Vehicle Donations: Benefits to Charities and Donors, but Limited 
Program Oversight (14-NOV-03, GAO-04-73).			 
                                                                 
Donating a vehicle to charity enables a donor to support a	 
charitable cause, dispose of an unwanted vehicle, and receive a  
tax benefit. More charities are turning to vehicle donation	 
programs as a means for raising funds. As a result, our 	 
objectives were to: (1) determine the number of charities with	 
vehicle donation programs, and the number of taxpayers claiming  
deductions for vehicle donations; (2) compare the proceeds	 
received by charities from vehicle donations to what donors	 
claimed for those deductions; and (3) describe related Internal  
Revenue Service (IRS) and state compliance activities.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-73						        
    ACCNO:   A08856						        
  TITLE:     Vehicle Donations: Benefits to Charities and Donors, but 
Limited Program Oversight					 
     DATE:   11/14/2003 
  SUBJECT:   Charitable organizations				 
	     Comparative analysis				 
	     Motor vehicles					 
	     Noncompliance					 
	     Solicitations					 
	     Surveys						 
	     Tax returns					 
	     Taxpayers						 
	     Tax deductions					 
	     IRS National Research Program			 

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GAO-04-73

United States General Accounting Office

GAO

Report to the Committee on Finance,

                                  U.S. Senate

November 2003

VEHICLE DONATIONS

        Benefits to Charities and Donors, but Limited Program Oversight

GAO-04-73

Highlights of GAO-04-73, a report to the Committee on Finance, U.S. Senate

Donating a vehicle to charity enables a donor to support a charitable
cause, dispose of an unwanted vehicle, and receive a tax benefit. More
charities are turning to vehicle donation programs as a means for raising
funds. As a result, our objectives were to: (1) determine the number of
charities with vehicle donation programs, and the number of taxpayers
claiming deductions for vehicle donations; (2) compare the proceeds
received by charities from vehicle donations to what donors claimed for
those deductions; and (3) describe related Internal Revenue Service (IRS)
and state compliance activities.

In conjunction with its ongoing National Research Program study, which is
to be completed in December 2004, GAO recommended that the IRS assess: (1)
the merits of its compliance program for generating audit leads on
taxpayers that may have overstated their noncash charitable contribution
deductions and (2) whether forms charities submit when disposing of
donated property should be recorded and retained.

IRS agreed with the recommendations and stated that the actions it will
take to implement them will depend on the results of its review of the
level of noncompliance in reporting noncash contributions.

www.gao.gov/cgi-bin/getrpt?GAO-04-73

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Cathleen A. Berrick at (202)
512-3404 or [email protected].

November 2003

VEHICLE DONATIONS

Benefits to Charities and Donors, but Limited Program Oversight

An estimated 4,300 charities have vehicle donation programs, based on a
GAO survey of 157,500 charities with revenue of $100,000 or more.
Taxpayers claimed deductions for donated vehicles on about 733,000 of the
4.4 million tax year 2000 returns filed with noncash deductions over $500,
lowering taxpayer liability by an estimated $654 million.

For the charities surveyed, proceeds from vehicle donations ranged from
$1,000 for one charity, to $8.8 million for another. However, proceeds
generally constituted a small share of total charity revenue for the
majority of charities GAO reviewed. In addition, for two-thirds of the 54
specific vehicle donations GAO examined, charities received 5 percent or
less of the value donors claimed as deductions on their tax return.
Differences in proceeds received by the charity and value claimed by a
taxpayer were due in part, to vehicles being sold at auctions at wholesale
prices, and proceeds being reduced by vehicle processing and fundraising
costs. Due to a lack of available data on the condition of donated
vehicles, GAO could not determine whether taxpayers appropriately valued
their vehicles when claiming associated tax deductions.

The IRS has some activities designed to detect noncompliant claims for
noncash deductions, including vehicle donations. However, the IRS has not
pursued potential leads from these activities because tax revenue yields
are less than other potential noncompliance cases, such as abusive tax
shelters. IRS's ongoing National Research Program study may provide
information on how to deal with donated vehicle compliance issues. Also,
an IRS task force drafted recommendations for improving IRS's oversight of
charities' donated property programs. State officials have filed legal
actions in a number of cases involving problems with vehicle donation
programs, such as an individual soliciting vehicle donations for
fictitious charities.

Charity Proceeds as a Percent of Donor Claims in 54 Selected Vehicle
Donations

Number of donations

30

25

20

15

10

5

0 Less than 1-5 6-10 11-15 Over 15 1 percent percent percent percent
percent

Source: GAO analysis of 54 tracked vehicle donations.

Contents

Letter

Results in Brief
Background
Few Charities Reported Having Vehicle Donation Programs, and

Small Percentage of Taxpayers Claim Deductions for Donated
Vehicles
Vehicle Donation Programs Varied for the Charities We Reviewed,
but Most Used Third-Party Agents
Charities Receive Less than Donors Claimed as the Value of the
Vehicle for the 54 Donations We Reviewed
IRS and States Compliance Activities Directed at Donated Vehicle
Issues Have Identified Cases of Noncompliance
Guidance Is Available to Donors and Charities Regarding Vehicle

Donations
Conclusion
Recommendations for Executive Action
Agency Comments and Our Evaluation

                                       1

                                      2 4

                                       7

10

15

20

25 27 28 28

Appendix I Objectives, Scope, and Methodology

Appendix II Sample Claims of Vehicle Donation Advertisements

Appendix III 	Selected Vehicle Donations Tracked from Donation to Taxpayer
Claim for Charitable Deduction

Appendix IV Vehicle Donation Guidance

Appendix V Comments from the Internal Revenue Service 41

Appendix VI 	Staff Acknowledgments 43
Acknowledgments 43

Tables

Table 1: Examples of Organizations That Do or Do Not Qualify to

Receive Deductible Charitable Contributions 4 Table 2: Data Sources Used
to Address Objectives 30 Table 3: Vehicle Donation Claims Related to Tax
Deductions (by

medium) 36 Table 4: Vehicle Donations Tracked from Donation to Taxpayer
Claim for Charitable Deduction-54 Vehicles 37 Table 5: Sources of Guidance
in Making Vehicle Donation Decisions 39

Figures

Figure 1: States That Require Registration of Charitable Soliciting
Organizations, Including the District of Columbia 6 Figure 2: Number of
Sampled Charities Starting Vehicle Donation Programs from 1978-2002 8

Figure 3: Percentage of Dollar Amount of Deductions for Noncash Charitable
Contributions over $500 by Type of Contributions, Tax Year 2000 9

Figure 4: Vehicle Donation Process 10 Figure 5: Example of Vehicle
Solicitation on a Truck 12 Figure 6: Some Charities Accept Vehicles in
Poor Condition 13 Figure 7: Example of a Vehicle Donation 16 Figure 8:
Charity Proceeds as a Percent of Donor Claims in 54

Selected Vehicle Donations 18 Figure 9: Most Common Claims in Newspaper,
Radio, and Internet Advertisements Reviewed 34 Figure 10: Transcript of
Actual Radio Advertisement for Vehicle Donations 36

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States General Accounting Office Washington, DC 20548

November 14, 2003

The Honorable Charles Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

Some charities are turning to vehicle donation programs as a means for
raising funds. While these donations create an important source of
revenue for a number of charities, questions have arisen regarding the
role
third-party agents1 play in the vehicle donation process, as well as the
amount of proceeds that are actually received by charities from vehicle
donations. Others have asked whether taxpayers know enough about
vehicle donation programs to make informed decisions about donating
their vehicles, and are claiming appropriate tax deductions.

Given these questions, this report expands on our preliminary
observations on vehicle donation programs in our April 1, 2003, testimony
before the Senate Finance Committee2 and discusses (1) the number of
charities with vehicle donation programs and the number of taxpayers
claiming deductions for vehicle donations; (2) the vehicle donation
process; (3) proceeds received by charities from vehicle donations
compared to what donors claim for vehicle donation deductions;
(4) Internal Revenue Service (IRS) and state compliance activities
directed
at vehicle donations, and the results of these activities; and (5)
guidance
available to taxpayers and charities to help them make informed decisions
regarding vehicle donations.

To satisfy these objectives, we relied on two sources of nationally
representative information and several anecdotal sources of information.
To determine the number of charities that have vehicle donation

1Third-party agents refer to commercial fund-raisers, vendors, and
not-for-profit organizations that solicit and perform vehicle donation
processing activities on behalf of charities.

2U.S. General Accounting Office, Vehicle Donations: Taxpayer
Considerations When Donating Vehicles to Charities, GAO-03-608T
(Washington, D.C.: Apr. 2003).

Results in Brief

programs, we conducted a national telephone survey of a statistically
representative sample of charities. Second, to determine how many
taxpayers claimed vehicle donation deductions, we analyzed a statistically
representative sample of tax year 2000 tax returns (the latest data then
available). We also obtained anecdotal information on compliance
activities from officials at the IRS and 11 state attorneys general and
secretary of state offices, and information on vehicle donation operations
from a pool of 65 charities, six third-party agents, and related interest
groups. Finally, we tracked a judgmental sample of 54 donated vehicles to
compare the amount of proceeds charities received from vehicle sales and
the amount claimed as deductions on donors' tax returns. Appendix I
contains a detailed description of our objectives, scope, and methodology.
Our work was conducted between October 2002 and October 2003 in accordance
with generally accepted government auditing standards.

