Vehicle Donations: Benefits to Charities and Donors, but Limited Program Oversight
Published: 2003-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Donating a vehicle to charity enables a donor to support a charitable cause, dispose of an unwanted vehicle, and receive a tax benefit. More charities are turning to vehicle donation programs as a means for raising funds. As a result, our objectives were to: (1) determine the number of charities with vehicle donation programs, and the number of taxpayers claiming deductions for vehicle donations; (2) compare the proceeds received by charities from vehicle donations to what donors claimed for those deductions; and (3) describe related Internal Revenue Service (IRS) and state compliance activities.
section_title: What GAO Found
paragraphs: An estimated 4,300 charities have vehicle donation programs, based on a GAO survey of 157,500 charities with revenue of $100,000 or more. Taxpayers claimed deductions for donated vehicles on about 733,000 of the 4.4 million tax year 2000 returns filed with noncash deductions over $500, lowering taxpayer liability by an estimated $654 million. For the charities surveyed, proceeds from vehicle donations ranged from $1,000 for one charity, to $8.8 million for another. However, proceeds generally constituted a small share of total charity revenue for the majority of charities GAO reviewed. In addition, for two-thirds of the 54 specific vehicle donations GAO examined, charities received 5 percent or less of the value donors claimed as deductions on their tax return. Differences in proceeds received by the charity and value claimed by a taxpayer were due in part, to vehicles being sold at auctions at wholesale prices, and proceeds being reduced by vehicle processing and fundraising costs. Due to a lack of available data on the condition of donated vehicles, GAO could not determine whether taxpayers appropriately valued their vehicles when claiming associated tax deductions. The IRS has some activities designed to detect noncompliant claims for noncash deductions, including vehicle donations. However, the IRS has not pursued potential leads from these activities because tax revenue yields are less than other potential noncompliance cases, such as abusive tax shelters. IRS's ongoing National Research Program study may provide information on how to deal with donated vehicle compliance issues. Also, an IRS task force drafted recommendations for improving IRS's oversight of charities' donated property programs. State officials have filed legal actions in a number of cases involving problems with vehicle donation programs, such as an individual soliciting vehicle donations for fictitious charities.

section_title: Letter
paragraphs: Some charities are turning to vehicle donation programs as a means for  raising funds. While these donations create an important source of  revenue for a number of charities, questions have arisen regarding the role  third-party agents play in the vehicle donation process, as well as the  amount of proceeds that are actually received by charities from vehicle  donations. Others have asked whether taxpayers know enough about  vehicle donation programs to make informed decisions about donating  their vehicles, and are claiming appropriate tax deductions.
Given these questions, this report expands on our preliminary  observations on vehicle donation programs in our April 1, 2003, testimony  before the Senate Finance Committee and discusses (1) the number of  charities with vehicle donation programs and the number of taxpayers  claiming deductions for vehicle donations; (2) the vehicle donation  process; (3) proceeds received by charities from vehicle donations  compared to what donors claim for vehicle donation deductions;   (4) Internal Revenue Service (IRS) and state compliance activities directed  at vehicle donations, and the results of these activities; and (5) guidance  available to taxpayers and charities to help them make informed decisions  regarding vehicle donations.
To satisfy these objectives, we relied on two sources of nationally  representative information and several anecdotal sources of information.  To determine the number of charities that have vehicle donation  programs, we conducted a national telephone survey of a statistically  representative sample of charities. Second, to determine how many  taxpayers claimed vehicle donation deductions, we analyzed a statistically  representative sample of tax year 2000 tax returns (the latest data then  available). We also obtained anecdotal information on compliance  activities from officials at the IRS and 11 state attorneys general and  secretary of state offices, and information on vehicle donation operations  from a pool of 65 charities, six third-party agents, and related interest  groups. Finally, we tracked a judgmental sample of 54 donated vehicles to  compare the amount of proceeds charities received from vehicle sales and  the amount claimed as deductions on donors’ tax returns. Appendix I  contains a detailed description of our objectives, scope, and methodology.  Our work was conducted between October 2002 and October 2003 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The tax code allows individuals and businesses to make noncash  contributions (e.g., vehicles, paintings, used clothing, and household  goods) to qualifying charities by allowing taxpayers to claim deductions  for their donations on their tax returns. However, not all organizations are  granted nonprofit or tax-exempt status by the IRS that qualifies taxpayers  for tax deductions for items donated to them. Table 1 provides examples  of organizations that do and do not qualify donors for noncash deductions,  including vehicle donations.
IRS guidance instructs donors to establish the value for their donation  based on its “fair market value” for donated vehicles, that is, what the item  would sell for on the market, taking into account its condition, including  mileage in the case of vehicle donations. As is the case for all noncash  contributions, the IRS does not require donors to obtain an independent  appraisal for a vehicle’s value unless they claim over $5,000 for the  donated property. IRS guidance suggests that donors use used car guides,  comparable sales, and other sources to assist in establishing the fair  market value for their donated vehicles.
Regulatory oversight over charities and their vehicle donation programs is  diffused, shared between the IRS and state agencies. The IRS decides  which charities are granted nonprofit status and whether the charity meets  tax-exempt requirements and complies with federal laws. Many states  require charities soliciting within the states to register with the state  attorney general’s office or the secretary of state’s office. Figure 1 shows  the 39 states and the District of Columbia that require charitable  organizations to register with state charity offices. In general, states  prohibit unregistered organizations from soliciting for donations in their  state. Some state agencies also review vehicle donation advertisements in  response to consumer complaints, or when they discover a charity is  soliciting for donations in their state without being registered.
