April 8, 2004
Car Donations May Hit IRS Roadblock
Get rid of your old car, help out a charity and get a write-off. What could be easier?
With the April 15 IRS deadline drawing near, charities are tapping taxpayer frustration by increasing their appeals for vehicle donations. But a proposed government crackdown on the value donors can claim for a donated vehicle is changing the way programs are being advertised.
Claims of "highest blue book value" and grandiose statements about how a car donation will support your favorite charity are giving way to cautious, increasingly detailed disclosures of the donation process, including specifics on how much a charity might expect to receive from a donation.
The pressure on advertisers to come clean about the donation process follows a recent congressional investigation that found many donors claim the highest "blue book" value on their taxes, while many charities are typically earning 20 percent or less from the transactions. In some cases, nonprofits are even losing money on the deal.
Uncle Sam is now threatening to step in and regulate a system based primarily on the honor system, which provides donors with plump write-offs and makes car auctioneers a tidy bundle but leaves charities with little to show.
"There's clearly been an area where there's potential abuse," said Paul Castro, president of Jewish Family Service (JFS).
While charities might be receiving a small percentage of the total donation, many are increasingly reliant on the vehicle sales as a funding source for annual budgets.
JFS, which uses a third party to collect and sell donated cars, is worried that any changes in the current system will carry a negative financial impact for charities. Proceeds from the sale of donated vehiclesÂ account for 22 percent and 33 percent of the budgets for the organization's Valley and Santa Monica offices, respectively.
"Obviously, anything that gets into place from a regulatory perspective that chills the donor is something that's going to effect us, because people are going to be more cautious," Castro said. "On the other hand, if the charity is forced to get the appraisal, then it's going to become a burdensome process, and if the donor is required to get an appraisal, they're going to be less likely to donate it."
The Bush administration, as part of its budget proposal for 2005, is hoping to close this tax loophole, which could save the federal government billions in estimated savings over the next 10 years by establishing either a deduction limit or stricter appraisal requirements for used vehicle donations. However, the change could have a deleterious impact on nonprofits at both the national and local level.
If passed by Congress, the changes could take effect this year.
A November 2003 report prepared for the Senate Finance Committee by the General Accounting Office (GAO), the investigative arm of Congress, found rampant abuse by taxpayers who donate vehicles to nonprofits. In addition to taxpayers inflating write-off claims for used vehicles to "blue book" value instead of fair-market value, the report found that charities often earn anywhere from 20 percent to 5 percent of the value donors claimed on their taxes.
The report tracked 54 donated vehicles, most of which were sold at auction. In one instance, a donor valued a 1987 Volvo 740 at $3,000, but the nonprofit's final take was $35. Some charities lost money on the donation after paying towing, repair and resale costs.
The GAO estimates that tax claims for vehicle donations cost the federal government $654 million in revenue for 2000, but the report did not estimate how much the IRS loses when donors use the higher "blue book" value rather than fair market.
The Treasury Department and several senators are pushing for stricter requirements.
According to the Treasury, closing the tax loophole on car donations, as well as a crackdown on deductions for intellectual property and patents, would raise about $4.8 billion over a 10-year period. Under a plan submitted by the Treasury, the IRS would require taxpayers to get their vehicle appraised prior to donation. Current IRS regulations require appraisal only if the vehicle's value is greater than $5,000.
"We encourage people to proceed carefully when donating vehicles," IRS Commissioner Mark W. Everson said. "But people should know that in some cases, the donation is providing little value."
Before donating a vehicle, the IRS advises that taxpayers ask questions of the charity to determine how the vehicle will be sold -- either by the charity itself or a private fundraiser, like an auction house -- and how much of the sale price will be used for charitable purposes.
California law requires that nonprofits issue donors a receipt that lists the mileage and condition of the vehicle for a state tax deduction. It's a model the federal government may turn to as a blueprint for any vehicle donation reform.
While more stringent reporting at the state level has made the taxpayer more honest, third-party retailers are still behind the curve. A California study revealed that 80 percent of charities contracting with fundraisers to run their car donation program received less than 60 cents for every dollar value of vehicle donated.
However, smaller-scale car donation programs that handle their own intake and sales, like Southern California Jewish Center or Chabad, aren't worried that future regulations will scare off potential donors.
Rabbi Moshe Bryski said Chabad of the Conejo, which recently sent out an advertisement about its vehicle donation program to congregants, takes in about a dozen cars every year that are then sold by a volunteer.
"Organizations that primarily get their cars donated from people who care about the organization, not so much doing it for the tax write-off but doing it to help Chabad, it's not going to have an effect on us at all," he said. Â