    Vehicle Donations: Selected Charities Reported Mixed Experiences
    after Changes in Vehicle Donation Rules (15-FEB-08, GAO-08-367).

    In 2003, GAO found that many taxpayers' estimates of the value of
    their vehicles, claimed as tax deductions, were in excess of the
    charities' subsequent sales of the vehicles. Subsequently,
    effective January 1, 2005, the rules related to the amount
    taxpayers can claim as a deduction on their tax returns for
    vehicles donated to charities changed. Under the new rules, in
    many cases the amount taxpayers are allowed to claim as a
    deduction is less than they could have claimed before the
    changes. Some charities that used vehicle donations as a revenue
    source said that the changes could lead to fewer donated vehicles
    and reduced revenues. GAO was asked to determine how charities
    have been affected by the 2005 changes. GAO discussed the rule
    changes with Internal Revenue Service (IRS) officials and the
    impact of the changes with representatives of several charities.
    GAO judgmentally selected 10 charities from among the 65
    contacted in the course of the 2003 GAO study. The experiences of
    these charities cannot be generalized to all charities because
    the selected charities were not drawn from a statistical sample
    of all charities with vehicle donation programs.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-367
        ACCNO:   A80831
      TITLE:     Vehicle Donations: Selected Charities Reported Mixed
    Experiences after Changes in Vehicle Donation Rules
         DATE:   02/15/2008
      SUBJECT:   Charitable organizations
    	     Claims
    	     Claims processing
    	     Evaluation criteria
    	     Motor vehicles
    	     Strategic planning
    	     Tax credit
    	     Tax refunds
    	     Taxpayers

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    GAO-08-367

    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. 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.

    GAO Highlights:

    Highlights of GAO-08-367, a report to the Chairman, Subcommittee on
    Select Revenue Measures, Committee on Ways and Means, House of
    Representatives.

    Why GAO Did This Study:

    In 2003, GAO found that many taxpayers� estimates of the value of their
    vehicles, claimed as tax deductions, were in excess of the charities�
    subsequent sales of the vehicles. Subsequently, effective January 1,
    2005, the rules related to the amount taxpayers can claim as a
    deduction on their tax returns for vehicles donated to charities
    changed. Under the new rules, in many cases the amount taxpayers are
    allowed to claim as a deduction is less than they could have claimed
    before the changes. Some charities that used vehicle donations as a
    revenue source said that the changes could lead to fewer donated
    vehicles and reduced revenues. GAO was asked to determine how charities
    have been affected by the 2005 changes. GAO discussed the rule changes
    with Internal Revenue Service (IRS) officials and the impact of the
    changes with representatives of several charities. GAO judgmentally
    selected 10 charities from among the 65 contacted in the course of the
    2003 GAO study. The experiences of these charities cannot be
    generalized to all charities because the selected charities were not
    drawn from a statistical sample of all charities with vehicle donation
    programs.

    What GAO Found:

    The selected charities GAO contacted reported mixed experiences after
    the rules for claiming a tax deduction for donating a vehicle were
    changed. Prior to the law change, taxpayers could claim estimated fair
    market value for any donated vehicle. However, beginning January 1,
    2005, taxpayers are generally limited to deducting only the sales price
    of the vehicle when a donated vehicle is sold by the charity. The 10
    charities GAO contacted reported varied experiences in the number of,
    quality of, and revenue from donated vehicles; some changes in their
    business operations; and mixed experiences with administering the
    changes in the rules. Of these 10 charities, when comparing 2003 to
    2006, 6 reported decreases in the number of vehicles donated and some
    of these decreases were substantial. Also, 3 charities reported an
    increase, and 1 did not provide data. Three reported an increase in
    quality, 3 a decrease, and 4 no change. Six reported a decrease in
    vehicle donation revenue from 2003 to 2006, 3 an increase, and 1 did
    not provide data. GAO did not find a consistent pattern when comparing
    the number of donated vehicles with the revenue from the vehicle
    donation program or a charity�s overall revenue. In response to the
    rule changes, some charities changed their fund-raising activities and
    some decreased services, such as reducing the hours for providing
    services. Examples of business operations changes include using minimum
    bids at auctions, selling vehicles online, and selling vehicles
    directly to the public instead of through wholesalers. Finally, all 10
    reported increased administrative burden due to increased reporting
    requirements, but they were able to accommodate the increase in
    paperwork.