In addition to oversight by the IRS and state agencies, some private sector  organizations develop standards to promote ethical charitable practices  and collect information on charitable organizations. Charity “watchdog”  organizations, such as the Better Business Bureau’s Wise Giving Alliance,  Council of Better Business Bureaus, American Institute of Philanthropy,  Association of Fund-Raising Professionals, and the Independent Sector,  provide insight to the public on various fund-raising activities. These  organizations collect information on charitable organizations and develop  standards to promote ethical practices. They disseminate these standards  in an effort to “inspire public confidence.” These standards include the  voluntary disclosure of an organization’s activities, finances, fundraising  practices, and governance.
section_title: Few Charities Reported Having Vehicle Donation Programs, and Small Percentage of Taxpayers Claim Deductions for Donated Vehicles
paragraphs: Based on our national survey of charities, few charities reported having a  vehicle donation program. Correspondingly, a small percentage of  taxpayers claimed tax deductions for donated vehicles.
subsections: section_title: Few Charities Reported Having Vehicle Donation Programs
paragraphs: Despite frequent advertisements soliciting vehicle donations to charities,  few charities reported having vehicle donation programs. Of U.S. charities  with revenues of $100,000 or more, we estimate that 2.7 percent, or about  4,300 charities nationwide, have vehicle donation programs. This  projection is based on our survey of 600 charities, of which 16 reported  having a vehicle donation program.
While the small number of charities with vehicle donation programs does  not allow us to make national estimates, we found that most of the   16 vehicle donation programs identified by the national survey were  relatively new programs, as shown in figure 2. Only 4 of the 16 charities  had vehicle donation programs prior to 1998.
section_title: Small Percentage of Taxpayers Claimed Deductions for Vehicle Donations
paragraphs: Our analysis of IRS tax return data for tax year 2000 showed that a small  percentage of taxpayers claimed deductions for vehicle donations. We  reviewed a representative sample of taxpayer returns that claimed  noncash contributions of over $500 for tax year 2000. We found that of the  129 million returns filed that year, an estimated 0.6 percent, or   733,000 returns, contained tax deductions for vehicle donations. The  733,000 returns represented about 17 percent of the 4.4 million returns  filed with noncash contribution deductions over $500. We estimate that  vehicle donation deductions lowered taxpayers’ income tax liability by an  estimated $654 million. The dollar amount of vehicle donation deductions  totaled about 6 percent of the noncash contributions claimed, while  stocks and thrift store donations accounted for most of the deductions for  noncash charitable contributions over $500, as shown in figure 3.
While few taxpayers claim tax deductions for donated vehicles, 2 charities  we contacted conducted surveys of their donors and found that the  ability to claim a tax deduction was one of the important reasons  individuals donated their vehicles to charity. Other important reasons  cited in the surveys for donating vehicles were to help a charitable cause  and to easily dispose of an unwanted vehicle.
section_title: Vehicle Donation Programs Varied for the Charities We Reviewed, but Most Used Third-Party Agents
paragraphs: The vehicle donation process, for the charities we reviewed generally  consisted of four steps: (1) solicitation/donor contact, (2) vehicle pick-up,  (3) vehicle sale, and (4) distribution of proceeds. Forty-five of the   65 charities we interviewed reported using third-party agents for some or  all of these steps rather than relying on in-house resources, and some had  arrangements with more than one agent. About half of the 45 charities  used third-party agents to run the entire program, while other charities  used a third-party agent for only certain functions. The vehicle donation  process is depicted in figure 4.
Step 1 – Solicitation/donor contact. The vehicle donation process  generally begins with solicitations for donated vehicles through  advertisements. Vehicle donations may be solicited directly by charities,  third-party agents, or both, depending on the agreement between the  charities and third-party agents. Of the 45 charities we interviewed that  discussed their advertising practices, 26 reported that advertising was  handled solely by the charity. Some third-party agents solicited donated  vehicles for several charities using a common advertisement. Some of the  most common mediums for vehicle donation advertisements include the  radio, newspapers, and the Internet. (For Web version of this report, click  here (www.gao.gov/media/audio/donatecar.mp3) to hear a radio vehicle  donation advertisement, or see app. II for the transcript.) Vehicle  donations are also solicited through advertisements on billboards, truck  banners (see fig. 5), and television, as well as in newsletters and even on  small paper bags.
Also during this step, donors initiate contact with the charity and or third- party agent to donate their vehicle. Either charities or third-party agents  may take the initial call from a potential donor, asking the donor questions  that may be used to screen vehicles, such as the vehicle’s make, year, and  condition, and if the donor has the title to the vehicle. Twenty-four of the  65 charities we interviewed reported that they accepted donor calls in- house, while 23 said that they used third-party agents to accept calls or  shared this responsibility. Some charities or their agents limited the  vehicles they accepted to those they anticipated would produce a profit  after towing and other expenses. However, some charities reported  accepting vehicles regardless of condition, as suggested in figure 6. One  charity official stated that accepting vehicles with little value was a way of  generating goodwill for future donations.
Step 2 – Vehicle pickup. After the donor makes the initial call to donate a  vehicle, arrangements are made to pick up the vehicle and deliver it to  wherever it will be stored until it is sold. Vehicles are generally towed,  according to a third-party agent, due to safety and liability concerns. A  majority of charities we contacted used third-party agents to pick up  vehicles. Once vehicles are picked up, donors are generally provided with  a receipt to document the donation for tax purposes. At this time, the  charity or third-party agent also obtains the title of the vehicle from the  donor. Some charities may provide the donor with state-required forms  (e.g., release of liability), or references for establishing the tax deductible  value of their donated vehicle (e.g., car guides or IRS guidance).
