oversight

Vehicle Donations: Taxpayer Considerations When Donating Vehicles to Charities

Published by the Government Accountability Office on 2003-04-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Finance, U.S. Senate




For Release on Delivery
Expected at
10:00 a.m. EST
                          VEHICLE DONATIONS
Tuesday, April 1, 2003

                          Taxpayer Considerations
                          When Donating Vehicles to
                          Charities
                          Statement of Cathleen A. Berrick
                          Acting Director, Homeland Security and Justice




GAO-03-608T
                          A
                                                April 1, 2003


                                                VEHICLE DONATIONS

                                                Taxpayer Considerations When Donating
Highlights of GAO-03-608T, testimony
before the Senate Finance Committee.            Vehicles to Charities



According to the Internal Revenue               Revenue from donated vehicles is a welcomed, and sometimes crucial,
Service (IRS), charities are                    source of income for a number of charities. Donors, by following
increasingly turning to vehicle                 available guidance and making careful selection of charities for their
donation programs as a fund-
raising activity, resulting in
                                                donations, can provide charity support while benefiting themselves
increased solicitations for donated             through tax deductions or disposing of unwanted vehicles.
vehicles. Therefore, to make
informed decisions about donating               Taxpayers generally first learn about vehicle donation programs through
their vehicles, taxpayers should be             advertisements. Interested donors call the advertised number and either
aware of how vehicle donation                   reach a charity that operates its program in-house, or a third-party fund-
programs operate, the role of fund-             raiser acting on the charity’s behalf. The charity or fund-raiser asks
raisers and charities in the vehicle
                                                questions of the potential donor regarding the vehicle, and then collects
donation process, and IRS rules
and regulations regarding                       and sells the vehicle for proceeds.
allowable tax deductions. Due to
the increased use of vehicle                    The proceeds a charity receives from a vehicle donation may be less than
donation programs, GAO was                      what a donor expects. Two factors contribute to this difference. First,
asked to describe (1) the vehicle               charities often sell vehicles at auto auctions for wholesale prices rather
donation process, (2) the amount                than the prices donors may receive if they sold their vehicles themselves.
of proceeds received by charities               Second, vehicle processing costs—whether the charity’s or the fund-
and fund-raisers, (3) donor tax
deductions, and (4) taxpayer                    raiser’s---as well as the fund-raiser’s portion of net proceeds further
cautions and guidance.                          reduces the amount of proceeds a charity receives.

                                                Of the 129 million individual returns filed for tax year 2000, an estimated
                                                733,000 returns had tax deductions for vehicle donations that lowered
GAO is not recommending
executive action. However, based
                                                taxpayers’ tax liability by an estimated $654 million. No data exist on
on guidance issued by the IRS and               whether these deductions were appropriately claimed.
other sources, GAO identified
several steps that taxpayers should             To assist donors in making decisions regarding vehicle donations, IRS
take before donating their vehicles             and other organizations have issued guidance on steps potential donors
and claiming tax deductions.                    should take before making vehicle donations. These steps include
These steps include                             verifying that the recipient organization is tax-exempt, asking questions
  • verifying that the recipient
                                                about vehicle donation proceeds, and deducting only the fair market
      organization is tax-exempt,
  • asking questions about                      value of the vehicle on tax returns.
      vehicle donation proceeds,
  • deducting only the fair                     The Vehicle Donation Process
      market value of the vehicle,
      and                                                                                                                      Parts
                                                                                                                               Reclaimer
  • following state laws                                                                                                                     $ Revenue $

      regarding title transfer for                                                          Charity or fundraiser
                                                                                                  arranges
      vehicles.                                                                               vehicle pickup
                                                                                 Vehicles                           Autos                    $ Net $
                                                                                   are                               sold                    Proceeds
                                                                                 donated
www.gao.gov/cgi-bin/getrpt?GAO-03-608T.
                                                               Advertisement
                                                               solicits donors
                                                                                                                                             $ Revenue $
To view the full testimony, click on the link                                                                               Auto auction /
above. For more information, contact                                                                                           dealers
Cathleen A. Berrick at (202) 512-3404, or
berrickc@gao.gov.                               Source: GAO.
Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss our ongoing work on vehicle
donation programs. According to the Internal Revenue Service (IRS), an
increasing number of charities are turning to vehicle donations as an
effective way to raise money. In order to make informed decisions about
these donations, however, taxpayers should be aware of how vehicle
donation programs operate, the role of charities and third-party fund-
raisers in the vehicle donation process, and IRS rules and regulations
regarding allowable tax deductions.