An estimated 4,300 U.S. charities with an annual revenue of $100,000 or
more are operating vehicle donation programs, or less than 3 percent of
the 157,500 charities with income at or exceeding this level. Based on our
estimates, tax deductions for donated vehicles were claimed on about
733,000 tax returns for tax year 2000, or an estimated 0.6 percent of the
129 million individual returns filed that year. These deductions lowered
taxpayers' income tax liability by an estimated $654 million.

The vehicle donation process generally involves four steps: (1)
advertising and fielding donors telephone calls regarding donating their
vehicles; (2) taking possession of vehicles, usually by tow truck; (3)
disposing of vehicles, most often through auto auctions; and (4)
distributing the proceeds from vehicle sales between charities and
organizations involved in the process. Some charities operate their
vehicle donation programs inhouse; however, most of the charities we
interviewed relied on third-party agents to conduct some or all components
of their programs for a share of the proceeds from vehicle sales.

The proceeds received by charities from vehicle donations were 5 percent
or less of the value donors claimed as a deduction on their tax returns
for the majority of the 54 vehicle donations we tracked. Based on
discussions with charities and third-party agents, we identified two
factors that contributed to this difference. First, donated vehicles are
often sold at auctions for wholesale prices rather than at the price a
donor might expect if selling the vehicle to a private party. Second,
vehicle processing and fund-raising costs are subtracted from gross
vehicle sales revenue, further reducing the proceeds charities receive
from vehicle sales. We could not

determine whether individuals claiming deductions for donated vehicles
accurately assessed the fair market value of their vehicle due to a lack
of available data on the condition of the vehicles donated.

IRS and states compliance activities directed at donated vehicles issues
have been limited. IRS has one compliance program that generates audit
leads on taxpayers that may have overstated their tax deductions for
noncash contributions, which include vehicle donations, but due to higher
priority compliance demands, IRS has not audited any of the leads during
the last 2 fiscal years. Also, IRS data on its returns processing
procedures for disallowing deductions for inappropriately claimed noncash
contributions on returns with relatively high deductions show that few
deductions are disallowed. The IRS may be able to assess compliance
problems associated with noncash deductions, including donated vehicles,
with information it obtains from audits being conducted as part of its
National Research Program. An IRS donated property task force developed
recommendations, which could lead to better oversight of charities'
donation programs, such as recording and retaining charities' donated
property disposal forms to determine whether charities filed the forms and
whether the forms are accurate. In addition, several of the officials we
contacted in 11 states said they uncovered problems with vehicle donation
programs, including an instance in which an organization posed as a
charity to receive donations, a third-party agent inappropriately kept
vehicle donation proceeds, and individuals solicited vehicle donations for
fictitious charities.

The IRS, state officials, and other organizations we contacted have
provided guidance to taxpayers and charities to help them donate or accept
vehicles. Guidance to taxpayers has included such things as helping them
identify legitimate, well-run charities; avoid personal liability for
their donated vehicles; claim appropriate tax deductions; and protect
themselves from fraudulent marketing solicitations. Guidance to charities
helps charities select and manage professional fund-raisers and suggested
documentation to maintain for donated vehicles.

We are recommending that IRS assess the merits of its program for
generating audit leads on taxpayers that may have overstated their noncash
charitable contributions, and whether forms charities submit when
disposing of donated property should be recorded and retained. IRS agreed
with our recommendations and stated that decisions on actions to be taken
will depend on the results of its review of the level of noncompliance in
reporting noncash contributions.

Background 	The tax code allows individuals and businesses to make noncash
contributions (e.g., vehicles, paintings, used clothing, and household
goods) to qualifying charities by allowing taxpayers to claim deductions
for their donations on their tax returns. However, not all organizations
are granted nonprofit or tax-exempt status by the IRS that qualifies
taxpayers for tax deductions for items donated to them. Table 1 provides
examples of organizations that do and do not qualify donors for noncash
deductions, including vehicle donations.

Table 1: Examples of Organizations That Do or Do Not Qualify to Receive
Deductible Charitable Contributions

Qualified for tax deductions Not qualified for tax deductions

Charitable organizations (e.g. religious, Civic leagues, social welfare
organizations, educational, scientific, charitable literary, and local
employee associations cruelty prevention, and some amateur Political
groups or candidatessports competitions)

Labor, agricultural, or horticultural

Federal, state, and local governments organizations

Domestic fraternal societies and war Social and recreational clubs
veterans' groups

Certain nonprofit cemetery groups Farmer's Cooperative associations

Childcare organizations

Source: Adapted from IRS Publication 557 Tax Exempt Status for Your
Organization, July 2001.

IRS guidance instructs donors to establish the value for their donation
based on its "fair market value" for donated vehicles, that is, what the
item would sell for on the market, taking into account its condition,
including mileage in the case of vehicle donations. As is the case for all
noncash contributions, the IRS does not require donors to obtain an
independent appraisal for a vehicle's value unless they claim over $5,000
for the donated property. IRS guidance suggests that donors use used car
guides, comparable sales, and other sources to assist in establishing the
fair market value for their donated vehicles.

Regulatory oversight over charities and their vehicle donation programs is
diffused, shared between the IRS and state agencies. The IRS decides which
charities are granted nonprofit status and whether the charity meets
tax-exempt requirements and complies with federal laws. Many states

require charities soliciting within the states to register3 with the state
attorney general's office or the secretary of state's office. Figure 1
shows the 39 states and the District of Columbia that require charitable
organizations to register with state charity offices. In general, states
prohibit unregistered organizations from soliciting for donations in their
state. Some state agencies also review vehicle donation advertisements in
response to consumer complaints, or when they discover a charity is
soliciting for donations in their state without being registered.

3Registration of charitable organizations may involve providing
information such as the name of the organization and charitable purpose;
office locations; information on key charity officials; and the general
purpose for which the solicited contributions are to be used.

standards to promote ethical practices. They disseminate these standards
in an effort to "inspire public confidence." These standards include the
voluntary disclosure of an organization's activities, finances,
fundraising practices, and governance.

Based on our national survey of charities, few charities reported having a
vehicle donation program. Correspondingly, a small percentage of taxpayers
claimed tax deductions for donated vehicles.

Few Charities Reported Having Vehicle Donation Programs, and Small
Percentage of Taxpayers Claim Deductions for Donated Vehicles

Few Charities Reported Having Vehicle Donation Programs

Despite frequent advertisements soliciting vehicle donations to charities,
few charities reported having vehicle donation programs. Of U.S. charities
with revenues of $100,000 or more, we estimate that 2.7 percent, or about
4,300 charities nationwide, have vehicle donation programs.4 This
projection is based on our survey of 600 charities, of which 16 reported
having a vehicle donation program.

While the small number of charities with vehicle donation programs does
not allow us to make national estimates, we found that most of the 16
vehicle donation programs identified by the national survey were
relatively new programs, as shown in figure 2. Only 4 of the 16 charities
had vehicle donation programs prior to 1998.

4We surveyed a statistically representative sample of charities from the
2002 core data set of the National Center for Charitable Statistics, of
approximately 157,500 501(c)(3) organizations with incomes of $100,000 or
higher. The 95 percent confidence interval for the number of charities
with vehicle donation programs is between 1.5 to 4.3 percent, or between
2,400 to 6,800 charities.

Figure 2: Number of Sampled Charities Starting Vehicle Donation Programs
from 1978-2002

Number of charities

                                       4

                                       3

                                      2 1

0 1978

Year

1981 1984-1990 1993 1996 1999

Source: GAO summary of data from 16 charities in national survey of
charities with annual revenues of $100,000 or more.

Small Percentage of Our analysis of IRS tax return data for tax year 2000
showed that a small Taxpayers Claimed percentage of taxpayers claimed
deductions for vehicle donations. We Deductions for Vehicle reviewed a
representative sample of taxpayer returns5 that claimed Donations noncash
contributions of over $500 for tax year 2000. We found that of the

129 million returns filed that year, an estimated 0.6 percent,6 or 733,000
returns, contained tax deductions for vehicle donations. The 733,000
returns represented about 17 percent7 of the 4.4 million returns

5We used IRS's tax year 2000 Statistics of Income (SOI) file to select our
statistically representative sample of returns.

6The 95 percent confidence interval for number of returns filed is plus or
minus 0.4 percent, or between 0.2 and 1 percent.

7The 95 percent confidence interval for noncash contribution deductions
over $500 is plus or minus 10.8 percent, or between 6 and 28 percent.

filed with noncash contribution deductions over $500. We estimate that
vehicle donation deductions lowered taxpayers' income tax liability by an
estimated $654 million.8 The dollar amount of vehicle donation deductions
totaled about 6 percent of the noncash contributions claimed,9 while
stocks and thrift store donations accounted for most of the deductions for
noncash charitable contributions over $500, as shown in figure 3.

Figure 3: Percentage of Dollar Amount of Deductions for Noncash Charitable
Contributions over $500 by Type of Contributions, Tax Year 2000

6%

Vehicle donation

9%

Property donation

Thrift store donation

Stock donation

Source: GAO analysis of a random sample of returns from IRS tax year 2000
Statistics of Income file.

