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. 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. 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. 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. 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.