    Table: Changes in Amount Donors Can Deduct for a Charitable
    Contribution of a Vehicle:

    Before changes in rules (any vehicle): Fair market value;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle is $500 or less: Lesser of fair market value
    or $500;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle exceeds $500: Fair market value if the charity
    intends to (a) make significant intervening use of vehicle, (b) make
    material improvement to vehicle, or (c) give or sell the vehicle to a
    needy individual in direct furtherance of the charity's charitable
    purpose;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle exceeds $500: Gross proceeds of the sale if
    charity does not intend to do (a), (b), or (c).

    Source: GAO.

    [End of table]

    What GAO Recommends:

    Report to the Chairman, Subcommittee on Select Revenue Measures,
    Committee on Ways and Means, House of Representatives:

    United States Government Accountability Office:

    GAO:

    February 2008:

    Vehicle Donations:

    Selected Charities Reported Mixed Experiences after Changes in Vehicle
    Donation Rules:

    Vehicle Donations:

    GAO-08-367:

    Contents:

    Letter1:

    Results in Brief:

    Background:

    Charities Have Had Mixed Experiences with Their Vehicle Donation
    Programs since the 2005 Changes:

    Agency Comments:

    Appendix I: Steps IRS Took to Implement Changes:

    Appendix II: IRS's Plans to Ensure Charity and Donor Compliance:

    Appendix III: Objectives, Scope, and Methodology:

    Appendix IV: Information Charity Must Include in Written
    Acknowledgment:

    Appendix V: Charity and Donor Filing Requirements:

    Appendix VI: Detailed Descriptions of Charities:

    Tables:

    Table 1: Changes in Amount Donors Can Deduct for a Charitable
    Contribution of a Vehicle:

    Table 2: Number of Vehicles Donated by Year:

    Table 3: Information That Charity Must Include in Written
    Acknowledgment Sent to Donor:

    Table 4: Donor's Recordkeeping and Filing Requirements for Vehicles
    Donated to Charities:

    Table 5: Charity A:

    Table 6: Charity B:

    Table 7: Charity C:

    Table 8: Charity D:

    Table 9: Charity E:

    Table 10: Charity F:

    Table 11: Charity G:

    Table 12: Charity H:

    Table 13: Charity I:

    Table 14: Charity J:

    Figure 1: Vehicle Donation Process:

    United States Government Accountability Office:

    Washington, DC 20548:

    February 15, 2008:

    The Honorable Richard E. Neal:
    Chairman:
    Subcommittee on Select Revenue Measures:
    Committee on Ways and Means:
    House of Representatives:

    Dear Mr. Chairman:

    Vehicle donation programs are important sources of income for some
    charities, with many of these charities selling the donated vehicles
    and using the proceeds for their charitable purposes. In 2003, we found
    that many taxpayers' estimates of the value of their vehicles, claimed
    as tax deductions, were far in excess of the proceeds of charities'
    subsequent sales of the vehicles.[Footnote 1] Subsequently, Congress
    changed the rules so that beginning in 2005, deductions for vehicles
    donated and then sold by the charities were to be limited to the gross
    sales price of the vehicle with some exceptions.[Footnote 2] Some
    charities were concerned that this would lead to fewer vehicle
    donations and less revenue for the charities to use in pursuit of their
    missions.

    Because of your interest in the effect of the vehicle donation rule
    changes, you asked us to determine how charities have been affected by
    the 2005 changes to the amounts donors can claim on their tax returns
    for donated vehicles. In addition, as you requested, appendixes I and
    II include information about the steps the Internal Revenue Service
    (IRS) took to implement these changes and to ensure charity and donor
    compliance.