Note: Totals do not add to 100% due to rounding. Sampling errors
associated with these estimates are large. The 95 percent confidence
intervals are: stock donation 39-86%, thrift store donation 838%; property
donation 3-19%, and vehicle donation 2-15%.

8The 95 percent confidence interval for the $654 million estimate is plus
or minus $480 million, or between $174 million and $1.13 billion.

9This value may underestimate the taxes foregone because only vehicles
valued over $500 are included. About 16 million taxpayers claimed an
estimated $5.5 billion in noncash contributions of $500 or less. Some of
these taxpayers may have claimed tax deductions for vehicle donations, but
they were not required to list these transactions on their returns.

Vehicle Donation Programs Varied for the Charities We Reviewed, but Most
Used Third-Party Agents

While few taxpayers claim tax deductions for donated vehicles, 2 charities
we contacted conducted surveys10 of their donors and found that the
ability to claim a tax deduction was one of the important reasons
individuals donated their vehicles to charity. Other important reasons
cited in the surveys for donating vehicles were to help a charitable cause
and to easily dispose of an unwanted vehicle.

The vehicle donation process, for the charities we reviewed generally
consisted of four steps: (1) solicitation/donor contact, (2) vehicle
pick-up, (3) vehicle sale, and (4) distribution of proceeds. Forty-five of
the 65 charities we interviewed reported using third-party agents for some
or all of these steps rather than relying on in-house resources, and some
had arrangements with more than one agent. About half of the 45 charities
used third-party agents to run the entire program, while other charities
used a third-party agent for only certain functions. The vehicle donation
process is depicted in figure 4.

Figure 4: Vehicle Donation Process

  Source: GAO depiction of information obtained from charities and third-party
                                    agents.

10Two charities shared voluntary feedback provided by vehicle donors. Over
3,000 donors responded in one survey and about 400 responded in the other.
We did not review the methodology for the surveys, and consider the
results to be illustrative.

Step 1 - Solicitation/donor contact. The vehicle donation process
generally begins with solicitations for donated vehicles through
advertisements. Vehicle donations may be solicited directly by charities,
third-party agents, or both, depending on the agreement between the
charities and third-party agents. Of the 45 charities we interviewed that
discussed their advertising practices, 26 reported that advertising was
handled solely by the charity. Some third-party agents solicited donated
vehicles for several charities using a common advertisement. Some of the
most common mediums for vehicle donation advertisements include the radio,
newspapers, and the Internet.11 (For Web version of this report, click
here to hear a radio vehicle donation advertisement, or see app. II for
the transcript.) Vehicle donations are also solicited through
advertisements on billboards, truck banners (see fig. 5), and television,
as well as in newsletters and even on small paper bags.

11We reviewed a nonprojectable sample of 147 radio, newspaper, and
Internet advertisements for donated vehicle programs to determine the
types of claims that charities and third parties made in soliciting for
used vehicles. Appendix II provides information on the results of our
analysis.

Figure 5: Example of Vehicle Solicitation on a Truck

Source: GAO, courtesy of The Salvation Army, Pasadena, California.

Also during this step, donors initiate contact with the charity and or
thirdparty agent to donate their vehicle. Either charities or third-party
agents may take the initial call from a potential donor, asking the donor
questions that may be used to screen vehicles, such as the vehicle's make,
year, and condition, and if the donor has the title to the vehicle.
Twenty-four of the 65 charities we interviewed reported that they accepted
donor calls inhouse, while 23 said that they used third-party agents to
accept calls or shared this responsibility.12 Some charities or their
agents limited the vehicles they accepted to those they anticipated would
produce a profit after towing and other expenses. However, some charities
reported accepting vehicles regardless of condition, as suggested in
figure 6. One charity official stated that accepting vehicles with little
value was a way of generating goodwill for future donations.

12We did not obtain information on donor contacts with the charity or
third-party agents for the remaining 18 charities.

Figure 6: Some Charities Accept Vehicles in Poor Condition

Source: Article on charities that accept vehicles in poor condition,
courtesy of Cartalk.com.

Step 2 - Vehicle pickup. After the donor makes the initial call to donate
a vehicle, arrangements are made to pick up the vehicle and deliver it to
wherever it will be stored until it is sold. Vehicles are generally towed,
according to a third-party agent, due to safety and liability concerns. A
majority of charities we contacted used third-party agents to pick up
vehicles. Once vehicles are picked up, donors are generally provided with
a receipt to document the donation for tax purposes. At this time, the
charity or third-party agent also obtains the title of the vehicle from
the donor.13 Some charities may provide the donor with state-required
forms (e.g., release of liability), or references for establishing the tax
deductible value of their donated vehicle (e.g., car guides or IRS
guidance).

13IRS ruled in November 2002 (REV. 2002-67) that a donor transfer of a
vehicle to a charityauthorized agent can be treated as a transfer to the
charity.

Step 3 - Vehicle sale. Once collected, donated vehicles are most often
sold. Charities or third-party agents typically sell donated vehicles
through auctions to auto dealers, to the public, or to vehicle salvagers.
The majority of charities we contacted said that charities do not handle
the selling of vehicles themselves, but instead rely on a third-party
agent. Charities and third-party agents said that they generally sold
donated vehicles at auto auctions because (1) auctions allow high volume
of auto sales and (2) charities do not have the resources, such as staff,
storage space, or licenses required to sell vehicles themselves. Of the 65
charities we interviewed, 43 charity officials said they sold all of their
donated vehicles, while officials at 16 charities said they used some
donated vehicles for clients, charity staff, or other purposes.14 For
example, 1 charity official said that the charity used donated vehicles
for student training for a community college auto course.

Step 4 - Distribution of proceeds. After vehicles have been liquidated,
the proceeds are distributed. Charities with in-house vehicle donation
programs keep proceeds that remain after deducting costs associated with
processing the vehicles. When charities use third-party agents, the
financial agreement between the charity and the third-party agents
dictates the proceeds that the charity and fund-raiser will receive from
the sale.

In addition to the in-house and third-party arrangements, we identified
some variations in how vehicle donation programs operate. In one case, a
consortium of 14 charities jointly runs a vehicle donation program in
conjunction with a wrecking yard. The charities share in oversight of the
operations, such as inspecting donated vehicles and monitoring vehicle
donation reports. Donors can select 1 charity to receive the proceeds, or
if no charity is designated, proceeds are split among members of the
consortium equally. In another case, 1 large charity runs a national
vehicle donation program and serves regional offices as a third-party
agent would, charging its regions vehicle processing costs. However, some
of the charity's affiliates choose other third-party agents that are not
part of the national program to run their program. Finally, in still
another case, a large charity runs a national program and serves charity
affiliates, but also has a nonprofit vehicle donation program for other
smaller charities.

14We did not obtain information on donated vehicle disposals from the
remaining 6 charities.

Charities Receive Less than Donors Claimed as the Value of the Vehicle for
the 54 Donations We Reviewed

Although proceeds from vehicle donations are a welcomed source of revenue,
it was not a crucial source of income for the majority of the charities we
reviewed. The proceeds charities received from vehicle donations varied in
the 54 cases we tracked, but were generally considerably less than the
amount donors claimed on their tax returns for the donated vehicles. Based
on information from charities we spoke with, this difference is due in
part to donated vehicles being often sold at auto auctions at wholesale
prices, and processing expenses and third-party fees reducing the amount
of proceeds charities receive. We could not verify the accuracy of
taxpayer claims regarding the value of their donated vehicle.

Revenue to Charities from Vehicle Donations Varied

The annual net proceeds from vehicle donations for 2002 reported by the
charities we interviewed ranged from as little as $1,000 for 2 vehicles
donated to a senior center, to over $8.8 million for 1 national charity
that received over 70,000 vehicles. The charities considered the proceeds
received as a welcomed, but rarely crucial source of income to sustain
their operations. Although the dollar amount received from vehicle
donations was over $1 million for several charities we spoke with, for
many, the revenue was a small share of total charity revenue. Charity
proceeds constituted less than 2 percent of the total annual budget for 15
of the 30 charities providing budget information; however, 2 of the
charities stated that vehicle donation proceeds provided 90 percent or
more of their annual revenue. Many of the charities we interviewed stated
that their vehicle donation program provided benefits beyond revenue by
providing an expanded donor base and name recognition for the charity.

Charity Proceeds Much Less than Values Claimed by Donors in Cases We
Tracked

In the 54 specific vehicle donations we tracked, charity proceeds from
vehicle donations were much less than the value deducted by donors on
their tax returns. Based on charity and the third-party agent we
contacted, two factors contributed to this difference: (1) vehicles are
often sold at auto auctions for salvage or at wholesale prices, which are
typically lower than prices that would be received if the donor sold the
vehicle themselves and (2) processing costs and fees are deducted from
gross sales revenue, further reducing charity proceeds.

