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Public Policy
Vehicle Donation Program Reforms
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Status
The IRS issued a clarification
in December 2005 regarding deductions for donated vehicles sold
at auction. Donors are permitted to claim a fair market value deduction
if the charity gave or sold the car to a needy individual at a price
significantly below fair market value and as long as the transfer
furthered the charitable purpose of helping a poor person in need
of transportation. (Otherwise, tax deductions for charitable vehicle
donations of over $500 are generally limited to the sale price obtained
by the nonprofit -- see rule below.) The IRS has announced, however,
that it has become aware of "questionable practices" in
which some charities sell donated vehicles at auction and then claim
the sales are to needy individuals at prices below fair market value.
The IRS will, therefore, no longer treat vehicles sold at auction
as qualifying for the fair market value deduction.
The IRS also released guidance in January 2006 (Notice 2006-1) explaining reporting requirements for charitable organizations that receive vehicle donations.
IRS clarification
IRS Guidance (PDF)
Meanwhile, Senate Finance Committee Chair Charles Grassley (R-IA) sent a December 19 letter (PDF) to the IRS urged the agency to curtail abuses by some charities reselling donated cars to low-income consumers and requesting clarification about when charitable organizations must sell vehicles donated to the groups to comply with new IRS vehicle donation rules. The IRS issued an announcement on December 22, 2005 clarifying questions about timing of the vehicle sales and reminding donors of the need for written acknowledgment from the charity.
Interim Guidance
On June 3, 2005 the IRS released Notice (2005-44) (PDF) explaining new vehicle donation rules that implement changes enacted in October 2004 as part of the American Jobs Creation Act (AJCA). In general, the AJCA limits deductions for vehicle donations of over $500 to the sale price obtained by the charity. In some limited circumstances, however, the donor may claim fair market value. The interim guidance provides clarification on those limited circumstances and explains how to determine fair market value. The notice also includes guidance on acknowledgements that charities must provide to donors, and on penalties imposed on organizations that provide false or inadequate acknowledgments. Specific comments were requested on which markets are appropriate for measuring the fair market value of vehicles.
The rules provided in the interim guidance will apply until final
regulations become effective. The IRS
also issued a new Form 1098-C for charities to report to the IRS
the same information they provide to donors in the acknowledgments.
Form 1098-C (PDF)
Instructions to Form 1098-C (PDF)
Summary of Interim Guidance (IS member password required)
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Vehicle Donation Restrictions
Limits on the deductions taxpayers can take for donations of vehicles were
included in the American Jobs Creation Act (AJCA) (Public
Law No. 108-357) that President Bush signed into law on October 22,
2004. The bill generally limits deductions for vehicle donations to
the sale price obtained by the charity. (The AJCA
also included restrictions on deductions for patents and intellectual property
and new reporting requirements for corporations making noncash donations.)
The new vehicle donation law disallows deductions for contributions of used motor vehicles, boats, and airplanes if the value exceeds $500 unless the taxpayer files with his/her tax return a written acknowledgement from the charity. If the charity sells the vehicle (without any intervening significant use or improvement), the taxpayer’s deductions will be limited to the gross proceeds from the sale. The charity must provide the taxpayer with a certification that the vehicle was sold at “arms length” between unrelated parties and the sale price of the vehicle within 30 days of the sale.
If the charity intends to use or improve the vehicle, it must also provide the donor with an acknowledgment within 30 days of the donation including a detailed description of the intended use or improvement and a certification that the vehicle will not be sold before the use or improvement is completed.
The new law provides penalties for fraudulent acknowledgements provided to taxpayers. It applies to donations made after December 31, 2004. The law also provides provides the IRS with discretionary authority to issue new regulations or other guidance to exempt sales "which are in furtherance of an organization's charitable purpose" from the requirements that limit the deduction to the gross proceeds from the sale. According to the conference report explanation of the new law, an example of such an exemption would be an organization that furthers its charitable purpose by selling vehicles to needy persons at a price significantly below fair market value.
Independent Sector Position
Independent Sector supports tax incentives for charitable giving, including in-kind gifts, but shares congressional concerns about the integrity of establishing and enforcing protections against taxpayer abuses. IS is working with nonprofit organizations that operate or benefit from vehicle donation programs to develop alternative proposals which would address both concerns.
Independent Sector wrote a letter to Treasury Secretary John Snow to register opposition to a proposal similar to the Senate provision that was described in the Joint Committee on Taxation analysis of the President’s FY 2005 budget proposal.
Principles for Vehicle Donation Reform
The vehicle donations working group has developed four draft principles that should govern reform of vehicle donation program operations by charities and by Congress:
- Charitable nonprofits operating or participating in vehicle donation programs should provide donors with a receipt that includes a clear description of the vehicle that was donated including the age, make, model, mileage, whether the vehicle was operable at the time of the donation, and any visible defects in the vehicle that could affect its resale value.
- Charitable nonprofits operating or participating in vehicle donation
programs should always advise donors that they may only claim tax deductions
for the "fair market value" of donated vehicles, based on
the condition (age, model, mileage, operating condition, and appearance)
of the vehicle. Advertisements, Internet postings, and other notices
about the program should not promise or suggest that donors can take
the "full blue book" value of their vehicle.
