Owens, director of the Internal Revenue Service division that watches over charitable contributions, recently singled out booming auto donation programs for special scrutiny. The IRS believes that some of these charities may be trying to cheat the government. That can jeopardize the charity's tax-exempt status, but it can also get you, the donor, audited.
"There are some donation programs that are operated in a forthright manner, but we also have some clear evidence that there are those that encourage rather dramatic understatement of tax," said Owens, director of the IRS' exempt-organization division in Washington. "We need to determine the extent of the problem and determine the best ways to deal with it. That's what we are doing now."
In a directive distributed to IRS field offices nationwide, Owens told IRS auditors to place auto donation programs among their top priorities.
Owens' directive should put millions of consumers on notice. Spurred by blanket advertising, auto donation programs have soared in popularity. While there are no precise statistics indicating how many cars have been given away, IRS data on noncash contributions to charity offer a glimpse. Until 1995, noncash charitable contributions, which include gifts of used clothing and furniture as well as other items, were relatively stable. About 14 million tax returns for 1995 included these gifts, which were valued at roughly $13.5 billion, or slightly less than $1,000 per applicable tax return.
However, in 1996, when auto donation programs began to take off, the number of taxpayers claiming noncash donations and the value of these deductions began to climb. That year, 16 million returns included such contributions, and the deductions claimed soared to more than $21 billion. They've been growing every since.
The IRS suspects that some of these programs are popular for the wrong reasons. Some of them encourage tax fraud by assuring consumers that they can get huge deductions for practically worthless vehicles, according to the agency.
"There is an advertisement in a local paper in Washington that states you can obtain a full Blue Book deduction for an automobile that has no motor," Owens said. "There is another set of advertisements that suggest that, in addition to getting a deduction amounting to full Blue Book value, you could also receive a special three-day, two-night mini-vacation package that includes $500 in grocery coupons and 100 rolls of film."
In reality, taxpayers are expected to value their auto donations based on what they could receive for the car if they sold it. Naturally, a car without a motor would not sell at full Blue Book value . (The Kelly Blue Book gives widely accepted estimates of what a car in good condition would sell for on the open market.)
And if you receive something from a charity in return for your contribution, you are required to subtract the value of the premium--in the previous case, the vacation, coupons and film--from the value of your contribution.
If you overstate the value of the car or understate the value of what you got in return, you can be held liable for income taxes, interest and penalties. If the IRS believes your behavior was egregious and purposeful, it may impose a special penalty of $1,000 "per event," Owens warned. In other words, not only would your inflated deduction be nixed, you'd also pay $1,000 to Uncle Sam for giving your old car away.
What may be most disturbing to honest taxpayers is Owens' belief that some car donation programs are not actually run by charitable institutions at all.
Instead, they're being operated by for-profit auto salvage firms that buy the right to use a charity's name by promising to pay the charity a set dollar amount for each car donated. If that's the case, you are not donating your car to charity--you are giving it to a for-profit company. You don't get a deduction for that, Owens said.
Unfortunately, many donors may not know how the program they donate to is operated, said Mark Luscombe, principal federal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information. If, for example, you respond to an advertisement urging you to give your car to XYZ charity, that's whom you are likely to assume you're talking to when you call the toll-free number to inquire, he said.
Taxpayers ought to investigate the charity a bit before they give their cars away, Owens said.
Look into what the charity plans to do with the car. Will it use it for programs, or immediately sell it for profit? If it is selling the car--in most cases, through a broker--will the charity receive a substantial amount of the sale price or does it just get a flat per-car fee unrelated to the value of the vehicle?
There are no clear rules covering what the IRS will conclude is acceptable, but you're probably on safer ground if the charity gets a percentage rather than a flat fee.
As a practical matter, simply asking questions may cause a donor to rethink his or her auto contribution for the better. After all, if the charity is only getting, say, 10% of the sales price, why wouldn't you simply sell the car and donate 100% of the proceeds? You'd still get the same deduction, but the charity would get a lot more.
As Owens put it: "If a charity has licensed Joe's Junk Yard to use their name for $50 a year, and you give your car to Joe's Junk Yard, you might have valued your car correctly, but you haven't given anything to charity. This is where it is wise to keep your eyes open."