Figure 7 illustrates the amount a charity received from 1 of the 54
vehicle donations we tracked. In this case, a 1983 GMC Jimmy truck was
donated in 2001 to a charity whose vehicle donation program is operated by
a thirdparty agent. The gross sale price for the truck, which sold at an
auction, was $375. After deducting third-party and advertising expenses,
net proceeds from the vehicle sale totaled $62.00. This amount was split

50/50 between the third-party agent and charity, leaving the charity with
$31 from the vehicle donation. The taxpayer claimed a $2,400 tax deduction
for the donated vehicle on his/her tax return, based on the fair market
value of the vehicle listed in a used car guidebook. Appendix III details
the vehicle donation transactions for all 54 tracked cases.

Figure 7: Example of a Vehicle Donation

Source: GAO.

Donated vehicles are often sold at auto auctions for lower prices than
what a seller might receive if the vehicle were sold to a private party.
For the 54 donated vehicles we tracked, sale prices for donated vehicles
ranged from 1 percent to 70 percent of donor tax deduction claims, and
over half of the cases were 10 percent or less of what donors' claimed.
(See app. III) As one third-party agent stated, it is unfair to compare
auction sale prices for donated vehicles to deduction claims because most
donated vehicles are sold at auctions that cater predominantly to
wholesalers who then resell the vehicle at higher prices. Of the 59
charities we contacted during our review that said they sell some or all
donated vehicles, 42 used auctions to dispose of the vehicles.

Another reason for the difference between the amounts deducted by donors
for donated vehicles and the proceeds charities receive from vehicle sales
is that sales proceeds are reduced by vehicle processing costs, such as
towing, advertising, program administration, and third-party agent fees.
California is the only state that collects data on the proceeds

received by charities from vehicle donation programs.15 According to the
California Attorney General's records, 145 charities using third-party
agents who had filed the required financial reports received approximately
$16 million, or 35 percent of the $45.8 million raised from reported
donated vehicle sales, during 2001. The amount of proceeds these charities
received in California ranged from 2 percent to 80 percent of proceeds
after third-party costs were deducted.

Taking both the lower sales price and deductions for processing costs into
account, the proceeds received by charities from donated vehicles were
much lower than the donor-claimed value for the vehicles in the 54 donated
vehicle cases we tracked. Charities received between 0 and 54 percent of
the value claimed by donors,16 with most receiving 5 percent or less, as
shown in figure 8. For some vehicle donation sales, charities receive no
proceeds after the costs of vehicle donations are deducted. For 6 of the
54 donated vehicles we tracked, the processing costs exceeded the sales
price for the vehicle (see app. III). For charities using third-party
agents, whether the loss is absorbed by the third-party agent or deducted
from charity proceeds from another higher value donated vehicle depends on
the agreement between the parties.

15See the state Web site for reporting requirements and list of charities
and third-party agents at www.caag.state.ca.us.

16About half of the vehicles we tracked came from 1 charity that does its
own advertising, which can be one of the highest cost elements of a
vehicle donation program. Proceeds this charity received from its
third-party agent are higher because the cost of advertising is not
included.

Figure 8: Charity Proceeds as a Percent of Donor Claims in 54 Selected
Vehicle Donations

                              Number of donations

Less than 1 percent

                     1-5 percent 6-10 percent 11-15 percent

             Source: GAO analysis of 54 tracked vehicle donations.

Because third-party agents and other donated vehicle processing costs vary
among charities, comparing net vehicle donation proceeds between charities
can be misleading. One third-party agent said that programs claiming a
high percent of proceeds as profit are not including their full costs,
that is, they are only counting towing costs and may not include space,
advertising, or staff costs. Similarly, 1 charity managing its own vehicle
donation program stated that its proceeds may be lower than some other
charities, but they are accurately capturing the true program costs while
others may not be. Proceeds also differ based on different agreements
between charities and third-party agents for paying for the third-party's
services. Of the 45 charities we contacted during our review that reported
using third-party agents, 20 said third parties were paid a percentage of
net proceeds for their vehicle donation services, many splitting the net
proceeds 50/50. Other charities reported paying thirdparty agents a flat
fee per vehicle17 or had some other arrangement, such as paying for towing
expenses incurred by third-party agents.

17Seven charities reported a flat fee arrangement, such as $45 or $50 per
vehicle.

A number of charities interviewed had little insight into vehicle donation
processing costs incurred by third-party agents because they received
limited, or in a few cases, no information on charges for vehicle
donations. Although most charities reported receiving an itemized list of
revenue and costs of donated vehicles from their third-party agents, the
detail was not always provided. For example, 1 charity received an
itemized list of each vehicle sold that listed all costs under "cost of
sales" except for the thirdparty fee. Another received an itemized list of
sold vehicles with all costs under "tow fees" and "expenses." Thirteen of
the charities we contacted reported that they received a check from a
third-party agent accepting vehicles for the charity without their
knowledge, and only 4 of the 13 said that information on processing costs
was provided. One well-known charity with its own vehicle donation program
stated that they repeatedly contacted two third-party agents to stop them
from accepting vehicles on their behalf. The charity estimated that in 1
year one of the third parties had deducted approximately $25,000 from
proceeds to the charity over what it would have cost the charity itself to
process the donated vehicles.

Limited Data to Assess Taxpayer Accuracy in Estimating Donated Vehicle's
Fair Market Value

An additional factor that may explain the difference between the proceeds
charities receive from vehicle donation sales and what donors claim as the
value of the donated vehicle may be an inaccurate assessment by donors of
the vehicle's value. Although many charities we spoke with said they try
to limit vehicle acceptance to those in running condition, some charities
accept vehicles in poor condition. Charities stated that a number of the
vehicles donated are sold for scrap, and some said donor claims about
vehicle value might be inflated.

We could not determine in the 54 cases we tracked whether donors
appropriately claimed deductions for donated vehicles. IRS guidance
suggests that taxpayers consider using used car guides when estimating the
fair market value for donated vehicles, while also considering the
vehicle's condition and mileage.18 Of the 54 cases, 25 assessments were
based on nationally recognized used car guides.19 However, since we did
not have additional information, such as the vehicle's condition and

18IRS Publication 561, Determining the Value of Donated Property.

19Seven of the 54 did not identify the basis for their vehicle's claimed
value; 6 used a "catalogue;" 8 stated they used comparable sale prices;
and the remaining 8 out of 54 used the Internet or other miscellaneous
sources.

IRS and States Compliance Activities Directed at Donated Vehicle Issues
Have Identified Cases of Noncompliance

mileage, we could not determine whether the reported valuations claimed by
donors accurately reflected fair market value.

The IRS has one compliance program that produces audit leads on
potentially overstated noncash contributions, but it does not follow up on
these leads. According to IRS officials, it does not audit cases with
potentially overstated noncash contributions because it has higher
priority compliance issues to address. Also, IRS data on its returns
processing procedures that are directed to disallowing deductions for
inappropriately claimed noncash contributions show that a small percent of
returns are subject to these procedures and that few deductions are
disallowed. As part of its National Research Program, IRS plans to gather
information on noncash contribution compliance issues, which could provide
it with data to determine how best to address noncash contribution
compliance issues. An IRS donated property task force has drafted several
recommendations that could lead to more emphasis being directed to vehicle
donation programs and deductions.

Data from the 11 states we contacted were limited regarding noncompliance
by charities and third-party agents involved with vehicle donation
programs. However, several states' agencies have identified and initiated
legal actions against individuals and organizations that have not complied
with laws or regulations related to vehicle donations. These include
instances in which an organization posed as a charity to receive
donations, a third party inappropriately kept vehicle donation proceeds,
and a charity was not following state requirements for processing
vehicles.

IRS's Compliance Activities Results in Few Disallowed Deductions for
Noncash Contributions

One of IRS's compliance programs is designed to detect individual
taxpayers who may overstate noncash contributions on their tax returns,
including donated vehicles. However, due to higher priority demands for
determining compliance with tax laws, IRS has not been following up on
leads of potential noncompliance that are generated from this program.
Under this program, about two full-time equivalent employees at IRS's
Ogden Submission Processing Center are used to compare the proceeds
charities received from donated property shown on property disposal

forms (Form 8282 Donee Information Return20) with the amounts claimed by
taxpayers on their tax returns. If there is a wide discrepancy between the
charity's revenues for the property and the amount claimed by the taxpayer
on their tax return, the case is referred to field offices for possible
audit.

An Ogden Campus official estimated that on average about 20,000 Form 8282s
are received annually, and that 4,000 to 5,000 individual tax returns are
reviewed to determine whether they should be audited. An Ogden official
estimated that the cost to retrieve a tax return from IRS files is between
$100 and $150. Ogden officials stated that they do not track the number of
cases that are referred for possible audit or the types of donated
property involved in the cases, but estimated that 30 percent to 40
percent of the returns reviewed are referred.21 An IRS official estimated
that most referred cases related to donated land or boats, which generally
have higher potential tax assessments than do vehicles. According to our
analysis of the IRS audit data,22 none of the returns that were referred
during fiscal years 2001 and 2002 were audited. IRS officials stated that
the returns were not audited because the potential tax assessment yield
from these cases was substantially smaller than from other types of
compliance issues handled in the field.