- Charitable nonprofits should carefully review the terms of contracts with third-party agents acting on their behalf with a special focus on the types of fees the agent will charge to the charity for towing and disposing of vehicles, the reimbursement arrangements for the charity, and the information the agent will provide to donors and to the charity.
- The Internal Revenue Service should increase its enforcement of current federal legal restrictions (including requirements for filing the Forms 8282 and 8283 by donors and charities). Legislation should be passed to remove barriers to cooperation between federal and state charity regulators in investigating and prosecuting cases of fraudulent vehicle donation operations (i.e., false advertising claims to donors, false claims that the agent represents a charity/charities without any return to the charity or the misrepresentation of a for-profit agency as a nonprofit organization).
Background
Gifts of donated property, clothing, vehicles, and other non-cash items
have long been an important source of revenue for many charitable nonprofit
organizations. In recent years, the number of charities operating or participating
in vehicle donations has been rising dramatically, spurring heightened
scrutiny by the press and by government officials. Following the release
of a General Accounting Office (GAO) report (GAO-04-73)
(PDF) on vehicle donations
to charity in December 2003, Congress has focused its attention on three
specific areas:
- Concerns that some taxpayers are overstating the value of donated vehicles when claiming tax deductions for charitable donations.
- Concerns that third party agents are collecting unreasonable fees for advertising and processing vehicle donations, thereby leaving few proceeds to support charitable programs.
- Concerns that there is not effective IRS oversight and enforcement of non-compliance with tax law in this area by both charities and individual taxpayers.
Currently, taxpayers who itemize deductions are allowed to deduct the
fair market value of vehicles donated to a qualified charitable organization.
If the vehicle is valued at $5,000 or more, the taxpayer must obtain an
independent appraisal of the vehicle to claim a tax deduction. If the
vehicle is valued over $500, the taxpayer must attach to their tax return
a Noncash Charitable Contributions Form 8283 with a description of the
donated property and the name and address of the charity receiving the
vehicle. The IRS provides guidance to taxpayers (Publication
561) (PDF) about how to determine the fair
market value of their donated property. In December 2003, the IRS issued
specific guidelines and cautions to taxpayers regarding vehicle
donations. The IRS has also issued two
publications in June 2004 for charities that operate car donation
programs (Publication
4302 PDF) and for individuals who donate
their cars (Publication
4303 PDF updated in February 2006).
The GAO Report on Vehicle Donations
At the request of the Senate Finance Committee, the General Accounting Office (GAO) undertook a study of charitable vehicle donation programs to determine the size and scope of the programs, compare the tax deductions claimed by donors with the proceeds received by charities, and evaluate related IRS and state compliance activities.
The GAO's final report (GAO-04-73)
(PDF), issued in December 2003, found that
733,000, or 0.6 percent, of all individual tax returns included claims
for vehicle contributions, lowering taxpayers' income tax liability by
an estimated $654 million.
The GAO estimates 4,300 charities -- 2.7 percent of all charities with
annual revenue of $100,000 or more -- have vehicle donation programs.
The annual net proceeds from vehicle donations for the 65 nonprofits with
vehicle donation programs interviewed by the GAO ranged from $1,000 for
two vehicles to over $8.8 million for 70,000 vehicles. The total annual
net proceeds from vehicle donations to charities is unknown.
In two-thirds of the 54 specific vehicle donations examined by the GAO, the charity received 5% or less of the value donors claimed as a deduction. The GAO attributes some of this difference to the cost of fundraising, vehicle towing and processing, and third-party agent fees. Charities generally resell vehicles at wholesale auction prices, which are substantially lower than retail (i.e., person to person) sales prices, but are less costly to administer.
The GAO noted that there is insufficient information about the condition of a donated vehicle to determine whether the deduction claimed by the taxpayer accurately reflects the vehicle’s fair market value. Audit leads are generated when there is a wide discrepancy between the proceeds reported by charities from disposal of donated vehicles on the Donee Information Return (Form 8282) and the amounts claimed by taxpayers on their tax returns. The GAO reports that the IRS does not follow up on audit leads on potentially overstated noncash contributions because it has higher priority compliance issues to address. Further, the IRS does not record or retain the Donee Information Returns filed by charities, limiting its ability to substantiate discrepancies in later audits.
The IRS is scheduled to complete a National Research Program study on the level of noncompliance in reporting noncash contributions in December 2004. The results of that study are expected to provide further guidance on the level of noncompliance in reporting noncash contributions.
Treasury Proposal
President Bush included a provision in his Fiscal Year 2005 budget proposals
that would require taxpayers claiming a tax deduction for vehicle donations
to obtain an independent appraisal of the fair market value of the vehicle
to substantiate their deduction claim. The Treasury Secretary may establish
an administrative safe harbor in published guidance that could establish
a minimum level for the appraisal requirement or it could provide an alternative
standard for what constitutes a qualified appraisal. This proposal is
analyzed on pages 274-279 of The
Joint Committee on Taxation's analysis (PDF) of the FY 2005 budget revenue proposals.
Last updated: April 11, 2006
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