    To determine how charities have been affected by the 2005 changes, we
    reviewed the new vehicle donation rules that became effective January
    1, 2005, and compared them to the previous vehicle donation rules. In
    addition, we attempted to contact the 65 charities we interviewed for
    our November 2003 report about the vehicle donation process. We reached
    58 of these charities and determined which of them still operated
    vehicle donation programs as of August 2007, if they used contractors
    to operate the programs, and approximately how many donated vehicles
    they received in 2006 or 2007.[Footnote 3] We selected 10 of these
    charities that still operated programs and 1 that no longer operated a
    program and conducted in-depth interviews with charity officials to
    obtain their views about how they were affected by the changes in the
    amounts donors could claim on their tax returns. To ensure that we
    obtained the views of officials who operated a wide variety of vehicle
    donation programs, we selected, based on the results of our initial
    screening contacts, charities that did and did not use the exceptions
    to the gross proceeds of sale rule[Footnote 4] and charities that used
    or did not use contractors to operate their vehicle donation programs.
    Also, our screening contacts indicated that some charities had vehicle
    donation programs that increased, stayed about the same, or decreased
    in terms of the number of donated vehicles in 2006 or 2007 in
    comparison to 2002, and we selected a similar mix of charities for our
    in-depth interviews. The information provided by charity officials is
    anecdotal and cannot be generalized to other charities that operate
    vehicle donation programs. We did not independently verify the
    information provided by the charity officials.

    We also reviewed and analyzed documents related to the rule changes,
    including IRS publications, forms and instructions, and notices, and
    Treasury Inspector General for Tax Administration (TIGTA) reports and
    our reports related to charitable contributions of vehicles or other
    noncash contributions. In addition, we interviewed TIGTA officials as
    well as IRS officials from the Tax Exempt and Government Entities, Wage
    and Investment, Small Business/Self Employed, and Large and Mid-Sized
    Business Divisions and analyzed related documents to determine IRS's
    plans for ensuring that charities and donors comply with the
    requirements related to vehicle donations or other noncash
    contributions. We performed our work from June 2007 through January
    2008 in accordance with generally accepted government auditing
    standards. Our scope and methodology are described in greater detail in
    appendix III.

    Results in Brief:

    Selected charities reported mixed experiences after the rules related
    to the amount taxpayers could claim as a deduction for donating a
    vehicle to a charity changed.[Footnote 5] We interviewed officials from
    10 of the 65 charities we previously interviewed in 2003 who still
    operate a vehicle donation program. They reported varied experiences in
    the number of, quality of, and revenue from donated vehicles; some
    changes in their business operations; and mixed experiences with
    administering the changes in the rules. Some charities experienced a
    substantial decline in the number of vehicles donated from 2003 to
    2006. For those same years, of the 10 charities covered in our in-depth
    interviews, 6 reported decreases in the number of vehicles donated, 3
    reported increases, and 1 did not provide data. However, when comparing
    years 2005 to 2006, 4 of the 5 charities that reported using one of the
    exceptions to the gross proceeds of sale rule also reported an increase
    in the number of vehicles donated. Charity experiences with the quality
    of donated vehicles varied. Three of the 10 charities reported an
    increase in quality, 3 reported a decrease, and 4 reported no change.

    In terms of vehicle donation revenue, officials from 6 of the 10
    charities reported a decrease from 2003 to 2006, 3 reported an
    increase, and 1 did not provide data but reported that the rule changes
    had no effect on the number of vehicle donations or revenue. We did not
    find a consistent pattern when comparing the number of vehicles donated
    with the revenue from the vehicle donation program or the charity's
    overall revenue. To deal with the decrease, some charities changed
    their fund-raising activities and some decreased services, such as
    reducing the number of hours services would be provided. Examples of
    changing business operations include using minimum bids at auctions,
    selling vehicles online, and selling vehicles directly to the public
    rather than to wholesalers. Finally, all 10 of the charities reported
    that they had experienced an increase in administrative burden because
    of the increase in reporting requirements, but the charities were able
    to accommodate the increase in paperwork.

    The Acting Commissioner of Internal Revenue was provided a draft of
    this report for her review and comment. IRS provided technical
    comments, and we incorporated them as appropriate.

    Background:

    Section 884 of the American Jobs Creation Act of 2004[Footnote 6]
    changed the rules for the amount taxpayers could claim as a deduction
    on their tax returns for donating a qualified vehicle[Footnote 7] to a
    charity.[Footnote 8] The new rules were effective for all vehicle
    donations made after December 31, 2004. Prior to this change, eligible
    taxpayers could claim up to the fair market value of the donated
    vehicle as a deduction on their tax returns. For any vehicles donated
    to a charity on January 1, 2005, or later with a claimed value that
    exceeds $500, taxpayers can only claim the lesser of the vehicle's fair
    market value or gross proceeds of the sale as a deduction on their tax
    returns unless the charity's intended use of the donated vehicle meets
    one of the three exceptions[Footnote 9] to the gross proceeds of the
    sale rule. If one of the exceptions is met, the taxpayer may be
    eligible to claim the fair market value of the vehicle as a
    deduction.[Footnote 10] The three exceptions are:

    * the charity intends to make a significant intervening use of the
    vehicle;[Footnote 11]

    * the charity intends to make a material improvement to the
    vehicle;[Footnote 12] or:

    * the charity intends to give or sell the vehicle to a needy individual
    at a price significantly below fair market value in direct furtherance
    of the charity's charitable purpose.

