Vehicle Donations: Taxpayer Considerations When Donating Vehicles to Charities
Published: 2003-04-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the Internal Revenue Service (IRS), charities are increasingly turning to vehicle donation programs as a fund- raising activity, resulting in increased solicitations for donated vehicles. Therefore, to make informed decisions about donating their vehicles, taxpayers should be aware of how vehicle donation programs operate, the role of fund- raisers and charities in the vehicle donation process, and IRS rules and regulations regarding allowable tax deductions. Due to the increased use of vehicle donation programs, GAO was asked to describe (1) the vehicle donation process, (2) the amount of proceeds received by charities and fund-raisers, (3) donor tax deductions, and (4) taxpayer cautions and guidance.
section_title: What GAO Found
paragraphs: Revenue from donated vehicles is a welcomed, and sometimes crucial, source of income for a number of charities. Donors, by following available guidance and making careful selection of charities for their donations, can provide charity support while benefiting themselves through tax deductions or disposing of unwanted vehicles. Taxpayers generally first learn about vehicle donation programs through advertisements. Interested donors call the advertised number and either reach a charity that operates its program in-house, or a third-party fund-raiser acting on the charity's behalf. The charity or fund-raiser asks questions of the potential donor regarding the vehicle, and then collects and sells the vehicle for proceeds. The proceeds a charity receives from a vehicle donation may be less than what a donor expects. Two factors contribute to this difference. First, charities often sell vehicles at auto auctions for wholesale prices rather than the prices donors may receive if they sold their vehicles themselves. Second, vehicle processing costs--whether the charity's or the fund-raiser's--- as well as the fund-raiser's portion of net proceeds further 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 taxpayers' tax liability by an estimated $654 million. No data exist on whether these deductions were appropriately claimed. To assist donors in making decisions regarding vehicle donations, IRS and other organizations have issued guidance on steps potential donors should take before making vehicle donations. These steps include verifying that the recipient organization is tax-exempt, asking questions about vehicle donation proceeds, and deducting only the fair market value of the vehicle on tax returns.

section_title: Letter
paragraphs: 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, 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  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  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.
subsections: section_title: The Vehicle Donation Process
paragraphs: Individuals often first learn about vehicle donation programs through  advertisements.  Vehicle donation advertisements can be found on  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, 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.
IRS has expressed concern about some vehicle donation advertisements.   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  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, 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.  Figure 2 identifies  the vehicle donation process for both in-house and fund-raiser vehicle  donation programs.
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, 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.
For fund-raiser programs, 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.
Another large charity runs a national program and serves charity  affiliates but also has a nonprofit vehicle donation program for other  smaller charities.
section_title: Vehicle Donation Proceeds
paragraphs: 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 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.
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.
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.
California is the only state that systematically captures information on the  percentage of proceeds received by charities through vehicle donation  programs.  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.
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 Court 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.”
section_title: Donor Tax Deductions
paragraphs: 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 returns, had tax  deductions for vehicle donations.
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 billion of the $47 billion in  noncash contributions claimed.  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 million 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, 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.   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  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.    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.
section_title: Taxpayer Guidance and Cautions
paragraphs: IRS and other organizations, including the National Association of State  Charity Officials and the Better Business Bureau, have issued guidance on  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.
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.