The tax code generally allows taxpayers to deduct vehicle donations and
other noncash contributions from their federal taxes if the donations go to
certain qualified organizations such as churches and most nonprofit
charitable, educational, and medical organizations. There is no national
data identifying the percentage of charities that operate vehicle donation
programs,1 or the number of third-party fund-raisers that solicit donated
vehicles on charities’ behalf.

The proceeds from vehicle donations can be an important, and sometimes
crucial, source of support for charities. One charity reported that starting a
vehicle donation program helped it avoid a potential deficit after it had to
cancel a major fund-raising event due to the events of September 11, 2001.
Other charities we spoke with estimated that vehicle donations made up
from less than 1 percent to about 98 percent of their respective budgets.
We plan to conduct a nation-wide survey of charities to determine their use
of vehicle donation programs, and the importance of the programs to their
operations.

Because charities have increasingly turned to vehicle donation programs to
raise funds, interest has been raised regarding how these programs
operate. Accordingly, you asked us to describe how vehicle donation
programs work, as well as information taxpayers should be aware of when
donating their vehicles. Today, I will discuss (1) the vehicle donation
process, (2) the amount of proceeds received by selected charities and




1
  We use the term “vehicle donation” to refer to vehicles, boats, and farm equipment donated
to a charity, although vehicles are most commonly donated. The term “vehicle donation
program” refers to situations wherein a charity officially solicits donated vehicles, rather
than occasionally accepting unsolicited vehicles.




Page 1                                                                         GAO-03-608T
commercial fund-raisers, (3) donor tax deductions, and (4) taxpayer
guidance and cautions.

For my statement today, we relied on several sources, including an analysis
of donor surveys regarding vehicle donations conducted by two charities,
vehicle donation advertisements, and a sample of tax returns where
taxpayers claimed deductions for donated vehicles. To determine how
vehicle donation programs work, we also interviewed officials of IRS, 10
states, 17 charities, 4 fund-raisers, and 5 related interest groups. We began
our review in October 2002, and plan to issue a final report in September
2003.

In summary, our work to date shows the following:

• There are two basic types of vehicle donation programs: those operated
  in-house by charities and those operated by third-party fund-raisers. For
  in-house programs, charities advertise for donated vehicles, pick up the
  vehicles, and sell the vehicles, generally at auto auctions or they salvage
  the vehicles for parts. For fund-raiser programs, fund-raisers generally
  perform the advertising, pick up, and selling functions, and also retain a
  portion of the net vehicle proceeds, after expenses. Individuals
  generally learn about vehicle donation programs through
  advertisements. A small percentage of the advertisements we reviewed
  could potentially mislead donors regarding allowable tax deductions.

• Charities operating in-house vehicle donation programs, and those using
  the services of third-party fund-raisers, consider proceeds received from
  vehicle donations as a welcome source of revenue. However, the total
  proceeds a charity receives from a vehicle donation may be less than
  what a donor expects. We identified two factors that contribute to this
  difference. First, charities and fund-raisers often sell vehicles at auto
  auctions and receive wholesale prices rather than the prices donors
  might receive if they sold their vehicles to private parties. Second,
  vehicle processing and fund-raising costs are subtracted from vehicle
  revenue, further reducing proceeds. Although charity proceeds may be
  less than what a donor expects, results of donor surveys identified that
  in addition to supporting charitable causes, individuals most often
  donated their vehicles in order to claim a tax deduction, or to dispose of
  an unwanted vehicle.

• Of the 129 million individual returns filed for tax year 2000, an estimated
  0.6 percent, or 733,000 returns, had tax deductions for vehicle



Page 2                                                            GAO-03-608T
                          donations. The vehicle donation deductions totaled an estimated $2.5
                          billion of the $47 billion in noncash contributions claimed. The vehicle
                          donations deductions lowered taxpayers’ income tax liability by an
                          estimated $654 million of the $1 trillion tax liability reported on returns.