IRS also established processing procedures for returns to identify and
disallow deductions for noncash contributions either when taxpayers claim
noncash contributions over a certain amount or when they do not attach
required Form 8283, Noncash Charitable Contributions 23 to their returns.
These processing procedures cover relatively few noncash contribution
deductions. For example, we estimate that for tax year 2000 returns, IRS's
returns processing threshold for these deductions

20Under section 6050L of the Internal Revenue Code, charities are required
to submit Form 8282 "Donee Information Return" when they dispose of
donated property within 2 years of receiving property for which the
taxpayer valued for more than $5,000. The form describes the property, the
donor, and the proceeds received by the charity. All Form 8282s are to be
sent to IRS's Ogden Campus.

21According to Ogden officials, as of September 23, 2003, 516 cases had
been referred to the field in 2003.

22We analyzed IRS's Audit Information Management System, which is a
computerized file of audit cases, to determine whether any of the Ogden
cases were audited in fiscal years 2001 and 2002. We did not verify the
accuracy of these data.

23Taxpayers are required to attach Form 8283 to their returns when they
have noncash contributions over $500. We did verify the accuracy of IRS's
disallowed deductions data.

would account for about 1 percent of the returns where noncash
contributions of over $500 were claimed. According to IRS, returns that
meet the threshold are given a special code and are reviewed by the
examination staff to determine whether they have audit potential. Returns
with audit potential are put in the audit inventory for possible audit
selection by field agents. IRS found that these returns were not being
selected for audit because field agents had other higher priority work.
IRS expects this higher priority work to continue into the foreseeable
future, and as a result, beginning in January 2004, returns processing
staff will discontinue coding these returns for review by examination
staff. IRS does not have data on the number of noncash contribution
deductions that have been disallowed because of missing Form 8283s, but
IRS officials estimate that few were disallowed. IRS also has returns
processing procedures to identify and disallow noncash donations to
individuals or nonqualifying organizations, such as political
organizations. According to IRS, in 2002 it disallowed noncash
contributions of about $21.8 million on 154 tax returns for donations made
to individuals and nonqualifying organizations.24

In addition to the above compliance activities that focus on taxpayers'
deductions for donated vehicles and other types of noncash contributions,
IRS's Exempt Organization Division has an examination program that focuses
on whether charities meet tax-exempt requirements and complies with
federal law, such as those governing the use of funds for a charitable
purpose rather than private gain. IRS had little information on whether
its examinations identified compliance problems with charities operating
vehicle donation programs. At the time of our review, IRS officials
informed us that IRS had seven vehicle donation program examinations in
progress and had completed two cases. According to an IRS official, in one
recent case, IRS revoked the exemption status for one Florida organization
whose charitable purpose was to provide research, education, and technical
training on the marine environment. The charity raised funds through the
solicitation and sale of boats. IRS found that the organization's
charitable activities were insubstantial, and that private parties were
benefiting from the substantial economic benefit of the organization's
activities.

24As of August 31, 2003, IRS data shows that 139 deductions valued at
about $12 million were disallowed.

Results of National Research Program and Donated Property Task Force May
Lead to More Noncash Contribution Compliance Activities

While more compliance resources are being devoted to higher priority audit
issues such as abusive tax shelters and high-income nonfilers, IRS's
National Research Program is to provide data on compliance problems
associated with noncash contributions, including deductions for donated
vehicles. Under the program, the IRS randomly selected about 47,000 tax
year 2001 returns to determine whether taxpayers complied with statutory
income, expense, and tax reporting requirements. Returns with noncash
contributions, including donated vehicles, could be subject to audit to
verify donation claims. Once this project is completed in December 2004,
IRS plans to assess individuals' compliance related to deductions for
noncash contributions and determine what actions are needed to help ensure
proper reporting in this area.

In 2001, IRS established a donated property task force that examined
various issues relating to such topics as property appraisals and
valuations and coordination of compliance activities between various IRS
organizational units. In July 2002, the task force developed several draft
recommendations for improving IRS's oversight of donated property programs
and deductions. The recommendations included revising Form 8283 to add a
separate category for donations of motor vehicles on the portion of the
form that identifies the type of property donated. Another recommendation
made was to establish procedures to ensure that IRS records and maintains
copies of Form 8282s that are filed with the Ogden Submission Processing
Center. The task force noted that without such procedures, IRS could not
verify the accuracy of the forms or determine whether charities filed
them. The IRS's audit procedures instruct auditors to determine whether
charities submit required Form 8282 when disposing of donated vehicles.
Auditors may assess penalties if they find that the charity did not submit
required Forms 8282.25 However, determining whether charities filed the
forms may be difficult because the forms are destroyed if they are not
used in Ogden's noncash contribution audit referral program discussed
above. According to IRS officials, at the time of our review, IRS had not
taken action on this recommendation.

25Under Internal Revenue Code section 6721, a $50 penalty can be assessed
for each failure to file a Form 8282.

State Agencies Have Identified Compliance Problems with Donated Vehicle
Programs

Many states oversee charities to protect the public, and 39 states and the
District of Columbia require charities to register with the state attorney
general or the secretary of state offices. States have an interest in
whether charitable fund-raising is fraudulent and whether charities are
using funds to meet the charitable purpose for which they were created. We
contacted 11 state attorney general offices or secretaries of state to
identify information related to vehicle donation programs. Only 1 state
reported having data to identify charities with vehicle donation programs;
however, several said that they would investigate a charity vehicle
donation program if they received complaints from the public. As discussed
in the following items, several of these states uncovered problems with
vehicle donation programs, including instances in which an organization
posed as a charity to receive donations, third-party agents
inappropriately kept vehicle donation proceeds, a charity was not
following state requirements in processing vehicles, and individuals
solicited vehicle donations for fictitious charities.

o  	In Massachusetts, a for-profit company representing itself as a
charity solicited cars through newspaper ads leading potential donors to
believe that the organization was a charity and that all, or a substantial
portion of the proceeds would go directly to providing counseling to
children and parents in Massachusetts. In May 2002, Massachusetts brought
and won an enforcement action in which the company's president agreed with
state officials to cease all further activity related to the car donation
operation.

o  	Connecticut officials filed suit in July 2003 against a used auto
dealership and a bogus charity that was created by the dealership's owner.
Vehicles were solicited, supposedly to help abused and abandoned animals,
but virtually all of the proceeds were retained by the auto dealership,
which maintained one checking account for both organizations, according to
state officials.

o  	Ohio's Attorney General filed a complaint in 2003 against a nonprofit
organization that solicited over 800 vehicles in the name of donor
designated charities, but at least $258,000 in vehicle proceeds was not
provided to the designated charities, according to the complaint.

o  	The California Attorney General's office filed a civil action against
the incorporator of a nonprofit that solicited vehicles for charity, but
there was never a charitable program, only a used car lot. The Attorney
General's office estimated that over $1 million was raised by the
operation, none of which benefited charity. Criminal charges against the
defendant resulted in a 5-year jail sentence.

o  	In a case filed in June 2003, the California Attorney General's office
filed a case against a nonprofit organization selling donated vehicles to
the public that had not met California's safety requirements. Some
vehicles sold for export to locations such as Belize and Mexico, which do
not require the same state safety standards, were not actually exported.

o  	An indictment filed in a U.S. District court in October 2002, charges
that defendants established over 100 toll-free numbers with sound- alike
charity names, such as the National Mental Health Association, Cancer
Society, or National Diabetes Association. According to the case filing,
potential donors were fraudulently told that the sound-alike organizations
were the national charities whose names they approximated or were
affiliated with nationally known charities; however, according to the case
records, the defendants kept all proceeds.

A number of government and consumer organizations provide guidance to
donors to assist them in making informed decisions about donating their
vehicles. Guidance is also available to assist charities in accepting
noncash contributions and in selecting, hiring, and managing third-party
agents.

Guidance Is Available to Donors and Charities Regarding Vehicle Donations

Donor Guidance for Donating Vehicles

Charitable donors in general, including those that donate their vehicles,
can rely on guidance available from the federal government and other
sources to ensure that they make informed donations. For example, IRS
publishes guidance on claiming deductions for donations, and establishing
fair market value for items donated. In addition, a Federal Trade
Commission-led initiative highlights legal actions taken against
individuals and organizations that engage in phony philanthropic
activities, and provides tips on how to recognize and avoid fraudulent
solicitations. Some states also offer guidance for potential donors and
may have financial information on specific charities. A number of
nongovernmental sources offer donors similar advice. For example, the
Better Business Bureau's Wise Giving Alliance, Guidestar, Charity
Navigator, and the American Institute of Philanthropy offer tips for
charitable giving or information on specific charities.

Appendix IV lists specific sources for donor guidance.

The guidance generally identifies steps donors should take when donating
vehicles and claiming associated tax deductions. These steps are listed as
follows:

o  	Verify that the recipient organization is a tax-exempt charity.
Churches, synagogues, temples, mosques, and governments are not required
to apply for this exemption in order to be qualified.

o  	Determine whether the charity is properly registered with the state
government agency that regulates charities. The state regulatory agency is
generally the state attorney general's office or the secretary of state.

o  	Ask questions about how the donated vehicle will be used to determine
whether it will be used as intended. Such questions include: Will the
vehicle be fixed up and given to the poor and needy? Will it be resold
and, if so, what share of the proceeds will the charity receive?

o  	Itemize deductions in order to receive a tax benefit from the
donation. The decision to itemize should be determined by whether total
itemized deductions are greater than the standard deduction.

o  	Deduct only the fair market value of the vehicle. The fair market
value takes into account many factors, including the vehicle's condition,
and can be substantially different from the value listed in used car
guides.

o  	Document the charitable contribution deduction. IRS Publication 526
identifies requirements for the types of receipts taxpayers must obtain
and the forms they must file.

o  	Follow state law regarding the car titles and license plates.
Generally, the donor should ensure that the title of the vehicle is
transferred to the charity's name by contacting the state department of
motor vehicles, and keep a copy of the title transfer. Donors are also
advised to remove the vehicle's license plate if allowed by the state.