Step 3 – Vehicle sale. Once collected, donated vehicles are most often  sold. Charities or third-party agents typically sell donated vehicles through  auctions to auto dealers, to the public, or to vehicle salvagers. The  majority of charities we contacted said that charities do not handle the  selling of vehicles themselves, but instead rely on a third-party agent.  Charities and third-party agents said that they generally sold donated  vehicles at auto auctions because (1) auctions allow high volume of auto  sales and (2) charities do not have the resources, such as staff, storage  space, or licenses required to sell vehicles themselves. Of the 65 charities  we interviewed, 43 charity officials said they sold all of their donated  vehicles, while officials at 16 charities said they used some donated  vehicles for clients, charity staff, or other purposes. For example,   1 charity official said that the charity used donated vehicles for student  training for a community college auto course.
Step 4 – Distribution of proceeds. After vehicles have been liquidated,   the proceeds are distributed. Charities with in-house vehicle donation  programs keep proceeds that remain after deducting costs associated   with processing the vehicles. When charities use third-party agents, the  financial agreement between the charity and the third-party agents  dictates the proceeds that the charity and fund-raiser will receive from   the sale.
In addition to the in-house and third-party arrangements, we identified  some variations in how vehicle donation programs operate. In one case,   a 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 1 charity to receive the proceeds, or if  no charity is designated, proceeds are split among members of the  consortium equally. In another case, 1 large charity runs a national vehicle  donation program and serves regional offices as a third-party agent would,  charging its regions vehicle processing costs. However, some of the  charity’s affiliates choose other third-party agents that are not part of the  national program to run their program. Finally, in still another case, a large  charity runs a national program and serves charity affiliates, but also has a  nonprofit vehicle donation program for other smaller charities.
section_title: Charities Receive Less than Donors Claimed as the Value of the Vehicle for the 54 Donations We Reviewed
paragraphs: Although proceeds from vehicle donations are a welcomed source of  revenue, it was not a crucial source of income for the majority of the  charities we reviewed. The proceeds charities received from vehicle  donations varied in the 54 cases we tracked, but were generally  considerably less than the amount donors claimed on their tax returns for  the donated vehicles. Based on information from charities we spoke with,  this difference is due in part to donated vehicles being often sold at auto  auctions at wholesale prices, and processing expenses and third-party fees  reducing the amount of proceeds charities receive. We could not verify the  accuracy of taxpayer claims regarding the value of their donated vehicle.
subsections: section_title: Revenue to Charities from Vehicle Donations Varied
paragraphs: The annual net proceeds from vehicle donations for 2002 reported by the  charities we interviewed ranged from as little as $1,000 for 2 vehicles  donated to a senior center, to over $8.8 million for 1 national charity that  received over 70,000 vehicles. The charities considered the proceeds  received as a welcomed, but rarely crucial source of income to sustain  their operations. Although the dollar amount received from vehicle  donations was over $1 million for several charities we spoke with, for  many, the revenue was a small share of total charity revenue. Charity  proceeds constituted less than 2 percent of the total annual budget for   15 of the 30 charities providing budget information; however, 2 of the  charities stated that vehicle donation proceeds provided 90 percent or  more of their annual revenue. Many of the charities we interviewed stated  that their vehicle donation program provided benefits beyond revenue by  providing an expanded donor base and name recognition for the charity.
section_title: Charity Proceeds Much Less than Values Claimed by Donors in Cases We Tracked
paragraphs: In the 54 specific vehicle donations we tracked, charity proceeds from  vehicle donations were much less than the value deducted by donors on  their tax returns. Based on charity and the third-party agent we contacted,  two factors contributed to this difference: (1) vehicles are often sold at  auto auctions for salvage or at wholesale prices, which are typically lower  than prices that would be received if the donor sold the vehicle themselves  and (2) processing costs and fees are deducted from gross sales revenue,  further reducing charity proceeds.
Figure 7 illustrates the amount a charity received from 1 of the 54 vehicle  donations we tracked. In this case, a 1983 GMC Jimmy truck was donated  in 2001 to a charity whose vehicle donation program is operated by a third- party agent. The gross sale price for the truck, which sold at an auction,  was $375. After deducting third-party and advertising expenses, net  proceeds from the vehicle sale totaled $62.00. This amount was split   50/50 between the third-party agent and charity, leaving the charity with  $31 from the vehicle donation. The taxpayer claimed a $2,400 tax  deduction for the donated vehicle on his/her tax return, based on the fair  market value of the vehicle listed in a used car guidebook. Appendix III  details the vehicle donation transactions for all 54 tracked cases.
Donated vehicles are often sold at auto auctions for lower prices than  what a seller might receive if the vehicle were sold to a private party. For  the 54 donated vehicles we tracked, sale prices for donated vehicles  ranged from 1 percent to 70 percent of donor tax deduction claims, and  over half of the cases were 10 percent or less of what donors’ claimed.  (See app. III) As one third-party agent stated, it is unfair to compare  auction sale prices for donated vehicles to deduction claims because most  donated vehicles are sold at auctions that cater predominantly to  wholesalers who then resell the vehicle at higher prices. Of the 59 charities  we contacted during our review that said they sell some or all donated  vehicles, 42 used auctions to dispose of the vehicles.
Another reason for the difference between the amounts deducted by  donors for donated vehicles and the proceeds charities receive from  vehicle sales is that sales proceeds are reduced by vehicle processing  costs, such as towing, advertising, program administration, and third-party  agent fees. California is the only state that collects data on the proceeds  received by charities from vehicle donation programs. According to the  California Attorney General’s records, 145 charities using third-party  agents who had filed the required financial reports received approximately  $16 million, or 35 percent of the $45.8 million raised from reported  donated vehicle sales, during 2001. The amount of proceeds these charities  received in California ranged from 2 percent to 80 percent of proceeds  after third-party costs were deducted.