                       • Because of the number of charities that are involved in vehicle donation
                         programs, IRS and other organizations have issued guidance on steps
                         potential donors should consider before donating their vehicles to
                         charity and claiming associated tax deductions. These steps include
                         verifying that the recipient organization is a tax-exempt charity, asking
                         questions about vehicle donation proceeds, deducting only the fair
                         market value of the vehicle, and following state laws regarding title
                         transfers for vehicles. In addition, in 2001 IRS created a cross-functional
                         Donated Property Task Force to study issues surrounding donated
                         property, including vehicle donation programs, and identify methods to
                         monitor this area.

                       I would now like to discuss these areas in more detail.



The Vehicle Donation   Individuals often first learn about vehicle donation programs through
                       advertisements. Vehicle donation advertisements can be found on
Process                billboards, truck banners, and television, as well as in newsletters and even
                       on small paper bags. Some of the most common mediums for vehicle
                       donation advertisements include the radio, newspapers, and the Internet.

                       Based on a sample of advertisements we reviewed,2 we found that
                       advertisements for vehicle donations often identified that individuals could
                       claim tax deductions for the donations, the donations served charitable
                       purposes, and the donors’ vehicles would be towed free of charge. Figure 1
                       identifies the most common claims made in the newspaper, radio, and
                       Internet advertisements we reviewed.




                       2
                         We analyzed 147 advertisements for vehicle donations, including 69 newsprint
                       advertisements from a sample of 50 newspapers nationwide, 33 radio advertisements from
                       19 radio stations in the top 10 U.S. markets, and 45 Internet advertisements. Our results
                       cannot be projected to all vehicle donation advertisements.




                       Page 3                                                                       GAO-03-608T
Figure 1: Most Common Claims in Newspaper, Radio, and Internet Advertisements Reviewed
  100 Percentage

   90

   80

   70

   60

   50

   40

   30

   20

   10

    0
          Ads with    Tax deduction    Serves             Free          Vehicles           Avoid            Some           Percent            Other
          no claims                   charitable         towing/        accepted          hassles         restrictions     going to
                                       purpose           pick up         running                                            charity
                                                                          or not

                                                            Newspaper
                                                            Radio

                                                            Internet

Source: GAO.

                                                   Note: GAO analysis of 147 vehicle donation advertisements. Claims classified as “other” included
                                                   promises that vehicles would be picked up in 24 hours, title transfer would be handled, or contributions
                                                   would be used locally.


                                                   IRS has expressed concern about some vehicle donation advertisements.3
                                                   According to an official from IRS’s Tax Exempt Division, tax deduction
                                                   claims are potentially deceptive when they do not specify that taxpayers
                                                   must itemize their deductions to claim a vehicle donation, since many
                                                   taxpayers do not itemize. Of the 147 advertisements we reviewed, 117

                                                   3
                                                     Responsibility for oversight of advertisements is diffused. The Federal Communications
                                                   Commission defers regulatory authority regarding false advertising on radio or television to
                                                   the Federal Trade Commission (FTC). FTC is charged with taking action against unfair or
                                                   deceptive acts that affect commerce. FTC does not have specific jurisdiction over charities,
                                                   but may become involved in cases of fraud. State officials are primarily responsible for false
                                                   advertising by charitable organizations. Officials we interviewed from two states said that
                                                   limited resources prevent them from providing broad oversight over advertisements, and
                                                   that they generally review advertisements in response to consumer complaints, or when
                                                   they discover that charities or fundraisers are soliciting in their state without being
                                                   registered.




                                                   Page 4                                                                                   GAO-03-608T
identified that taxpayers could claim a tax deduction, but only 7
advertisements specified that donors must itemize in order to claim a
deduction.

