By Paul N. Gada, CCH Business Owner's Toolkit Staff Writer
Charitable giving is a many-splendored thing. It is also one of the largest categories of tax deductions every filing season.
In recent years, the IRS has seen a dramatic increase in fundraising programs involving the sale of donated cars. The General Accounting Office estimates that 733,000 (of 125 million) individual returns for the 2000 tax year claimed a tax deduction for a vehicle donation. These donations were valued at about $2.5 billion and reduced taxpayer liability by an estimated $654 million. This would seem like a great deal for both the taxpayers and the charities involved.
Unfortunately, charitable car donation programs provide a fertile ground for abuse and donation scams are widespread. Otherwise law-abiding taxpayers can become indignant when they learn their vehicle donations are limited after they've seen ads on the Internet or in print promising them big deductions for their old cars and trucks. Those donating a vehicle to charity also may be shocked to learn that their charity ends up with pennies on the dollar after a fundraiser deducts administrative and advertising costs related to selling the vehicle.
Meanwhile, the IRS is generally caught between a rock and a hard place when reviewing such non-cash donations. The IRS cannot afford to look miserly and opposed to charitable endeavors by making audits so disagreeable that no one wants to donate property. At the same time, it lacks the audit resources to police the valuation rules in even a fraction of the claimed contributions. In cases where charitable contributions are finally audited, however, most taxpayers should expect the IRS examiner to be looking for a compromise value (i.e., more money from the taxpayer) unless the taxpayer's self-determined value for the car donation is airtight.
To assist individual taxpayers and charities in complying with the tax laws, the IRS has recently announced the release of two new publications on car donations: Publication 4302, A Charity's Guide to Car Donations, and Publication 4303, A Donor's Guide to Car Donations.
"We want people and the charities to make sure they are taking the proper steps involving vehicle donations," said IRS Commissioner Mark W. Everson. "Supporting charitable activities through tax deductible contributions is an important element of tax law and serves the national interest. But we encourage people to proceed carefully when donating vehicles."
Publication 4302
Publication 4302, A Charities Guide to Car Donations, describes four common charities with car donation programs:
- charities that use donated cars in their charitable programs
- charities that sell donated cars and use the proceeds in their charitable programs
- charities that hire a private or for-profit entity as an agent to operate the car donation program
- charities that authorize a for-profit entity to use their name for the purpose of soliciting car donations.
In the fourth type of program, the publication explains that because there is no agency relationship between the charity and for-profit entity, donors' contributions are made to the for-profit entity and are not treated as having been made to the charity.
The publication also addresses the filing and reporting requirements applicable to charities with car donation programs. Charities are reminded that in addition to filing their annual information return (Forms 990), they may be required to complete the appraisal summary portion of Form 8283, Noncash Charitable Contributions, for contributions for which the claimed deduction exceeds $5,000. Charities required to sign Form 8283, must file Form 8282, Donee Information Return, if the car is sold or disposed of within two years of receipt. Charities are also encouraged to provide written acknowledgement of contributions of $250 or more, which is required for donors to claim a deduction. Finally, charities that provide goods or services in exchange for donations over $75 must provide donors with a written "quid pro quo" statement.
Publication 4303
Publication 4303, A Donor's Guide to Car Donations, reminds individuals that their donations must be made to qualified organizations to be tax deductible. To verify that organization is qualified to receive tax-deductible contributions, taxpayers are urged to either:
- review IRS Publication 78, Cumulative List of Organizations, which is available on the IRS's website at www.irs.gov
- call the IRS Customer Account Service division for Tax Exempt and Government Entities at (877) 829-5500 (toll free).
The publication also warns taxpayers that they are entitled to deduct only the fair market value of the car, which may be less than the "blue book" value from a used car guide. According to the IRS, some fundraisers have mistakenly advised all their donors to use the full value listed in a used car guide in every instance. To withstand IRS scrutiny, donors can use IRS Publication 561, Determining the Value of Donated Property, to calculate the value of a donated car.
"A few simple steps can help avoid headaches for taxpayers," Everson said.
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Added to the news on July 27, 2004.
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