Taking both the lower sales price and deductions for processing costs into  account, the proceeds received by charities from donated vehicles were  much lower than the donor-claimed value for the vehicles in the   54 donated vehicle cases we tracked. Charities received between 0 and   54 percent of the value claimed by donors, with most receiving 5 percent  or less, as shown in figure 8. For some vehicle donation sales, charities  receive no proceeds after the costs of vehicle donations are deducted. For  6 of the 54 donated vehicles we tracked, the processing costs exceeded the  sales price for the vehicle (see app. III). For charities using third-party  agents, whether the loss is absorbed by the third-party agent or deducted  from charity proceeds from another higher value donated vehicle depends  on the agreement between the parties.
Because third-party agents and other donated vehicle processing costs  vary among charities, comparing net vehicle donation proceeds between  charities can be misleading. One third-party agent said that programs  claiming a high percent of proceeds as profit are not including their full  costs, that is, they are only counting towing costs and may not include  space, advertising, or staff costs. Similarly, 1 charity managing its own  vehicle donation program stated that its proceeds may be lower than some  other charities, but they are accurately capturing the true program costs  while others may not be. Proceeds also differ based on different  agreements between charities and third-party agents for paying for the  third-party’s services. Of the 45 charities we contacted during our review  that reported using third-party agents, 20 said third parties were paid a  percentage of net proceeds for their vehicle donation services, many  splitting the net proceeds 50/50. Other charities reported paying third- party agents a flat fee per vehicle or had some other arrangement, such as  paying for towing expenses incurred by third-party agents.
A number of charities interviewed had little insight into vehicle donation  processing costs incurred by third-party agents because they received  limited, or in a few cases, no information on charges for vehicle donations.  Although most charities reported receiving an itemized list of revenue and  costs of donated vehicles from their third-party agents, the detail was not  always provided. For example, 1 charity received an itemized list of each  vehicle sold that listed all costs under “cost of sales” except for the third-  party fee. Another received an itemized list of sold vehicles with all costs  under “tow fees” and “expenses.” Thirteen of the charities we contacted  reported that they received a check from a third-party agent accepting  vehicles for the charity without their knowledge, and only 4 of the 13 said  that information on processing costs was provided. One well-known  charity with its own vehicle donation program stated that they repeatedly  contacted two third-party agents to stop them from accepting vehicles on  their behalf. The charity estimated that in 1 year one of the third parties  had deducted approximately $25,000 from proceeds to the charity over  what it would have cost the charity itself to process the donated vehicles.
section_title: Limited Data to Assess Taxpayer Accuracy in Estimating Donated Vehicle’s Fair Market Value
paragraphs: An additional factor that may explain the difference between the proceeds  charities receive from vehicle donation sales and what donors claim as the  value of the donated vehicle may be an inaccurate assessment by donors  of the vehicle’s value. Although many charities we spoke with said they try  to limit vehicle acceptance to those in running condition, some charities  accept vehicles in poor condition. Charities stated that a number of the  vehicles donated are sold for scrap, and some said donor claims about  vehicle value might be inflated.
We could not determine in the 54 cases we tracked whether donors  appropriately claimed deductions for donated vehicles. IRS guidance  suggests that taxpayers consider using used car guides when estimating  the fair market value for donated vehicles, while also considering the  vehicle’s condition and mileage. Of the 54 cases, 25 assessments were  based on nationally recognized used car guides. However, since we did  not have additional information, such as the vehicle’s condition and  mileage, we could not determine whether the reported valuations claimed  by donors accurately reflected fair market value.
section_title: IRS and States Compliance Activities Directed at Donated Vehicle Issues Have Identified Cases of Noncompliance
paragraphs: The IRS has one compliance program that produces audit leads on  potentially overstated noncash contributions, but it does not follow up on  these leads. According to IRS officials, it does not audit cases with  potentially overstated noncash contributions because it has higher priority  compliance issues to address. Also, IRS data on its returns processing  procedures that are directed to disallowing deductions for inappropriately  claimed noncash contributions show that a small percent of returns are  subject to these procedures and that few deductions are disallowed. As  part of its National Research Program, IRS plans to gather information on  noncash contribution compliance issues, which could provide it with data  to determine how best to address noncash contribution compliance issues.  An IRS donated property task force has drafted several recommendations  that could lead to more emphasis being directed to vehicle donation  programs and deductions.
Data from the 11 states we contacted were limited regarding  noncompliance by charities and third-party agents involved with vehicle  donation programs. However, several states’ agencies have identified and  initiated legal actions against individuals and organizations that have not  complied with laws or regulations related to vehicle donations. These  include instances in which an organization posed as a charity to receive  donations, a third party inappropriately kept vehicle donation proceeds,  and a charity was not following state requirements for processing vehicles.
subsections: section_title: IRS’s Compliance Activities Results in Few Disallowed Deductions for Noncash Contributions
paragraphs: One of IRS’s compliance programs is designed to detect individual  taxpayers who may overstate noncash contributions on their tax returns,  including donated vehicles. However, due to higher priority demands for  determining compliance with tax laws, IRS has not been following up on  leads of potential noncompliance that are generated from this program.  Under this program, about two full-time equivalent employees at IRS’s  Ogden Submission Processing Center are used to compare the proceeds  charities received from donated property shown on property disposal  forms (Form 8282 Donee Information Return) with the amounts claimed  by taxpayers on their tax returns. If there is a wide discrepancy between  the charity’s revenues for the property and the amount claimed by the  taxpayer on their tax return, the case is referred to field offices for  possible audit.