IRS also expressed concern when advertisements claim donors can value
their vehicles at full, or maximum, market value when claiming a tax
deduction. IRS does not define full or maximum value, but believes these
claims may be misleading since vehicles are required to be valued at fair
market value. IRS stated that these advertisements may be particularly
misleading when they also claim that vehicles will be accepted whether
they are running or not. Fair market value equals what a vehicle would sell
for on the market, and takes into account a vehicle’s condition and mileage,
among other factors. Of the 117 advertisements we reviewed that mention
tax deductions, 38 specified that donors could claim fair market value on
their tax returns when donating their vehicles; while 8 identified that a
donor could claim full or maximum market value. Other advertisements
referred potential donors to the IRS Web site, an accountant, used car
guides such as the Kelley Blue Book,4 or other sources for guidance on
claiming a tax deduction.

After deciding to donate a vehicle to charity, a donor will generally
encounter one of two types of vehicle donation programs: those operated
by charities (in-house) and those operated by a for-profit or not-for profit
fund-raiser (fund-raiser). Donors may not know whether they are donating
vehicles directly to charities or through fund-raisers.5 Figure 2 identifies
the vehicle donation process for both in-house and fund-raiser vehicle
donation programs.




4
  The Kelley Blue Book is one of several guides listing values for various models of used
vehicles based on their condition and mileage.
5
    This may not be a factor for donors if their primary motivation is disposing of their vehicle.




Page 5                                                                              GAO-03-608T
Figure 2: Vehicle Donation Process

                                                                                                 Parts
                                                                                                 Reclaimer
                                                                                                                $ Revenue $

                                                     Charity or fundraiser
                                                           arranges
                                                       vehicle pickup
                                     Vehicles                                Autos                              $ Net $
                                       are                                    sold                              Proceeds
                                     donated
               Advertisement
               solicits donors
                                                                                                                $ Revenue $
                                                                                             Auto auction /
                                                                                                dealers


Source: GAO.



                                            For in-house programs, charities, typically larger ones, advertise for vehicle
                                            donations, and respond to donor’s initial call inquiring about a donation.
                                            After the charity determines that it will accept the vehicle,6 it arranges to
                                            have the vehicle picked up, often towed, and delivered to wherever it will
                                            be stored until it is liquidated. The charity provides the donor with a receipt
                                            when the vehicle is picked up, or at a later time to document the donation
                                            for tax purposes. At the time the vehicle is picked up, the charity obtains
                                            the title of the vehicle from the donor, and some charities may provide
                                            donors with state-required forms (e.g., release of liability) or references for
                                            establishing the tax deductible value of their donated vehicles (e.g., Kelley
                                            Blue Book or IRS guidance). Charities we spoke with stated that it is up to
                                            the donor to establish the vehicle’s value. Once the donated vehicles are
                                            collected, they are generally sold at auto auctions or salvaged for parts, but
                                            may also be sold to auto dealers or to the general public. Charities with in-
                                            house programs keep 100 percent of the net proceeds after deducting costs
                                            associated with processing the vehicles.



                                            6
                                              When a charity or commercial fund-raiser receives the initial call from a potential donor,
                                            the donor is asked questions about the vehicle, including the vehicle’s make, year, and
                                            condition, and whether the donor has the title. Some programs will only accept vehicles
                                            expected to produce a profit after towing and other expenses. Charities sometimes will
                                            accept vehicles regardless of condition, because, as one charity stated, they view accepting
                                            vehicles with little value as generating goodwill for future donations.




                                            Page 6                                                                         GAO-03-608T
For fund-raiser programs, 7 fund-raisers generally perform some or all of
the tasks associated with advertising, vehicle pick up, and vehicle disposal.
After deducting expenses, fund-raisers keep a portion of the net proceeds
from the vehicle sale or salvage, providing the remainder of the proceeds to
the specified charity. A charity working with a fund-raiser may have no
oversight of the process, leaving the operation of the program, and
distribution of proceeds, up to the fund-raiser.

The relationship between charities and fund-raisers varies, depending on
the agreements they have established. Some commercial fund-raisers may
handle vehicle donation programs for many charities. For example, one
national fund-raiser has contracts with about 140 charities, and another
works with about 200 charities. Charities may also contract with multiple
fund-raisers. Fund-raisers often support smaller charities that would not
otherwise be able to participate in vehicle donation programs. For
example, at one California charity, a staff person spent half her time
working with two vehicle donation fund-raisers, which together generated
about $110,000 for the first six months of the current year (approximately
8 - 10 percent of its annual budget).

