Many Donors Inflate Value of Vehicles They Give, Federal Report Shows

Wide gaps often exist between the proceeds charities receive from sales of donated vehicles and the tax deductions claimed by donors, according to a new Congressional report.

Vehicle donations have become increasingly popular in recent years, but Congress is concerned that some taxpayers may be inflating the value of the cars, trucks, boats, and planes they donate to charity, potentially costing the U.S. Treasury millions of dollars in fraudulent deductions.

The new report by the General Accounting Office, the investigative arm of Congress, follows years of scrutiny by regulators. In 2002, the Internal Revenue Service issued a revenue ruling explaining how charities and donors should properly value used cars. Last month, the agency said it would scrutinize such transactions more carefully and might penalize not only taxpayers who inflate the value of their gifts but those who promote such tactics as well.

Senator Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, has said the committee is considering various ways to discourage abuses in the donation of vehicles, artwork, and other property. One possibility might be to limit deductions to the value a charity actually receives from such a gift.

What Charities Get

In its new report, the GAO says charities routinely receive from car donations less than 5 percent of what donors say the vehicles are worth in claiming their deductions.

For example, in 2001, someone gave a 1983 GMC Jimmy truck to a charity that relies on an outside company to handle such gifts. The truck sold at auction for $375, but advertising and fund-raising fees claimed by the company reduced the net proceeds to $62, which was split equally between the charity and the outside company. The taxpayer claimed a $2,400 deduction, based on values listed in a used-car guidebook, for a gift that netted the charity $31.

In another case, a donor claimed a $2,915 deduction for a 1990 Mercury station wagon that sold for $30 and ended up costing the charity $130 in processing fees. In six of the 54 cases tracked by the GAO, in fact, processing costs exceeded the sale price of the vehicles, so the charities either received nothing at all from the donations or actually had to pay the company that brokered the sale.

About 733,000 taxpayers claimed deductions for vehicle donations in 2000, the report says, about 0.6 percent of the 129 million individual returns filed for that year. Their donations reduced the amount that those taxpayers owed the U.S. Treasury by $654-million, or about 6 percent of all noncash charitable donations claimed by taxpayers that year.

Relatively few charities receive such gifts. About 4,300 charities — some 2.7 percent of all charities nationwide with annual revenue of at least $100,000 — have vehicle-donation programs, the report estimates. Among the 600 charities it surveyed, revenue from vehicle donations ranged from $1,000 for two cars donated to a senior center to $8.8-million for more than 70,000 vehicles donated to a national charity.

Even for charities that do accept such gifts, vehicle donations usually form only a trickle of their revenue streams. For 15 of the 30 charities that provided budget information, for example, proceeds from vehicle donations amounted to less than 2 percent of their revenue. Yet some charities have found such donations to be a profitable niche: Two of the charities generated at least 90 percent of their revenue from car donations.

Donated vehicles are generally sold at auction at wholesale prices, and vehicle-processing and fund-raising costs further reduce proceeds to charity. The GAO says that, because it lacked information on the condition of the donated vehicles, it could not determine whether taxpayers were inflating the value of their donated vehicles. In 36 of the 54 cases the agency examined in detail, charities received 5 percent or less of the value donors claimed as deductions on their tax returns. In only seven of the cases did charities receive more than 15 percent of the value claimed by donors.

The Internal Revenue Service says taxpayers may claim the fair market value of their donated vehicles, taking into account their mileage and condition. Donors must obtain an independent appraisal only if they are claiming more than $5,000 for their gifts.

Yet an auto broker told the GAO that it is unfair to compare auction prices with the amounts claimed as deductions, because most donated vehicles are sold at auctions that cater mostly to wholesalers who then resell the vehicles at higher prices.

How Transactions Are Handled

Other findings in the report:

• Seventy percent of 65 charities interviewed for the report said they relied on other nonprofit groups or companies to handle some or all of their vehicle-donation transactions.
• Two-thirds of the charities interviewed said they sold all vehicles donated to them, while other groups use some donated vehicles to support their programs.
• Thirteen of the charities said they had received checks from third-party groups that had accepted vehicle donations on their behalf but without their knowledge. In only four of those cases did the charities receive a list itemizing the information on processing costs.

The GAO based its report on information from the IRS and on its own random sample of 600 charities. It also sought more-detailed information from 65 charities that it identified as running vehicle-donation programs, including 16 charities in its national sample.

The GAO report on vehicle donations (GAO-04-73) is available on the agency’s Web site, http://www.gao.gov/. Click on GAO Reports, then Today’s Reports, then December 12.