An Ogden Campus official estimated that on average about 20,000 Form  8282s are received annually, and that 4,000 to 5,000 individual tax returns  are reviewed to determine whether they should be audited. An Ogden  official estimated that the cost to retrieve a tax return from IRS files is  between $100 and $150. Ogden officials stated that they do not track the  number of cases that are referred for possible audit or the types of  donated property involved in the cases, but estimated that 30 percent to   40 percent of the returns reviewed are referred. An IRS official estimated  that most referred cases related to donated land or boats, which generally  have higher potential tax assessments than do vehicles. According to our  analysis of the IRS audit data, none of the returns that were referred  during fiscal years 2001 and 2002 were audited. IRS officials stated that the  returns were not audited because the potential tax assessment yield from  these cases was substantially smaller than from other types of compliance  issues handled in the field.
IRS also established processing procedures for returns to identify and  disallow deductions for noncash contributions either when taxpayers  claim noncash contributions over a certain amount or when they do not  attach required Form 8283, Noncash Charitable Contributions  to their  returns. These processing procedures cover relatively few noncash  contribution deductions. For example, we estimate that for tax year   2000 returns, IRS’s returns processing threshold for these deductions  would account for about 1 percent of the returns where noncash  contributions of over $500 were claimed. According to IRS, returns that  meet the threshold are given a special code and are reviewed by the  examination staff to determine whether they have audit potential. Returns  with audit potential are put in the audit inventory for possible audit  selection by field agents. IRS found that these returns were not being  selected for audit because field agents had other higher priority work. IRS  expects this higher priority work to continue into the foreseeable future,  and as a result, beginning in January 2004, returns processing staff will  discontinue coding these returns for review by examination staff. IRS does  not have data on the number of noncash contribution deductions that have  been disallowed because of missing Form 8283s, but IRS officials estimate  that few were disallowed. IRS also has returns processing procedures to  identify and disallow noncash donations to individuals or nonqualifying  organizations, such as political organizations. According to IRS, in   2002 it disallowed noncash contributions of about $21.8 million on 154 tax  returns for donations made to individuals and nonqualifying  organizations.
In addition to the above compliance activities that focus on taxpayers’  deductions for donated vehicles and other types of noncash contributions,  IRS’s Exempt Organization Division has an examination program that  focuses on whether charities meet tax-exempt requirements and complies  with federal law, such as those governing the use of funds for a charitable  purpose rather than private gain. IRS had little information on whether its  examinations identified compliance problems with charities operating  vehicle donation programs. At the time of our review, IRS officials  informed us that IRS had seven vehicle donation program examinations in  progress and had completed two cases. According to an IRS official, in one  recent case, IRS revoked the exemption status for one Florida  organization whose charitable purpose was to provide research,  education, and technical training on the marine environment. The charity  raised funds through the solicitation and sale of boats. IRS found that the  organization’s charitable activities were insubstantial, and that private  parties were benefiting from the substantial economic benefit of the  organization’s activities.
section_title: Results of National Research Program and Donated Property Task Force May Lead to More Noncash Contribution Compliance Activities
paragraphs: While more compliance resources are being devoted to higher priority  audit issues such as abusive tax shelters and high-income nonfilers, IRS’s  National Research Program is to provide data on compliance problems  associated with noncash contributions, including deductions for donated  vehicles. Under the program, the IRS randomly selected about 47,000 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 in December   2004, IRS plans to assess individuals’ compliance related to deductions   for noncash contributions and determine what actions are needed to help  ensure proper reporting in this area.
In 2001, IRS established a donated property task force that examined  various issues relating to such topics as property appraisals and valuations  and coordination of compliance activities between various IRS  organizational units. In July 2002, the task force developed several draft  recommendations for improving IRS’s oversight of donated property  programs and deductions. The recommendations included revising Form  8283 to add a separate category for donations of motor vehicles on the  portion of the form that identifies the type of property donated. Another  recommendation made was to establish procedures to ensure that IRS  records and maintains copies of Form 8282s that are filed with the Ogden  Submission Processing Center. The task force noted that without such  procedures, IRS could not verify the accuracy of the forms or determine  whether charities filed them. The IRS’s audit procedures instruct auditors  to determine whether charities submit required Form 8282 when disposing  of donated vehicles. Auditors may assess penalties if they find that the  charity did not submit required Forms 8282. However, determining  whether charities filed the forms may be difficult because the forms are  destroyed if they are not used in Ogden’s noncash contribution audit  referral program discussed above.  According to IRS officials, at the time  of our review, IRS had not taken action on this recommendation.
section_title: State Agencies Have Identified Compliance Problems with Donated Vehicle Programs
paragraphs: Many states oversee charities to protect the public, and 39 states and the  District of Columbia require charities to register with the state attorney  general or the secretary of state offices. States have an interest in whether  charitable fund-raising is fraudulent and whether charities are using funds  to meet the charitable purpose for which they were created. We contacted  11 state attorney general offices or secretaries of state to identify  information related to vehicle donation programs. Only 1 state reported  having data to identify charities with vehicle donation programs; however,  several said that they would investigate a charity vehicle donation  program if they received complaints from the public. As discussed in the  following items, several of these states uncovered problems with vehicle  donation programs, including instances in which an organization posed as  a charity to receive donations, third-party agents inappropriately kept  vehicle donation proceeds, a charity was not following state requirements  in processing vehicles, and individuals solicited vehicle donations for  fictitious charities.
In Massachusetts, a for-profit company representing itself as a charity  solicited cars through newspaper ads leading potential donors to  believe that the organization was a charity and that all, or a substantial  portion of the proceeds would go directly to providing counseling to  children and parents in Massachusetts. In May 2002, Massachusetts  brought and won an enforcement action in which the company’s  president agreed with state officials to cease all further activity related  to the car donation operation.
Connecticut officials filed suit in July 2003 against a used auto  dealership and a bogus charity that was created by the dealership’s  owner. Vehicles were solicited, supposedly to help abused and  abandoned animals, but virtually all of the proceeds were retained by  the auto dealership, which maintained one checking account for both  organizations, according to state officials.