In addition to the in-house and fund-raiser programs described above, we
identified some variations in how vehicle donation programs operate. For
example, see the following:

• Some charities refurbish donated vehicles for their own program
  services or clients, rather than for sale or salvage.

• One state consortium of 14 charities jointly runs a vehicle donation
  program in conjunction with a wrecking yard. The charities share in
  oversight of the operations, such as inspecting donated vehicles and
  monitoring vehicle donation reports. Donors can select one charity to
  receive the proceeds, or proceeds are split among members of the
  consortium equally if no charity is designated.

• One large charity runs a national vehicle donation program and serves
  regional offices as a fund-raiser would, charging its regions vehicle
  processing costs. Some of the charity’s affiliates choose other fund-
  raisers and do not participate in the national program.


7
  Some charities perform vehicle donation fund-raising for other charities, but most of the
vehicle donation fund-raisers we identified were for-profit businesses.




Page 7                                                                         GAO-03-608T
                   • Another large charity runs a national program and serves charity
                     affiliates but also has a nonprofit vehicle donation program for other
                     smaller charities.



Vehicle Donation   The total proceeds a charity receives from a vehicle donation may be less
                   than what a donor expects. We identified two factors that contribute to
Proceeds           this difference. First, charities and fund-raisers often sell vehicles at auto
                   auctions for wholesale or liquidation prices or to salvage yards for parts,
                   rather than obtaining the amount they would receive if vehicles were sold
                   to private parties. Second, vehicle processing and fund-raising costs are
                   subtracted from vehicle revenue, further lowering proceeds.

                   According to a 2001 survey of charitable donors commissioned by the Wise
                   Giving Alliance, donors expect at least 70 to 80 percent of a charity’s funds
                   to be used for charitable purposes rather than fund-raising or
                   administrative costs. Actual charity receipts reported to state officials for
                   charity fund-raising are less. For example, in New York telemarketing
                   fund-raisers (not specifically vehicle donations) returned 32 percent of
                   funds raised for charities in 2000. Although donors are often motivated by
                   serving a charitable cause when donating their vehicle, the results of donor
                   surveys identified that individuals are also motivated by the ability to claim
                   a tax deduction and to dispose of an unwanted vehicle. 8

                   Figure 3 provides an example of the amount a charity received from an
                   actual vehicle donation. In this case, a 1983 truck was donated in 2001 to a
                   charity whose vehicle donation program is operated through a fund-raiser.
                   The gross sale price for the truck (sold at an auction) was $375. After
                   deducting fund-raiser and advertising expenses, net proceeds totaled
                   $63.00. This amount was divided evenly between the fund-raiser and
                   charity, leaving the charity with $31.50 from the vehicle donation. The
                   donor claimed a deduction of $2,400 on his or her tax return, based on the
                   fair market value of the vehicle as identified in a used car guidebook.




                   8
                    Two charities shared voluntary feedback provided by vehicle donors. Over 3,000 donors
                   responded in one survey and about 400 responded in the other. We did not review the
                   methodology for the surveys and consider the results to be illustrative.




                   Page 8                                                                     GAO-03-608T
Figure 3: Example of Vehicle Donation
                                                                  Gross sale
                           Vehicle
                                                                      price
                          donation
                                                                  (wholesale)
                         1983 Truck
                                                              Truck sold at auction
                                                                  for $375.00
        Proceeds
           after
        expenses                                Net
     After deducting                         proceeds
        $312.00 in                           to charity                        For tax
     fundraising and                                                          deduction
                                          Charity receives
    advertising costs,                                                      Donors claimed
                                            $31.50, half of
   the net proceeds of                                                       $2400 on tax
                                          the net proceeds
                                                                                return
     $63.00 are split                       from donation
       with charity

Source: GAO.

Note: GAO analysis of an actual vehicle donation.


