Fraudulent Auto Donation Deductions and Tax Laws
When giving its report on the rise of auto donation to the Senate Committee on Finance in 2003, the US General Accounting Office (GAO) found quite a bit of discrepancy between the amount of monies claimed as deductions on individual and business returns and the monies reported from actual automobile donation sales by non-profit organizations (NPO). As a result, certain changes were made to the existing tax laws that govern how deductions are claimed from automobile donation.
Tracking Auto Donation Proceeds
Though California was the only state that kept track of automobile donation proceeds at the time, it was found that third party organizations handling automobile donation usually took up as much as 70% of the amount received from the original sale of such a vehicle on the wholesale market. The exact amount depending upon the arrangement between the automobile donation organization and the NPO.
In California, third-party agencies that handle automobile donation are beholden to take only a given percentage of the sale, wholesale or not, as overhead expenses, no matter what those expenses actually are. As such, higher prices for vehicles are often achieved in private sales in that state, though such sales often take longer than automobile donation auctions in other states.
When the Finance Committee heard these figures and many more that proved the federal government was bearing the brunt of these donations in the form of donation discrepancy, the process to clear this problem with auto donation deductions was initiated. There’s nothing to get a sub-committee going like an estimated $600 million shortfall in tax revenues.
Charitable Auto Donations
This is not to say that someone using the blue book value of their car to describe a barely running rust bucket given as a charitable auto donation is setting out to defraud the government, but it certainly has the same effect. In that 2003 GAO report, the majority of tax returns investigated from 2002 showed an average actual donation to the charities of 1-5% of that reported as the original donation on the resultant tax forms largely due to the use of third party auto donation agencies and the use of wholesale and wrecking yard sales.
To this day, a large number of NPOs continue using third-party agents to facilitate auto donation. The lack of communication as to where the actual overhead expenses of the third-party auto donation agents were almost entirely lacking in detail – instead, lumping all expenses under categories such as “towing” or “other.” Indeed, bookkeeping has been a real problem with many of these setups.
In an effort to combat this discrepancy with auto donation, new rules were instated by the IRS that require a statement of monies received from the sale of the car, rather than the “fair market value” of the vehicle for vehicles netting over $5,000. Because of this, many who consider auto donation as a viable source of deduction have grown suspicious of letting third-party agencies handle the auto donation process for them.
For instance, if you have a vehicle with a fair market value of $10,000 and sell it yourself, you’ll net about $10,000. After you pay capital gains and income taxes on that amount, you should still have over $7,000 to donate to the charity of your choice, whether they take auto donations or not. This does depend upon your tax bracket, but that full amount will go to the charity and be legally deductible. A third party may be lucky to get $4,000 at auction and give less than $1,000 to your charity and giving a lower reported value to you.
Tax Deductions
On the other hand, since rules were tightened in the early ‘aughts by the IRS, vehicle donations of over $500 are officially valued for deduction purposes by their sale amount (usually at wholesale) or by an independent appraisal. In fact, you must provide a copy of such an appraisal if your net auto donation is greater than $5,000. Auto donations with a value of less than $250 are still allowed under the “honor system.”
Regardless of the value of your auto donation, the title must be free and clear. You are also responsible for providing the name and address of the charity, where the actual auto donation occurred (very often your home, if towed), a description of the car or truck and the date when the auto donation took place. If the auto donation is valued there or after the fact at less than $250, you must also have a receipt.
Donate A Vehicle To Charity and Avoid Destination Charges
You should never, ever be given a bill with destination charges, whether you donate a vehicle to a charitable, non-profit organization or are the recipient of a charitable gift from such an organization. Donated vehicles that are kept in-state are, no matter how many pieces they’re in, should never subject you to any type of charge.
Donated Vehicles For Charities
For starters, a charity that runs its own donated vehicle program is not allowed to charge you a fee to make a donation. If they take donated cars, then they can choose which ones to take, but not to charge you a fee. Even if they end up losing money after the tow fee is taken into account, many non-profit organizations still take such donations, just to “encourage a culture of giving.”
That leaves third-party, usually for profit, companies that manage donated vehicles for the charities that don’t have the facilities (tow truck) to pick up and process cars, trucks, boats, RVs and trailers. If they are actually affiliated w/ a genuine IRS-approved and exempted charitable organization, they are not allowed to charge you a towing fee either, since they’re acting as an agent of the charity
Only a third-party company that wasn’t operating for an actual charity would be likely to charge you for towing (especially without telling you about it first). You should stop your dealings with such a company immediately and check into their charity a little closer, even if that means reporting them to the state Attorney General’s office.
Vehicle Sold At Wholesale Auctions
Also, there is plenty of a market for the raw materials and components of even cars that aren’t running any more. Even if the amount of a refund you get from a donated vehicle that is sold at wholesale auctions is quite small, the value increases greatly as each component is sold and resold again until eventually turning up in an automotive repair on the other side of the country. The appreciation is part profit motive and part transportation fees. It makes your donated vehicle, ultimately valuable, though your charity will see very little of that unless they actually run a surplus auto parts business.
Sometimes for-profit, third-party agents will have a business on the side by where they trade you promotional offers from cruise ships and vouches for hotel stays for the chance to recycle your car. Though the claims of the environmentalism of such a trade as it’s hard to know at what point the additional miles of the object in question (and its eventual function of keeping another car on the road) are offset by the inherent energy involved in finding, extracting, heating and purifying the metal, much less the elaborate network that created that part in the first place.
Regardless, if there is very little benefit to your local charity after the third-party agents they employ take their cut, it may be just as good of a choice to choose to “recycle” the vehicle rather than donate the vehicle and then not bother to take the paltry deduction, anyhow.
Destination charges are usually assessed on drivable cars taken in and out of state. For instance, if you were to purchase a new car from the dealership, there’s often a line on the bill denoting a destination charge. This is to pay for the caravan of cars that is sometimes seen traveling across interstate highways. In fact, it is because of a network of dealerships that destination charges are even assessed for new cars.
The closest thing to a destination fee that you should find when you donate a vehicle to charity is the tow truck fee. However, that fee should also be paid by the charity or the third-party agent working for the charity as part your donation. It is very rare for any type of towing charge to apply to you when you donate a vehicle.
For starters, when you are considering donating a vehicle, you should ask what charity will be benefiting. If you’ve never heard of the charity in question, ask if you can have their tax ID number that identifies the charity as an exempt charitable organization. You may look this up online or call the IRS.
When you donate a vehicle to a non-profit organization, there’s something very wrong if you are then asked to pay for destination charges.