Ohio’s Attorney General filed a complaint in 2003 against a nonprofit  organization that solicited over 800 vehicles in the name of donor  designated charities, but at least $258,000 in vehicle proceeds was not  provided to the designated charities, according to the complaint.
The California Attorney General’s office filed a civil action against the  incorporator of a nonprofit that solicited vehicles for charity, but there  was never a charitable program, only a used car lot.  The Attorney  General’s office estimated that over $1 million was raised by the  operation, none of which benefited charity. Criminal charges against  the defendant resulted in a 5-year jail sentence.
In a case filed in June 2003, the California Attorney General’s office  filed a case against a nonprofit organization selling donated vehicles to  the public that had not met California’s safety requirements. Some  vehicles sold for export to locations such as Belize and Mexico, which  do not require the same state safety standards, were not actually  exported.
An indictment filed in a U.S. District court in October 2002, charges  that defendants established over 100 toll-free numbers with sound– alike charity names, such as the National Mental Health Association,  Cancer Society, or National Diabetes Association. According to the  case filing, potential donors were fraudulently told that the sound-alike  organizations were the national charities whose names they  approximated or were affiliated with nationally known charities;  however, according to the case records, the defendants kept all  proceeds.
section_title: Guidance Is Available to Donors and Charities Regarding Vehicle Donations
paragraphs: A number of government and consumer organizations provide guidance to  donors to assist them in making informed decisions about donating their  vehicles. Guidance is also available to assist charities in accepting noncash  contributions and in selecting, hiring, and managing third-party agents.
subsections: section_title: Donor Guidance for Donating Vehicles
paragraphs: Charitable donors in general, including those that donate their vehicles,  can rely on guidance available from the federal government and other  sources to ensure that they make informed donations. For example, IRS  publishes guidance on claiming deductions for donations, and establishing  fair market value for items donated. In addition, a Federal Trade  Commission-led initiative highlights legal actions taken against individuals  and organizations that engage in phony philanthropic activities, and  provides tips on how to recognize and avoid fraudulent solicitations. Some  states also offer guidance for potential donors and may have financial  information on specific charities. A number of nongovernmental sources  offer donors similar advice. For example, the Better Business Bureau’s  Wise Giving Alliance, Guidestar, Charity Navigator, and the American  Institute of Philanthropy offer tips for charitable giving or information on  specific charities.
Appendix IV lists specific sources for donor guidance.
The guidance generally identifies steps donors should take when donating  vehicles and claiming associated tax deductions. These steps are listed as  follows:     Verify that the recipient organization is a tax-exempt charity. Churches,  synagogues, temples, mosques, and governments are not required to  apply for this exemption in order to be qualified.
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: Will the  vehicle be fixed up and given to the poor and 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 should be 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 value listed in used car guides.
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 titles 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 vehicle’s license plate if allowed by the state.
section_title: Guidance to Charities
paragraphs: Some guidance is also available to charities with vehicle donation  programs regarding accepting noncash contributions and hiring a third- party agent for fund-raising purposes. For example, IRS Publication   1771, Charitable Contributions, Substantiation, and Disclosure  Requirements, explain federal law for organizations that receive tax- deductible contributions. The IRS also plans to publish, by March 31,   2004, a brochure advising charities on how to avoid problems raised by  vehicle donation programs. State guidance to charities we reviewed was  generally not specific to vehicle donation programs, but rather provided  general guidelines for selecting, hiring, and managing third-party agents. In  addition, a number of nongovernmental sources offer charities similar  advice. The Better Business Bureau, for example, publishes standards for  charities in areas such as fund-raising activities, and issuing informational  materials to donors. Appendix IV lists specific sources for charitable  guidance.
Some of the general guidance provided to charities that are relevant to  donation programs are listed as follows.
Consult and adhere to IRS’s publications explaining federal law for  organizations that receive tax-deductible contributions, and review  IRS’s annual Exempt Organizations Implementing Guidelines.
Comparison shop for fund-raising agents, insist on a written contract,  and do not relinquish control of a program to the fund-raiser.
Follow standards published by various nongovernmental sources for  governance, oversight, fund-raising activities, and issuing informational  materials.
section_title: Conclusion
paragraphs: IRS will not have data on whether taxpayers are appropriately claiming tax  deductions for noncash contributions, including donated vehicles, until it  completes its National Research Program study at the end of 2004. In the  meantime, IRS is using resources to produce audit leads on overstated  noncash contributions that are not being audited because of higher  priority compliance demands. To determine whether these resources  could be used more productively, IRS could assess the merits of the  noncash contribution compliance program to determine whether it could  be modified to take advantage of the leads that are generated, such as  auditing taxpayers through correspondence instead of sending them to  field offices.
The IRS has audit procedures that instruct auditors to assess penalties  against charities that do not file the required Form 8282 when they dispose  of property. However, as reported by its donated property task force, IRS  does not have a way of verifying whether charities file the required Form  8282 or whether forms that are filed are accurate. The task force’s draft  recommendation to maintain and record Form 8282 is worth considering.  This recommendation was made in July 2002, and has not been acted  upon.
section_title: Recommendations for Executive Action
paragraphs: In conjunction with IRS’s ongoing National Research Program study,  which is to be completed in December 2004, we recommend that the  Commissioner of the Internal Revenue assess (1) whether the Ogden  compliance program should be modified to take advantage of the leads  generated by the program and (2) the feasibility and usefulness of  maintaining and recording the receipt of Form 8282 as recommended by  IRS’s donated property task force.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the  Commissioner of Internal Revenue (see app. V). The Commissioner agreed  with our recommendations and identified some alternatives and actions  that IRS is considering to ensure compliance by charities with reporting  requirements.
