January 12, 2006 | Read Time: 2 minutes
After discovering that some charities are providing donors of automobiles and other vehicles with incorrect receipts that allow contributors to claim overly generous charitable deductions, the IRS has taken steps to block the practice.
Under a law that took effect last year, a donor’s income-tax deduction for a contributed car, truck, boat, or airplane is limited to the amount a charity receives for selling it, in most cases. Previously, a donor could deduct a vehicle’s fair market value.
The law has three exceptions. A donor may continue to deduct the fair market value of a vehicle if the charity uses the vehicle rather than selling it, fixes it up before selling it, or sells it at a cut rate to a needy individual.
For gifts of vehicles, a charity must supply a receipt to the donor that states either the selling price of the vehicle or that one of the three exceptions has been met. The law does not apply to donated vehicles worthless than $500 (The Chronicle, June 23, 2005).
In an announcement, the IRS said some organizations are falsely claiming to donors that the third exception — sales to the needy — has been met when a vehicle is actually sold cheaply at auction. Charities give donors a receipt incorrectly stating that the auctioned vehicle was sold to a needy person at a price significantly below fair market value and that the donor may deduct the fair market value of the vehicle, the IRS said.
Donors who try to deduct more than the auction price, or charities that provide them with incorrect receipts, will face penalties, the IRS warned.
The government’s announcement, “IRS Warns of Questionable Deductions for Donated Vehicles,” IR-2005-145, is available online (http://www.irs.gov/newsroom/article/0,,id=152030,00.html).
Separately, the IRS clarified that charities are not required to sell vehicles by the end of the calendar year in which they are donated in order for the donor to write off the gift in that year. The announcement, “IRS Reminds Taxpayers About Requirement of Written Acknowledgement for Donated Cars,” IR-2005-149, also may be found online (http://www.irs.gov/irs/article/0,,id=152127,00.html).
