The twisty trail of car donations
New tax rules aim to stem abuse of charity programs. Is it too much — or still not enough?
Got a used lemon to unload? For years, the federal government allowed owners of rundown vehicles to donate them to a charity and then declare them as tax write-offs - often based on unrealistically high values - and saddling many low-income buyers with defective cars while cheating the IRS on taxes.
After growing abuse of this little-understood system, Congress last year enacted legislation to stop the tax abuse and force major reforms in the nonprofit sector. The new rules apply beginning with last year’s donations filed on this year’s tax returns.
After growing abuse of this little-understood system, Congress last year enacted legislation to stop the tax abuse and force major reforms in the nonprofit sector. The new rules apply beginning with last year’s donations filed on this year’s tax returns.
“Americans are generous and enjoy donating to charity. Unfortunately, a lack of clear guidance for taxpayers and poor oversight of car donations created a perfect storm for abuse,” Sen. Charles E. Grassley (R-Iowa), author of the reforms, said in a statement. “Some taxpayers were taking inflated deductions they didn’t deserve.”
Critics call the system a charity-lemon mill. It operates largely through an interstate auction system that seldom gets close to actual charities touted in big-budget ad campaigns. In many cases, charities get a relatively small percentage of the contributions from car donations.
Charity donations account for an estimated 733,000 vehicles in the used-car market every year, according to a 2004 investigation by the Government Accountability Office, an arm of Congress that monitors public funds. The numbers vastly exceeded previous estimates of the size and scope of the system. More than 4,000 charities have car-donation programs.
The toll-free phone numbers cited in advertising or on the Internet often go to large boiler rooms, operated not by the charities but by businesses, calls to several organizations found. They send privately operated tow trucks to pick up the car, take it to an auction lot in a nearby town and from there it eventually ends up on a used-car lot.
Half of the Internet come-ons for donations note that vehicles do not have to be running to qualify, according to the GAO investigation. The probe tracked 54 of these charity vehicles and the resulting tax write-offs.
In one example, a GMC Jimmy truck was given to a charity-donation program, operated by a third-party agent, that auctioned it for $375. After the agent deducted advertising and other expenses, $62 was left. Of that, the agent kept half and $31 went to the charity. Meanwhile, the taxpayer who donated the Jimmy took a $2,400 deduction, based on the market value of the vehicle listed in a guidebook.
In the vast majority of cases, charities received less than 50% of the proceeds of a vehicle donation. Keep in mind, those proceeds are generally less than an owner might raise by selling the vehicle privately and then donating the full amount to charity.
Critics call the system a charity-lemon mill. It operates largely through an interstate auction system that seldom gets close to actual charities touted in big-budget ad campaigns. In many cases, charities get a relatively small percentage of the contributions from car donations.
Charity donations account for an estimated 733,000 vehicles in the used-car market every year, according to a 2004 investigation by the Government Accountability Office, an arm of Congress that monitors public funds. The numbers vastly exceeded previous estimates of the size and scope of the system. More than 4,000 charities have car-donation programs.
The toll-free phone numbers cited in advertising or on the Internet often go to large boiler rooms, operated not by the charities but by businesses, calls to several organizations found. They send privately operated tow trucks to pick up the car, take it to an auction lot in a nearby town and from there it eventually ends up on a used-car lot.
Half of the Internet come-ons for donations note that vehicles do not have to be running to qualify, according to the GAO investigation. The probe tracked 54 of these charity vehicles and the resulting tax write-offs.
In one example, a GMC Jimmy truck was given to a charity-donation program, operated by a third-party agent, that auctioned it for $375. After the agent deducted advertising and other expenses, $62 was left. Of that, the agent kept half and $31 went to the charity. Meanwhile, the taxpayer who donated the Jimmy took a $2,400 deduction, based on the market value of the vehicle listed in a guidebook.
In the vast majority of cases, charities received less than 50% of the proceeds of a vehicle donation. Keep in mind, those proceeds are generally less than an owner might raise by selling the vehicle privately and then donating the full amount to charity.
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