With regard to our recommendation that IRS assess its compliance  program for generating audit leads on taxpayers that may have overstated  their noncash contributions, the Commissioner stated that IRS actions  related to the compliance program will be based on its review of the level  of noncompliance in reporting noncash contributions. The Commissioner  also agreed with our second recommendation to consider whether the  Form 8282s that charities submit when disposing of donated property  should be recorded and retained. He stated that decisions on the handling  of the forms would be made in conjunction with decisions on the first  recommendation and with other changes IRS has underway, particularly  the redesign of the Form 990. IRS is considering changing the Form 990 to  include information on the filing of Form 8282 as an alternative to  retaining the Form 8282.
The Commissioner noted that some steps have already been taken to  improve the reporting of vehicle donation programs, such as the revision  of Form 990 filing instructions for 2003 to provide organizations with an  example of a vehicle donation, and other actions noted in our report.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this report. We will then send copies of this report to the Secretary  of the Treasury; the Commissioner of Internal Revenue; the Director,  Office of Management and Budget; and other interested parties. We will  also make copies available to others on request. The report is also  available on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions on this report, please contact me at  (202) 512-8777 or Ralph Block at (415) 904-2150. Key contributors to the  report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine: (1) the number of charities with vehicle  donation programs, and the number of taxpayers claiming deductions for  vehicle donations; (2) the vehicle donation process; (3) proceeds received  by charities from vehicle donations to what donors claim for vehicle  donation deductions; (4) the Internal Revenue Service’s (IRS) and state  compliance activities directed at vehicle donations and incidents of  noncompliance; and (5) guidance available to taxpayers and charities to  help them make informed decisions regarding vehicle donations. To  satisfy these objectives, we relied on two sources of nationally  representative information and several anecdotal sources of information.  Table 2 summarizes the primary data sources used to address each of the  objectives.
subsections: section_title: National Charity Survey
paragraphs: To estimate the number of charities that have vehicle donation programs,  we conducted a national telephone survey with a statistically  representative sample of organizations registered with IRS as 501(c)(3)  organizations (charities) with an annual income of at least $100,000. The  sample was drawn from the 2002core data set (tax year 2001) of the  National Center for Charitable Statistics (NCCS), which contains the IRS  Form 990 data for all nonprofit organizations in the United States. A  simple random sample of 600 charities was drawn from the population of   157,512 charities. The NCCS data were determined to be sufficiently  reliable for the purposes of our report, based on interviews with NCCS  officials regarding reliability procedures and observation of the sampling  process.
Valid telephone numbers could not be obtained for 11 percent of the  charities in the sample, and 6.8 percent of the charities did not answer the  telephone after several contact attempts or did not return calls, yielding a  total rate of nonresponse of 17.8 percent. We took steps to reduce errors  in our estimates by pretesting the survey with charities of varying  characteristics and performing computer analyses to identify  inconsistencies and other indicators of errors.
We received valid responses from 493 of the 600 charities, for a response  rate of 82.2 percent. Interview responses were weighted to account for the  initial sampling rate and response rate. As with most surveys, our  estimation assumes that nonrespondents would have answered like the  survey respondents, and we do not know of any evidence about whether  our respondents were different from nonrespondents. Our confidence in  the precision of the results from this sample is expressed in 95 percent  confidence intervals. We are 95 percent confident that the results we  would have obtained had we studied the entire population are within +/- 2  percentage points of this result.
section_title: Statistics of Income Data
paragraphs: To estimate the number of taxpayers that claimed deductions for donated  vehicles, we analyzed a random sample of tax year 2000 individual tax  returns from IRS’s Statistics of Income (SOI) individual tax return file. The  SOI file is a stratified probability sample of income tax returns filed with  the IRS. The tax year 2000 sample represented about 129 million tax  returns. The SOI sample contained information on 34,942 returns where  taxpayers itemized deductions and claimed a noncash contribution of over  $500. We randomly sampled 600 cases from this sample population and  requested the tax returns from the IRS. Weights were adjusted to represent  all taxpayers claiming noncash contributions exceeding $500. Of the   600 cases in our sample, actual returns were available for 509 of the cases.  We determined that the SOI data were sufficiently reliable for the  purposes of our report based on interviews with IRS officials and testing  for bias in our sample. No bias was identified in a comparison of available  returns and nonavailable returns in terms of taxable income, total  contributions, and several other factors.
section_title: Charity Officials
paragraphs: To obtain information on vehicle donation program processes and  proceeds from vehicle sales, we contacted 65 charities throughout the  country. The 65 charities included:    16 charities in our national charity survey that reported having a    8 charities interviewed as pretests to the survey, and   41 charities identified in advertisements or on taxpayer deduction  claims.
Not all 65 charities provided information on all topics discussed in the  report. Where information is reported, the specific number of charities  that provided information related to the topic discussed is included.   These examples cannot be generalized beyond the charities responding.
section_title: Third-Party Agent and Other Organizations Interviewed
paragraphs: We interviewed six third-party agents that provide vehicle donation  program services to charities for examples of how the vehicle donation  process works for their organizations and the charities they served. Some  of the agents represented more than 100 different charities; however, the  information we received from these agents cannot be generalized beyond  the agents responding. We relied on a number of sources to identify  vehicle donation third-party agents, including state attorney generals’  office officials, donated vehicle advertisements, and charity officials.