Guidance to Charities 	Some guidance is also available to charities with
vehicle donation programs regarding accepting noncash contributions and
hiring a thirdparty agent for fund-raising purposes. For example, IRS
Publication 1771, Charitable Contributions, Substantiation, and Disclosure
Requirements, explain federal law for organizations that receive
taxdeductible contributions. The IRS also plans to publish, by March 31,
2004, a brochure advising charities on how to avoid problems raised by
vehicle donation programs. State guidance to charities we reviewed was

generally not specific to vehicle donation programs, but rather provided
general guidelines for selecting, hiring, and managing third-party agents.
In addition, a number of nongovernmental sources offer charities similar
advice. The Better Business Bureau, for example, publishes standards for
charities in areas such as fund-raising activities, and issuing
informational materials to donors. Appendix IV lists specific sources for
charitable guidance.

Some of the general guidance provided to charities that are relevant to
donation programs are listed as follows.

o  	Consult and adhere to IRS's publications explaining federal law for
organizations that receive tax-deductible contributions, and review IRS's
annual Exempt Organizations Implementing Guidelines.

o  	Comparison shop for fund-raising agents, insist on a written contract,
and do not relinquish control of a program to the fund-raiser.

o  	Follow standards published by various nongovernmental sources for
governance, oversight, fund-raising activities, and issuing informational
materials.

IRS will not have data on whether taxpayers are appropriately claiming tax
deductions for noncash contributions, including donated vehicles, until it
completes its National Research Program study at the end of 2004. In the
meantime, IRS is using resources to produce audit leads on overstated
noncash contributions that are not being audited because of higher
priority compliance demands. To determine whether these resources could be
used more productively, IRS could assess the merits of the noncash
contribution compliance program to determine whether it could be modified
to take advantage of the leads that are generated, such as auditing
taxpayers through correspondence instead of sending them to field offices.

The IRS has audit procedures that instruct auditors to assess penalties
against charities that do not file the required Form 8282 when they
dispose of property. However, as reported by its donated property task
force, IRS does not have a way of verifying whether charities file the
required Form 8282 or whether forms that are filed are accurate. The task
force's draft recommendation to maintain and record Form 8282 is worth
considering. This recommendation was made in July 2002, and has not been
acted upon.

Conclusion

Recommendations for Executive Action

Agency Comments and Our Evaluation

In conjunction with IRS's ongoing National Research Program study, which
is to be completed in December 2004, we recommend that the Commissioner of
the Internal Revenue assess (1) whether the Ogden compliance program
should be modified to take advantage of the leads generated by the program
and (2) the feasibility and usefulness of maintaining and recording the
receipt of Form 8282 as recommended by IRS's donated property task force.

We received written comments on a draft of this report from the
Commissioner of Internal Revenue (see app. V). The Commissioner agreed
with our recommendations and identified some alternatives and actions that
IRS is considering to ensure compliance by charities with reporting
requirements.

With regard to our recommendation that IRS assess its compliance program
for generating audit leads on taxpayers that may have overstated their
noncash contributions, the Commissioner stated that IRS actions related to
the compliance program will be based on its review of the level of
noncompliance in reporting noncash contributions. The Commissioner also
agreed with our second recommendation to consider whether the Form 8282s
that charities submit when disposing of donated property should be
recorded and retained. He stated that decisions on the handling of the
forms would be made in conjunction with decisions on the first
recommendation and with other changes IRS has underway, particularly the
redesign of the Form 990. IRS is considering changing the Form 990 to
include information on the filing of Form 8282 as an alternative to
retaining the Form 8282.

The Commissioner noted that some steps have already been taken to improve
the reporting of vehicle donation programs, such as the revision of Form
990 filing instructions for 2003 to provide organizations with an example
of a vehicle donation, and other actions noted in our report.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this report. We will then send copies of this report to
the Secretary of the Treasury; the Commissioner of Internal Revenue; the
Director, Office of Management and Budget; and other interested parties.
We will also make copies available to others on request. The report is
also available on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions on this report, please contact me
at (202) 512-8777 or Ralph Block at (415) 904-2150. Key contributors to
the report are listed in appendix VI.

Cathleen A. Berrick, Director, Homeland Security and Justice Issues

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine: (1) the number of charities with vehicle
donation programs, and the number of taxpayers claiming deductions for
vehicle donations; (2) the vehicle donation process; (3) proceeds received
by charities from vehicle donations to what donors claim for vehicle
donation deductions; (4) the Internal Revenue Service's (IRS) and state
compliance activities directed at vehicle donations and incidents of
noncompliance; and (5) guidance available to taxpayers and charities to
help them make informed decisions regarding vehicle donations. To satisfy
these objectives, we relied on two sources of nationally representative
information and several anecdotal sources of information. Table 2
summarizes the primary data sources used to address each of the
objectives.

                Table 2: Data Sources Used to Address Objectives

                                                             IRS and  
                          IRS's                                         Other 
                 National Statistics            Third-party   state      data 
                          of           Charity  agents                
    Objectives   charity  Income file officials and others  officials sources 
                 survey                                                     a 
(1)Number of     x                                           x     
      vehicle                                                         
     donation                                                         
     programs                                                         
     Number of                                                        
     taxpayers                 x                                x     
     claiming                                                         
    deductions                                                        
    (2) Vehicle     x                     x          x          x        x    
     donation                                                         
      process                                                         
    (3) Vehicle     x                     x          x          x        x    
     donation                                                         
     proceeds                                                         
     (4) IRS,                                                   x     
       state                                                          
    compliance                                                        
    activities                                                        
(5) Taxpayer                                      x          x     
        and                                                           
      charity                                                         
     guidance                                                         

Source: GAO.

aOther data sources include 54 tracked vehicle donation cases, Internet
searches, and a judgmental sample of vehicle donation advertisements.

National Charity Survey 	To estimate the number of charities that have
vehicle donation programs, we conducted a national telephone survey with a
statistically representative sample of organizations registered with IRS
as 501(c)(3) organizations (charities) with an annual income of at least
$100,000. The sample was drawn from the 2002core data set (tax year 2001)
of the National Center for Charitable Statistics (NCCS), which contains
the IRS Form 990 data for all nonprofit organizations in the United
States. A simple random sample of 600 charities was drawn from the
population of

Appendix I: Objectives, Scope, and Methodology

157,512 charities. The NCCS data were determined to be sufficiently
reliable for the purposes of our report, based on interviews with NCCS
officials regarding reliability procedures and observation of the sampling
process.

Valid telephone numbers could not be obtained for 11 percent of the
charities in the sample, and 6.8 percent of the charities did not answer
the telephone after several contact attempts or did not return calls,
yielding a total rate of nonresponse of 17.8 percent. We took steps to
reduce errors in our estimates by pretesting the survey with charities of
varying characteristics and performing computer analyses to identify
inconsistencies and other indicators of errors.

We received valid responses from 493 of the 600 charities, for a response
rate of 82.2 percent. Interview responses were weighted to account for the
initial sampling rate and response rate. As with most surveys, our
estimation assumes that nonrespondents would have answered like the survey
respondents, and we do not know of any evidence about whether our
respondents were different from nonrespondents. Our confidence in the
precision of the results from this sample is expressed in 95 percent
confidence intervals. We are 95 percent confident that the results we
would have obtained had we studied the entire population are within +/- 2
percentage points of this result.

                           Statistics of Income Data

To estimate the number of taxpayers that claimed deductions for donated
vehicles, we analyzed a random sample of tax year 2000 individual tax
returns from IRS's Statistics of Income (SOI) individual tax return file.
The SOI file is a stratified probability sample of income tax returns
filed with the IRS. The tax year 2000 sample represented about 129 million
tax returns. The SOI sample contained information on 34,942 returns where
taxpayers itemized deductions and claimed a noncash contribution of over
$500. We randomly sampled 600 cases from this sample population and
requested the tax returns from the IRS. Weights were adjusted to represent
all taxpayers claiming noncash contributions exceeding $500. Of the 600
cases in our sample, actual returns were available for 509 of the cases.
We determined that the SOI data were sufficiently reliable for the
purposes of our report based on interviews with IRS officials and testing
for bias in our sample. No bias was identified in a comparison of
available returns and nonavailable returns in terms of taxable income,
total contributions, and several other factors.

Appendix I: Objectives, Scope, and Methodology

                               Charity Officials

To obtain information on vehicle donation program processes and proceeds
from vehicle sales, we contacted 65 charities throughout the country. The
65 charities included:

o  	16 charities in our national charity survey that reported having a
vehicle donation program,

o  8 charities interviewed as pretests to the survey, and

o  	41 charities identified in advertisements or on taxpayer deduction
claims.