Charities operating in-house vehicle donation programs incur costs
associated with processing vehicles for sale or salvage, but do not incur
additional fees generally associated with fund-raiser programs. Processing
costs cannot be compared among in-house programs because charities may
record their costs differently. One of the few in-house charities we spoke
with reported that it earned a net average of 42 to 44 percent of the sales
price of donated vehicles. Another charity operating a national program
for local affiliates reported a range of 13 to 32 percent net proceeds for
programs operating for over 2 years, and a deficit to slightly in excess of
breakeven for newer programs.

Proceeds received by charities participating in vehicle donation programs
run by fund-raisers also varied, in part due to the different processing costs
deducted by fund-raisers, as well as different agreements between charities
and fund-raisers for splitting net proceeds. Some charities receive a
percentage of the net proceeds, after the fund-raisers costs are deducted.
Other charities receive the net proceeds remaining after the fund-raiser
deducts a flat fee for expenses.




Page 9                                                                           GAO-03-608T
California is the only state that systematically captures information on the
percentage of proceeds received by charities through vehicle donation
programs.9 However, California only captures information related to
programs run by fund-raisers, and cannot separately identify the number of
charities that operate in-house programs. According to a report from the
California State Attorney General’s Office, less than 1 percent of registered
charities in California have vehicle donation programs that are managed by
commercial fund-raisers. In 2000, these fund-raisers generated
approximately $36.8 million in sales revenue, with about $11.3 million
(31 percent on average) being returned to the charities. As shown in figure
4, California charities received proceeds from fund-raiser programs ranging
from less than 20 percent to over 80 percent of the net proceeds from
vehicles, but most were in the 40 – 59 percent range.



Figure 4: Vehicle Donation Proceeds to California Charities Using Fund-raisers
100 Number of charities
                                           94
  90

  80

  70

  60

  50

  40                      41

  30     31

  20
                                                 15
  10
                                                           6
   0
        Less           20-39             40-59   60-79      80
       than 20                                           or more
       Percent of proceeds received by charity
Source: California Attorney General’s Office.




9
  National data on the proceeds charities receive from vehicle donation fund-raising do not
exist. Although IRS’s Form 990 collects information from charities on fund-raising costs, it
does not identify the portion, if any, related to vehicle donations.




Page 10                                                                        GAO-03-608T
                       Issues relating to charity proceeds from fund-raising reached the Supreme
                       Court on March 3, 2003, in arguments related to “Ryan v. Telemarketing
                       Associates”. The Attorney General of Illinois is appealing a decision of the
                       Illinois Supreme Court10 to dismiss fraud charges against Telemarketing
                       Associates. At issue were solicitations implying that cash donations would
                       go to a charity to buy food baskets and blankets for needy veterans, while
                       only 15 percent of the funds raised actually went to the charity. As part of
                       the case, donor affidavits were reviewed stating that some individuals
                       would not have donated if they knew the percentage of proceeds the
                       charity would actually receive. The Supreme Court has ruled in three
                       previous cases that percentage-based limitations on charitable solicitations
                       were unconstitutional. The Supreme Court decision in this case is not
                       expected until July 2003.

                       We plan to conduct a national survey of charities to further review vehicle
                       donation proceeds received by charities and fund-raisers. We will identify
                       any concerns regarding the amount of net proceeds fund-raisers keep from
                       vehicle donations and the significance of vehicle donation programs to
                       charity operations. Charities may consider proceeds from vehicle
                       donations to be a welcomed, if not crucial, source of revenue to support
                       their operations. For example, one charity stated that vehicle donations
                       are “just keeping their heads above water.”



Donor Tax Deductions   The results of donor surveys we reviewed indicated that the ability to claim
                       a tax deduction is one of the most important reasons individuals donate
                       vehicles to charity. However, we found that a small percentage of
                       Americans claim tax deductions for vehicle donations. Specifically, we
                       reviewed a representative sample of taxpayer returns that claimed noncash
                       contributions for the tax year 2000. Of the 129 million returns filed that
                       year, a projected 0.6 percent, or an estimated 733,000 returns11, had tax
                       deductions for vehicle donations.




