betting scandal. The NBA has claimed Donaghy owes it $1.4 million, including $577,000 of his pay and benefits over four seasons, plus hefty legal fees and other expenses related to an internal investigation. His lawyer has argued that the punishment should apply to only one season—a position supported by the government in court papers.
On July 29, 2008, Donaghy was sentenced in the United States District Court for the Eastern District of New York to 15 months in prison for his participation in the gambling scandal. Donaghy could have faced up to 33 months, but Judge Carol Amon reduced his sentence to 15 months (two 15-month terms served concurrently, followed by 3 years of supervised release) in exchange for his cooperation. Judge Amon noted she held Donaghy "more culpable" than his two co-conspirators, adding, "Without Mr. Donaghy, there was no scheme." His lawyer, John Lauro, asked for probation, but the request was denied. Donaghy apologized in court, saying "I brought shame on myself, my family and the profession." Battista and Martino were sentenced earlier that month, earning sentences of 15 months and 366 days, respectively.
In the federal prison camp in Pensacola, Florida, Donaghy started to write his memoir, Blowing the Whistle: The Culture of Fraud in the NBA. The book was to have covered his NBA career, described his dealings with the "underworld" during the betting scandal, and explained how he would determine the winning team in the games he refereed. Donaghy also promised to "discuss the relationship that players, coaches and referees have with each other." The book was due to be published in October 2009. However, Donaghy's publisher, Triumph Books, canceled it because of liability concerns. Pat Berdan, Donaghy's liaison with Triumph, said the book was canceled after the NBA threatened legal action—which the NBA denies. Donaghy found a new publisher, VTi-Group, willing to release the book, which was renamed Personal Foul: A First-Person Account of the Scandal That Rocked the NBA. The book was released in December 2009.
On November 4, 2009, Donaghy was released from prison in Hernando County after serving out the remainder of his sentence.
Donaghy sued VTi-Group, the publisher of his memoir, for not paying him. In June 2012, a jury found VTi liable for breach of contract. Donaghy was awarded $1.3 million.
On April 22, 2014, Donaghy claimed that the league office was going to push referees to fix playoffs games to have Brooklyn Nets beat the Toronto Raptors, so they could advance to the second round and face the Miami Heat because it would be good for ratings, which it was. On May 4, 2014, the Nets eliminated the Raptors after winning game seven of the series by a point.
Donaghy was arrested on December 22, 2017 for aggravated assault. He was released on $5,000 bond and given an arraignment, scheduled for January 19, 2018. Donaghy had been looking for his 19-year-old daughter, who he believed was doing drugs at a friend's house. The two got into an argument; Donaghy told the house owner that he was going to hit him with a hammer if he came any closer. Donaghy's attorney said that he was "just trying to be a good dad."
On November 1, 2019, the movie Inside Game was released in theaters. The official film description focuses on Donaghy's decade-long misrepresentation of crucial facts about the NBA betting scandal.