To obtain information on guidance provided to donors and charities, we  interviewed officials or reviewed materials from several organizations  involved with charity oversight or charity fund-raising, including the Better  Business Bureau, Chronicles of Philanthropy, the Independent Sector, and  the American Institute of Philanthropy.
section_title: IRS and State Officials
paragraphs: In addressing all of our objectives, we spoke with IRS headquarters  officials from the Tax Exempt and Government Entities Operating  Division, the Wages and Investment Operating Division, and the Small  Business/Self-Employed Operating Division. We also conducted an on-site  visit to IRS’s Ogden Campus to obtain information on its Form 8282  compliance program. We also interviewed the Chairperson of the IRS  Vehicle Donations Working Group.
We contacted state officials based on referrals from the IRS and the  National Association of State Charity Officials. We also interviewed state  officials in California, Michigan, Massachusetts, Florida, Pennsylvania,  South Carolina, Ohio, Oregon, Connecticut, Washington, and Texas.
section_title: Other Data Sources
paragraphs: To determine the amount of proceeds charities receive from donated  vehicles relative to the amounts taxpayers claimed as tax deductions, we  tracked a judgmental set of donated vehicles obtained from 4 charities in   4 states. Two charities were local charities that used third-party agents to  manage their vehicle donation programs; 1 was a national charity that  used a third-party agent to handle processing (but not advertising) for  their vehicle donation program; and the fourth was a national charity that  managed its vehicle donation program in-house. The information we  obtained from the charities included the vehicle description, selling price,  net amount received by the charity after expenses, and donor information.  Using the donor information, we requested tax return data from the IRS to  determine the amounts donors claimed as deductions for their vehicles.  Not all of the vehicle donors claimed deductions for their donations. Of  the 70 donors the IRS was able to identify as filing returns, 12 did not  itemize their taxes. Four additional cases were dropped due to data errors  or missing information. We were able to track the remaining 54 vehicle  donations. The individual cases or cases in aggregate are for illustration  only, and cannot be used to generalize to vehicle donations overall. Our  analysis of the 54 tracked vehicles is shown in appendix III.
We reported summary data from the California Office of the Attorney  General regarding the percent of proceeds received by charities from  vehicle donation programs using commercial fundraisers. We discussed  data reliability issues with state officials and determined that the data  were sufficiently reliable for the purposes of our report.
section_title: Appendix II: Sample Claims of Vehicle Donation Advertisements
paragraphs: Based on a review of a nonprojectable sample of vehicle donation  advertisements, we found that vehicle donation advertisements most often  stated that individuals could claim a tax deduction for the donation, if the  donation served a charitable purpose, and the donor’s vehicle would be  towed free of charge. We analyzed 147 advertisements, 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 44 Internet advertisements. Figure 9 identifies the most common  claims made in the newspaper, radio, and Internet advertisements we  reviewed.
According to an IRS official, advertisement claims are potentially  misleading when they do not specify that taxpayers must itemize their  deductions to claim a deduction for vehicle donations, since many  taxpayers do not itemize their deductions. Of the 147 advertisements we  reviewed, 117 indicated that taxpayers could claim a tax deduction, but  only 7 advertisements specified that donors must itemize in order to claim  a deduction.
In addition, IRS officials stated that advertisements could be misleading  when they claim donors can value their vehicles at full, or maximum,  market value when claiming a tax deduction, particularly when the same  advertisements claim that vehicles are accepted whether they are running  or not. Full or maximum market value, although not clearly defined,  implies that a vehicle is in good running condition with no major  mechanical defects. Fair market value equates to what a vehicle would sell  for on the market, and takes into account a vehicle’s condition and  mileage, among other factors. Of the 147 advertisements we reviewed,   8 identified that a donor could claim full or maximum market value, while  more commonly, advertisements identified that donors could claim fair  market value on their tax returns when donating their vehicles.
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).  The 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 2 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 third-party agents are soliciting in their state  without being registered.
Table 3 identifies the number of advertisements we reviewed that  specified taxpayers must itemize their deductions to claim a vehicle  donation; that taxpayers could claim full, maximum, or fair market value  for their deduction; and whether the advertisement referred potential  donors to the IRS Web site, an accountant, the Kelley Blue Book, or other  source for guidance on claiming a tax deduction.
The transcript from an actual radio advertisement identifying some of the  benefits of vehicle donation programs is shown in figure 10.
What to do with that car?  Donate it to the Council of the Blind!   Donating a car is trouble free; you get a tax write off, and do your  part for a worthy cause.  The California Council of the Blind has  helped in the workplace since the thirties.  Simply call, we’ll pick up  that car, running or not, in most cases, plus boats--even real estate  can be donated for a write off.  Call our live operators for your free  pick up now-- 800 xxx-xxxx. 800 xxx-xxxx, that’s xxx-xxxx.
section_title: Appendix III: Selected Vehicle Donations Tracked from Donation to Taxpayer Claim for Charitable Deduction
paragraphs: Table 4 details 54 specific vehicle donations identifying the amount of  proceeds charities receive from donated vehicle sales relative to the  amounts taxpayers claim as tax deductions for donated vehicles.  Information on this judgmental set of 54 vehicle donations were obtained  from 4 charities in 4 states. The individual cases or cases in aggregate are  for illustration only, and cannot be used to generalize vehicle donations  overall.
section_title: Appendix IV: Vehicle Donation Guidance
paragraphs: Government and consumer organizations provide guidance to donors to  assist them in making informed decisions about donating vehicles.  Guidance is also available to charities to assist them in selecting, hiring,  and managing third-party agents. A partial list of resources is included in  table 5.
section_title: Appendix V: Comments from the Internal Revenue Service
section_title: Appendix VI: Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Leo Barbour, Carl Barden, Keira Dembowski, Michele Fejfar, Tre Forlano,  Lemuel N. Jackson, Monica Kelly, Rosa Leung, Brittni Milam-Bell, Amy  Rosewarne, Sam Scrutchins, Addie Spahr, and Wendy Turenne made key  contributions to this report.