                       10
                         The Illinois Supreme Court held that the fund-raiser's conduct was protected under the
                       First Amendment and the Attorney General's complaint was not legally sufficient because it
                       was an attempt to impose a constitutionally impermissible percentage-based limitation on
                       the fund-raiser's ability to engage in a protected activity.
                       11
                         Ninety-five percent confidence intervals:0.6 percent +/- 0.2 percent, and 733,000 returns +/-
                       520,000 returns.




                       Page 11                                                                          GAO-03-608T
We also found that deductions for vehicle donations accounted for a small
fraction of forgone tax revenue. Based on the sample we reviewed, vehicle
donation deductions totaled an estimated $2.5 billion12 of the $47 billion in
noncash contributions claimed.13 Stocks and thrift store donations
accounted for most of the tax dollars deducted for noncash charitable
contributions. We estimate that in 2000, vehicle donations deductions
lowered taxpayers’ income tax liability by an estimated $654 million14 of the
$1 trillion tax liability reported on returns.

IRS guidance limits the amount of an allowable deduction to the vehicle’s
fair market value, or the amount a willing, knowledgeable buyer would pay
for the vehicle. We reviewed each deduction for vehicle donations in our
sample to determine the average value claimed for donated vehicles in
2000, and whether these values fell within the ranges identified in a
nationally recognized blue book. We estimated that the average value
claimed for donated vehicles in 2000 was $3,370,15 and that the amounts
claimed for almost all of these vehicles fell within the blue book. However,
since we did not have additional information regarding the vehicles’
condition and mileage, we could not determine whether reported values
accurately reflected fair market value.

For a donor to claim a vehicle tax deduction, the contribution must be
made to a qualified organization. Churches and most nonprofit charitable,
educational, and medical organizations are qualified.16 We submitted the
names of charities from our sample that taxpayers reported on their
returns to IRS to verify whether the recipient organization was qualified to
receive tax deductible donations. Of the 22 charities IRS reviewed, it was
able to verify that 10 of the charities were qualified to receive tax-
deductible donations. IRS could not determine whether the remaining 12


12
     Ninety-five percent confidence interval: $2.5 billion +/- $2.0 billion.
13
  Our estimates are based on taxpayers who were required to file Form 8283, “Noncash
Charitable Contributions,” for noncash contributions exceeding $500. Some of these
taxpayers may have claimed tax deductions for vehicle donations, but they were not
required to list these transactions on their returns.
14
     Ninety-five percent confidence interval: $654 million +/- $480 million.
15
     Ninety-five percent confidence interval: $3,370 +/- $790.
16
  Other types of organizations that qualify for donations include war veteran organizations,
domestic fraternal societies, certain nonprofit cemetery companies or corporations, and the
United States and any state or local government.




Page 12                                                                        GAO-03-608T
                    charities were qualified organizations because it needed more information
                    than taxpayers reported on their tax returns, such as the organizations’ full
                    names and addresses and employer identification numbers.

                    IRS has a compliance program to review noncash donations, including
                    vehicle donations generating revenue over $5,000, which compares the
                    amounts received by a charity upon the sale of a donated item with the
                    amount claimed by the taxpayer as the fair market value of the item. 17
                    Although differences exist between fair market values and the proceeds
                    from items sold at wholesale prices, this program gives IRS an indication of
                    whether a particular donation should be further scrutinized. However, IRS
                    has no data identifying whether cases referred for further review by this
                    program are ever pursued.

                    IRS is also in the process of implementing a National Research Program,
                    which may provide data on compliance issues dealing with vehicle
                    donations and other noncash contributions. Under the program, officials
                    will randomly select about 49,000 tax year 2001 returns to determine
                    whether taxpayers complied with statutory income, expense, and tax
                    reporting requirements. Returns with noncash contributions, including
                    donated vehicles, could be subject to audit to verify donation claims. Once
                    this project is completed, IRS plans to assess individuals’ compliance
                    related to deductions for noncash contributions, and determine whether
                    more enforcement is needed to help ensure proper reporting in this area.



Taxpayer Guidance   IRS and other organizations, including the National Association of State
                    Charity Officials and the Better Business Bureau, have issued guidance on
and Cautions        steps potential donors should take before donating their vehicles to charity
                    and claiming associated tax deductions. These steps include the following:

                    • Verify that the recipient organization is a tax-exempt charity. Potential
                      donors can search IRS’s Publication 78, which is an annual cumulative
                      list of most organizations that are qualified to receive deductible
                      contributions.