Not all 65 charities provided information on all topics discussed in the
report. Where information is reported, the specific number of charities
that provided information related to the topic discussed is included.
These examples cannot be generalized beyond the charities responding.

Third-Party Agent and Other Organizations Interviewed

We interviewed six third-party agents that provide vehicle donation
program services to charities for examples of how the vehicle donation
process works for their organizations and the charities they served. Some
of the agents represented more than 100 different charities; however, the
information we received from these agents cannot be generalized beyond the
agents responding. We relied on a number of sources to identify vehicle
donation third-party agents, including state attorney generals' office
officials, donated vehicle advertisements, and charity officials.

To obtain information on guidance provided to donors and charities, we
interviewed officials or reviewed materials from several organizations
involved with charity oversight or charity fund-raising, including the
Better Business Bureau, Chronicles of Philanthropy, the Independent
Sector, and the American Institute of Philanthropy.

IRS and State Officials 	In addressing all of our objectives, we spoke
with IRS headquarters officials from the Tax Exempt and Government
Entities Operating Division, the Wages and Investment Operating Division,
and the Small Business/Self-Employed Operating Division. We also conducted
an on-site visit to IRS's Ogden Campus to obtain information on its Form
8282 compliance program. We also interviewed the Chairperson of the IRS
Vehicle Donations Working Group.

                 Appendix I: Objectives, Scope, and Methodology

We contacted state officials based on referrals from the IRS and the
National Association of State Charity Officials. We also interviewed state
officials in California, Michigan, Massachusetts, Florida, Pennsylvania,
South Carolina, Ohio, Oregon, Connecticut, Washington, and Texas.

                               Other Data Sources

To determine the amount of proceeds charities receive from donated
vehicles relative to the amounts taxpayers claimed as tax deductions, we
tracked a judgmental set of donated vehicles obtained from 4 charities in
4 states. Two charities were local charities that used third-party agents
to manage their vehicle donation programs; 1 was a national charity that
used a third-party agent to handle processing (but not advertising) for
their vehicle donation program; and the fourth was a national charity that
managed its vehicle donation program in-house. The information we obtained
from the charities included the vehicle description, selling price, net
amount received by the charity after expenses, and donor information.
Using the donor information, we requested tax return data from the IRS to
determine the amounts donors claimed as deductions for their vehicles. Not
all of the vehicle donors claimed deductions for their donations. Of the
70 donors the IRS was able to identify as filing returns, 12 did not
itemize their taxes. Four additional cases were dropped due to data errors
or missing information. We were able to track the remaining 54 vehicle
donations. The individual cases or cases in aggregate are for illustration
only, and cannot be used to generalize to vehicle donations overall. Our
analysis of the 54 tracked vehicles is shown in appendix III.

We reported summary data from the California Office of the Attorney
General regarding the percent of proceeds received by charities from
vehicle donation programs using commercial fundraisers. We discussed data
reliability issues with state officials and determined that the data were
sufficiently reliable for the purposes of our report.

Appendix II: Sample Claims of Vehicle Donation Advertisements

Based on a review of a nonprojectable sample of vehicle donation
advertisements, we found that vehicle donation advertisements most often
stated that individuals could claim a tax deduction for the donation, if
the donation served a charitable purpose, and the donor's vehicle would be
towed free of charge. We analyzed 147 advertisements, including 69
newsprint advertisements from a sample of 50 newspapers nationwide, 33
radio advertisements from 19 radio stations in the top 10 U.S. markets,
and 44 Internet advertisements. Figure 9 identifies the most common claims
made in the newspaper, radio, and Internet advertisements we reviewed.

Figure 9: Most Common Claims in Newspaper, Radio, and Internet
Advertisements Reviewed

Percent of advertisements 100

90

80

70

60

50

40

30

20

10

0

Ads with Tax no claims deduction

                                   Newspaper

                                     Radio

                                    Internet

Source: GAO.

Serves Free Vehicles Avoid Some Percent Other charitable towing/ accepted
hassles restrictions going to purpose pick up running or not charity

Note: Claims classified as "other" included promises that vehicles would
be picked up in 24 hours, title transfer would be handled, or
contributions would be used locally.

According to an IRS official, advertisement claims are potentially
misleading when they do not specify that taxpayers must itemize their
deductions to claim a deduction for vehicle donations, since many

Appendix II: Sample Claims of Vehicle Donation Advertisements

taxpayers do not itemize their deductions. Of the 147 advertisements we
reviewed, 117 indicated that taxpayers could claim a tax deduction, but
only 7 advertisements specified that donors must itemize in order to claim
a deduction.

In addition, IRS officials stated that advertisements could be misleading
when they claim donors can value their vehicles at full, or maximum,
market value when claiming a tax deduction, particularly when the same
advertisements claim that vehicles are accepted whether they are running
or not. Full or maximum market value, although not clearly defined,
implies that a vehicle is in good running condition with no major
mechanical defects. Fair market value equates to what a vehicle would sell
for on the market, and takes into account a vehicle's condition and
mileage, among other factors. Of the 147 advertisements we reviewed, 8
identified that a donor could claim full or maximum market value, while
more commonly, advertisements identified that donors could claim fair
market value on their tax returns when donating their vehicles.

Responsibility for oversight of advertisements is diffused. The Federal
Communications Commission defers regulatory authority regarding false
advertising on radio or television to the Federal Trade Commission (FTC).
The FTC does not have specific jurisdiction over charities, but may become
involved in cases of fraud. State officials are primarily responsible for
false advertising by charitable organizations. Officials we interviewed
from 2 states said that limited resources prevent them from providing
broad oversight over advertisements, and that they generally review
advertisements in response to consumer complaints, or when they discover
that charities or third-party agents are soliciting in their state without
being registered.

Table 3 identifies the number of advertisements we reviewed that specified
taxpayers must itemize their deductions to claim a vehicle donation; that
taxpayers could claim full, maximum, or fair market value for their
deduction; and whether the advertisement referred potential donors to the
IRS Web site, an accountant, the Kelley Blue Book,1 or other source for
guidance on claiming a tax deduction.

1The Kelley Blue Book is a used car guide featuring 15 years of values for
over 10,000 models of cars, trucks, and vans and is available both in
print and Internet format.

Appendix II: Sample Claims of Vehicle Donation Advertisements

     Table 3: Vehicle Donation Claims Related to Tax Deductions (by medium)

                                      Newspaper    Radio    Internet    Total 
                        Must itemize            1        0          6 
                   Full market value            3        1          2 
                       Maximum value            0        0          2 
                   Fair market value            7        7     24     
                Consult IRS Web site            0        0     14     
             Consult with accountant            2        3     17     
                    Kelley Blue Book            1        4     22     
                    Other (e.g. IRS)           12        3          7 

Source: GAO.

Note: Some ads contained more than one claim, so the total number of
claims is greater than the 147 advertisements we reviewed.

The transcript from an actual radio advertisement identifying some of the
benefits of vehicle donation programs is shown in figure 10.

Figure 10: Transcript of Actual Radio Advertisement for Vehicle Donations

That Car What to do with that car? Donate it to the Council of the Blind!
Donating a car is trouble free; you get a tax write off, and do your part
for a worthy cause. The California Council of the Blind has helped in the
workplace since the thirties. Simply call, we'll pick up that car, running
or not, in most cases, plus boats--even real estate can be donated for a
write off. Call our live operators for your free pick up now-- 800
xxx-xxxx. 800 xxx-xxxx, that's xxx-xxxx.

Source: Courtesy of Pete Palmer Advertising, San Francisco, California.

Appendix III: Selected Vehicle Donations Tracked from Donation to Taxpayer Claim
for Charitable Deduction

Table 4 details 54 specific vehicle donations identifying the amount of
proceeds charities receive from donated vehicle sales relative to the
amounts taxpayers claim as tax deductions for donated vehicles.
Information on this judgmental set of 54 vehicle donations were obtained
from 4 charities in 4 states. The individual cases or cases in aggregate
are for illustration only, and cannot be used to generalize vehicle
donations overall.

