It seems so easy. With one phone call, you can donate that used car to charity, help a worthy cause and get a nice deduction when you file your taxes next year.
But if you aren’t careful, you can be taken for a ride. According to warnings from the Better Business Bureau and the Internal Revenue Service:
- You may court trouble with the IRS, even though your deduction was within the range of the “Blue Book” value provided by the charity.
- You may unwittingly send much of your car’s value to a for-profit middleman who handles the pickup and sale, leaving only a portion of the proceeds for the charity, which has agreed to the process.
Both problems can be avoided.
“If you were about to give a $3,000 gift to charity, you’d probably do a little research,” said Bennett Weiner, chief operating officer for the Better Business Bureau’s Wise Giving Alliance. “You’d check out the group you’re donating to. You’d check out what they do.
“You should do the exact same thing if you’re giving away your car. But what’s happening is consumers are seeing this as a donation of convenience. And the sad truth is most people aren’t going to bother to check out what the financial arrangements are before making the gift.”
The IRS has made cracking down on car donation abuses a priority for fiscal 2003, which begins Oct. 1. It plans to release guidelines explaining the specifics of enforcement.
“Individuals need to understand that if they’re not taking an appropriate deduction, they’re playing the audit lottery and they may or may not win,” said Bill Cressman, a Washington-based IRS spokesman.
“If you donate a car, you must understand [the deduction] has to be the fair market value of a car, what you could sell it for. In many cases, if your car is beat up and out of condition, it may not be worth the Blue Book value. Junk is junk, even when you give it to charity.”
Joe Davis, a spokesman for Davis Memorial Goodwill Industries in Washington, will tell you “whatever you deduct is between you and the IRS” but that it’s up to you to prove the car’s worth if you’re audited. If that makes you nervous, Davis suggests a professional appraisal for about $75. The IRS requires one for deductions of $5,000 or more. Only itemizers can deduct, and they must use IRS form 8283 for “noncash charitable contributions.”
Davis Memorial says it was the first to offer car donations, a 1978 idea that has grown into a widely emulated, multimillion-dollar, nationwide fund-raising enterprise.
The first year, the charity received five cars. In 2001, it took in 4,063, raising more than $1 million, about 5 percent of its total revenues. For 23 years, it handled all facets of the program, which required 10 employees and large car lots. But that became a hassle. So in September 2001, Davis hired Capital Auto Auction, paying the for-profit company a flat rate of $98 to tow away donated cars and sell them.
The charity gets back whatever the highest bidder pays; the auction makes its money by charging a buyer’s fee for each purchase. Davis sees it as a win-win-win for donors, the charity and the auction.
But the IRS has expressed concern for several years about a twist in which commercial fund raisers pay charities a flat rate to use their names to attract “donated” cars. The fund raiser handles the entire transaction and keeps most of the money. Charities get a new revenue stream.
Many donors erroneously think their favorite charity keeps the car, or at least most of the sale proceeds.
A three-year-old memo to national IRS officials from the head of the agency’s tax-exempt division called this a “serious matter” because “to be deductible as a gift ‘to’ charity, used cars must in actuality be given ‘to’ the charity, or at least to an agent of the charity.”
John Bindas of Volunteers of America Michigan, based in Pontiac, makes certain donated cars are handled only by his charity and advises concerned donors to donate to charities that operate similarly. “There’s less chance of anything underhanded going on.”
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