                    17
                     Charities file Form 8282 when donated property valued at over $5,000 is disposed of
                    within 2 years of receiving it.




                    Page 13                                                                     GAO-03-608T
• Determine whether the charity is properly registered with the state
  government agency that regulates charities. The state regulatory agency
  is generally the state attorney general’s office or the secretary of state.

• Ask questions about how the donated vehicle will be used to determine
  whether it will be used as intended. Such questions include the
  following: Will the vehicle be fixed up and given to the needy? Will it be
  resold, and if so, what share of the proceeds will the charity receive?

• Itemize deductions in order to receive a tax benefit from the donation.
  The decision to itemize is determined by whether total itemized
  deductions are greater than the standard deduction.

• Deduct only the fair market value of the vehicle. The fair market value
  takes into account many factors, including the vehicle’s condition, and
  can be substantially different from the blue book value. IRS Publication
  526, “Charitable Deductions,” and IRS Publication 561, “Determining the
  Value of Donated Property,” provide instructions on how to calculate the
  fair market value of donated property.

• Document the charitable contribution deduction. IRS Publication 526
  identifies requirements for the types of receipts taxpayers must obtain
  and the forms they must file.

• Follow state law regarding the car title and license plates. Generally, the
  donor should ensure that the title of the vehicle is transferred to the
  charity’s name, by contacting the state department of motor vehicles,
  and keep a copy of the title transfer. Donors are also advised to remove
  the license plates, if allowed by the state.

The IRS and the states have identified few significant occurrences of abuse
by charities and fund-raisers operating vehicle donation programs.
However, the guidance above may help potential donors avoid donating
vehicles to organizations that have not complied with laws or regulations
related to vehicle donation activities, and prevent problems sometimes
encountered with vehicle title transfers. For example, see the following:

• IRS revoked the charity status for one Florida organization that solicited
  boat donations after finding that its charitable activities were
  insubstantial, and that proceeds were kept for personal gain.




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                  • California charity officials prosecuted and jailed the owner of a used car
                    lot soliciting vehicles for charity. The organization raised an estimated
                    $1 million, none of which benefited charity.

                  • In Massachusetts, a for-profit company solicited cars through
                    newspaper ads, and led potential donors to believe that the organization
                    was a charity and that all, or a substantial portion of, proceeds would go
                    to a charitable purpose. In May 2002, Massachusetts brought an
                    enforcement action in which the company’s president agreed to cease
                    all further activity related to the car donation operation and dissolve.

                  • According to state agency officials, they often receive complaints from
                    donors when charities do not transfer vehicle titles as promised.
                    Donors found themselves responsible for parking violations, penalties,
                    and in some cases damages when donated vehicles were subsequently
                    involved in accidents.

                  In addition to noncash contributions guidance found in various IRS
                  publications and news releases, the IRS has publicized guidance regarding
                  vehicle donations, and developed a training video for state and IRS
                  compliance regulators. In 2001 IRS also created a cross-functional
                  Donated Property Task Force to study issues surrounding donated
                  property and identify methods to monitor this area. The task force, in
                  cooperation with the National Association of State Charity Officials, is also
                  surveying state charity officials to identify information that states collect
                  on charity fund-raising, and on vehicle donations in particular. As of March
                  2003, only California reported having data available on vehicle donation
                  handled by fund-raisers.

                  Mr. Chairman, this completes my prepared statement. I would be happy to
                  respond to any question you or other Members of the Committee may have
                  at this time.



Contacts and      For further information regarding this testimony, please contact
                  Cathleen A. Berrick, Acting Director, Homeland Security and Justice, at
Acknowledgments   (202) 512-8777. Individuals making key contributions to this testimony
                  include Ralph Block, Leo Barbour, Keira Dembowski, Michelle Fejfar, Tre
                  Forlano, Lemuel Jackson, Monica Kelly, Brittni Milam, Amy Rosewarne,
                  Sam Scrutchins, Kathleen Seymour, Addie Spahr, and Wendy Turenne.




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