Table 4: Vehicle Donations Tracked from Donation to Taxpayer Claim for
Charitable Deduction-54 Vehicles

                                                    Gross             Charity 
                                                    sale              
                                        Net Donated price as Proceeds receipt 
                                                             to       
                                   proceeds vehicle percent  charity   (loss) 
                                                       of    as a          as 
                          Vehicle (loss) to   value   amount  percent percent 
                                                                   of      of 
    Vehicle as described          charity   claimed    donor    gross   donor 
        in taxpayer         gross from      on                   sale 
         documents           sale vehicle       tax  claimed  price     claim 
                            price sale       return           (loss)  
    1990 Mercury Station      $30    ($130)  $2,915       1%   (433%)    (4%) 
           Wagon                                                      
       1989 Subaru GL         $50     ($45)  $3,100       2%    (90%)    (1%) 
1991 Plymouth Voyager      $40     ($25)  $1,700       2%    (63%)    (1%) 
         1993 Ford            $25     ($20)  $2,000       1%    (80%)    (1%) 
      1988 Ford Escort        $25     ($20)  $1,000       3%    (80%)    (2%) 
      1990 Ford Taurus        $30     ($15)  $1,500       2%    (50%)    (1%) 
    1986 Toyota 4-Runner     $300        $5  $3,950       8%       2%      0% 
     1981 Toyota Celica      $100        $5    $500      20%       5%      1% 
      1991 Ford Crown        $300      $165  $3,100      10%      55%      5% 
          Victoria                                                    
     1990 Nissan 240 SX      $450      $293  $2,375      19%      65%     12% 
       1993 Chevrolet        $450      $405    $750      60%      90%     54% 
          Cavalier                                                    
      1996 Ford Taurus       $700      $480  $3,500      20%      69%     14% 
      1991 Saab 9000S        $950      $653  $4,500      21%      69%     15% 
1994 Saturn SL2 Sedan   $1,350      $968  $5,750      23%      72%     17% 
             4D                                                       
     1988 Toyota Camry       $900      $615  $2,680      34%      68%     23% 
1992 Pontiac Grand Am     $325      $174  $2,750      12%      54%      6% 
           SE-V6                                                      
    1989 Toyota All Trac     $600      $390  $1,000      60%      65%     39% 
      Wagon (Corolla)                                                 
    1995 Toyota 1/2 Ton    $1,800    $1,290  $4,999      36%      72%     26% 
           Pickup                                                     
    1989 Plymouth Grand      $200       $55  $1,900      11%      28%      3% 
          Voyager                                                     
      1980 Datsun 510        $350      $213  $1,400      25%      61%     15% 
        1992 Lincoln       $1,200   $1,065a  $4,675      26%      89%     23% 
        Continental                                                   
1989 Chevrolet Blazer     $300     $180a  $4,050       7%      60%      4% 
          S10-2DR                                                     
      1989 Ford Taurus       $225      $84a  $1,500      15%      37%      6% 
     1987 Chevy Pickup       $350     a$245    $500      70%      70%     49% 
    Red Honda Accord LXI                                                      
             2D              $150     $10 a  $4,175       4%       7%      0%

Appendix III: Selected Vehicle Donations Tracked from Donation to Taxpayer
Claim for Charitable Deduction

                                                    Gross             Charity 
                                                    sale              
                                        Net Donated price as Proceeds receipt 
                                                             to       
                                   proceeds vehicle percent  charity   (loss) 
                                                       of    as a          as 
                          Vehicle (loss) to   value   amount  percent percent 
                                                                   of      of 
    Vehicle as described          charity   claimed    donor    gross   donor 
        in taxpayer         gross from      on                   sale 
         documents           sale vehicle       tax  claimed  price     claim 
                            price sale       return           (loss)  
     1994 Dodge Caravan      $650     a$510  $4,535      14%      78%     11% 
      1993 Saturn SC 2       $225      a$70  $3,800       6%      31%      2% 
    1990 GMAC Convention     $400     a$245  $4,800       8%      61%      5% 
     1991 Toyota Camry       $675     a$520  $2,039      33%      77%     26% 
     1995 Dodge Caravan      $900     a$715  $4,692      19%      79%     15% 
     1991 Toyota Camry       $400     a$285  $4,500       9%      71%      6% 
    1988 Toyota Corolla       $35      a$20  $1,427       2%      57%      1% 
           Wagon                                                      
    1986 Mazda B2000 LX       $35      a$20  $1,095       3%      57%      2% 
          Long Bed                                                    
       1985 Volvo 760         $35      a$20  $2,654       1%      57%      1% 
         Automobile           $50      a$35    $395      13%      70%      9% 

     1987 Ford Thunderbird        $35   a$10     $1,595     2%    29%      1% 
     1994 Hyundai Elantra         $25   a$10     $1,450     2%    40%      1% 
       1988 Mazda Pickup         $125   a$75     $1,525     8%    60%      5% 
        1987 Volvo 740            $50   a$35     $3,000     2%    70%      1% 

             a1986 Chrysler Town & Country $35 $20 $1,850 2%           57% 1% 
               a1988 Olds Cutlass Wagon $25 $10 $1,000 3%              40% 1% 
                      a1987 Honda $70 $10 $1,500 5%                    14% 1% 
                     a1987 Subaru $25 $10 $1,890 1%                    40% 1% 
                      a1987 Volvo $50 $35 $2,175 2%                    70% 2% 
                 a1996 Dodge Caravan $110 $60 $1,800 6%                55% 3% 
                  a1986 Nissan Maxima $40 $15 $1,250 3%                38% 1% 
                  a1990 Ford Taurus L $25 $10 $1,105 2%                40% 1% 
                a1988 Oldsmobile Cutlass $35 $20 $900 4%               57% 2% 
               1983 Audi 5000 4DR Turbo $100 $0 $1,500 7%              0%  0% 
                 1985 Toyota Celica $250 $10 $2,000 13%                4%  1% 
                   1983 GMC Jimmy $375 $31 $2,400 16%                  8%  1% 
                 1982 Toyota Starlet $300 $22 $1,225 24%               7%  2% 
                1983 Volvo 240 2 door $450 $55 $2,000 23%              12% 3% 
           1991 Plymouth Acclaim Sedan 4D $475 $52 $3,285 14%          11% 2% 
       Source: GAO summary of specific vehicle donations made to 4         
charities and associated tax claims for those donations. All dollar     
                 amounts rounded to the nearest dollar.                    
            aExcluding expenses associated with advertising.               

                     Appendix IV: Vehicle Donation Guidance

Government and consumer organizations provide guidance to donors to assist
them in making informed decisions about donating vehicles. Guidance is
also available to charities to assist them in selecting, hiring, and
managing third-party agents. A partial list of resources is included in
table 5.

Table 5: Sources of Guidance in Making Vehicle Donation Decisions

                         Sources Available information

Internal Revenue Service  o  Lists tax exempt organizations that may
qualify donors for tax deductions www.irs.gov (Pub. 78). IRS also suggests
Guidestar (see below) as a resource.

o  	Describes contributions that qualify for tax deductions and
recordkeeping requirements (Pub. 526).

o  	Describes information necessary for donors to value and deduct noncash
contributions (Pub 561).

o  	Provides guidance for exempt organizations on documenting charitable
contributions (Pub. 1771).

o  	Provides an annual brochure called Exempt Organizations Implementing
Guidelines, Vehicle Donations, that advises how exempt organizations can
avoid problems with vehicle donation programs.

Federal Trade Commission www.ftc.gov

Provides tips on how to recognize and avoid deceptive solicitations. In
conjunction with state officialsa launched Operation Phony Philanthropy,
to identify fraudulent fundraising activities, none of these cases to date
have involved vehicle donations.

                            State charity regulators

o  Lists contacts for state regulators overseeing charitable
solicitations, including

those with vehicle donation programs, and general information state
regulators need to know.

-The National Organization of State Charity Officials www.nasconet.org

-Individual state Web sites, such as:  o  	Provide information to donors
on making contribution decisions, including financial information on
charities or their fund-raisers.

California Attorney General

www.caag.state.ca.us

Michigan Attorney General

www.michigan.gov/ag

New York Attorney General

www.oag.state.ny.us

Guidestar  o  Provides a national database of U.S. charitable
organizations, and general www.guidestar.org information relevant to
IRS-recognized nonprofits.

Better Business Bureau's  o  Provides a Vehicle Donations Checklist that,
among its seven tips, advises

Wise Giving Alliance 	the donor to take a photo of the car for tax records
and to keep copies of current classified ads or guide value estimates for
similar vehicles.

www.give.org/tips/usedcar.asp  o  	Provides general standards charities
should meet, including those with vehicle donation programs, enabling
donors to evaluate (1) how charities are governed, (2) the ways they spend
money, (3) the truthfulness of their representations, and (4) their
willingness to disclose basic information to the public. Standards also
help charities maintain overall good governance of their vehicle donation
programs.

                     Appendix IV: Vehicle Donation Guidance

                         Sources Available information

Charity Navigator  o  Provides advice to donors of used vehicles, such as
urging donors who have

www.charitynavigator.org	to use third-party agents to research the
percentage the charity ultimately receives.

American Institute of Philanthropy  o  	Provides search capability to
locate tax exempt organizations that may qualify vehicle donors for tax
deductions.

www.charitywatch.org

o  	Provides tips to donors of used vehicles, such as encouraging them to
get a receipt from the charity for their vehicle donation.

Chronicle of Philanthropy  o  	Provides general information for
subscribers on all matters involving philanthropic enterprises, including
fund-raisers who may process vehicle

http://philanthropy.com donations.

Source: GAO analysis of government and consumer organizations guidance.

aParticipating states included Connecticut, Florida, Illinois, Kansas,
Massachusetts, Maine, Michigan, Minnesota, Mississippi, North Dakota, New
Jersey, New York, Oregon, Pennsylvania, South Carolina, and South Dakota.

             Appendix V: Comments from the Internal Revenue Service

Appendix VI: Staff Acknowledgments

Acknowledgments 	Leo Barbour, Carl Barden, Keira Dembowski, Michele
Fejfar, Tre Forlano, Lemuel N. Jackson, Monica Kelly, Rosa Leung, Brittni
Milam-Bell, Amy Rosewarne, Sam Scrutchins, Addie Spahr, and Wendy Turenne
made key contributions to this report.

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