    If the charity sells the vehicle for $500 or less and the exceptions do
    not apply, the taxpayer can deduct the lesser of $500 or the vehicle's
    fair market value on the date of the contribution. Table 1 summarizes
    the amount donors could deduct for charitable contributions of vehicles
    before and after the changes in the rules for such deductions.

    Table 1: Changes in Amount Donors Can Deduct for a Charitable
    Contribution of a Vehicle:

    Before changes in rules (any vehicle): Fair market value;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle is $500 or less: Lesser of fair market value
    or $500;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle exceeds $500: Fair market value if the charity
    intends to (a) make significant intervening use of vehicle, (b) make
    material improvement to vehicle, or (c) give or sell the vehicle to a
    needy individual in direct furtherance of the charity's charitable
    purpose;
    After changes in rules (vehicles donated January 1, 2005, or later):
    Claimed value of vehicle exceeds $500: Gross proceeds of the sale if
    charity does not intend to do (a), (b), or (c).

    Source: GAO.

    [End of table]

    Vehicle Donation Process:

    The vehicle donation process generally consists of six steps: (1)
    solicitation/donor contact, (2) vehicle pickup, (3) vehicle sale, (4)
    distribution of proceeds, (5) charity provides donor with written
    acknowledgment, and (6) charity and donor file required forms with
    IRS.[Footnote 13] The vehicle donation process is depicted in figure 1.

    Figure 1: Vehicle Donation Process:

    This figure is a flowchart with illustrations showing vehicle donation
    process.

    Step 1: Solicitation/donor contract;
    Step 2: Vehicle pickup;
    Step 3: Vehicle sold;
    Step 4: Proceeds distributed;
    Step 5: Charity sends donor written acknowledgment;
    Step 6: Charity and donor file forms with IRS.

    [See PDF for image]

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

    [End of figure]

    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. Vehicle donations are
    solicited through advertisements on the radio, in newspapers, on the
    Internet, on truck banners, on television, and on billboards. Also
    during this step, donors initiate contact with the charity and or third-
    party agent to donate their vehicles. Either a charity or third- party
    agent 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.

    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. Once
    vehicles are picked up, the charity or third-party agent also obtains
    the title of the vehicle from the donor.

    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,[Footnote 14] to the public, or to
    vehicle salvagers.

    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 agent
    dictates the proceeds that the charity and fund-raiser will receive
    from the sale.

    Step 5 - Charity provides donor with written acknowledgment. Charities
    are required to provide a contemporaneous written acknowledgment to the
    taxpayer for any contribution of a vehicle with a claimed value that
    exceeds $500. The charity can either create its own acknowledgment, or
    it can use Copy B of Form 1098-C (Contributions of Motor Vehicles,
    Boats, and Airplanes) as the contemporaneous written acknowledgment.
    For details about the information that must be included in the written
    acknowledgment, including contributions with a claimed value of $500 or
    less, see appendix IV.

    Step 6 - Charity and donor filing requirements. The charity must file a
    Form 1098-C if a donor contributes a qualified vehicle to a charity
    with a claimed value of more than $500. Charities are not to file Form
    1098-C for contributions of qualified vehicles with a claimed value of
    $500 or less. Donors must attach Copy B of Form 1098-C, or a copy of
    the acknowledgment if the charity does not use Copy B for this purpose,
    to their returns if they are claiming a deduction of more than $500. A
    donor must also file Form 8283 (Noncash Charitable Contributions) if
    the deduction he/she is claiming for a donated vehicle is greater than
    $500 and attach it to the Form 1040 (U.S. Individual Income Tax
    Return). For more information on the filing requirements for charities
    and donors, see appendix V.

    Charities Have Had Mixed Experiences with Their Vehicle Donation
    Programs since the 2005 Changes:

    We contacted 58 charities during August 2007 and found that almost all
    of them still operated their vehicle donation programs. We conducted in-
    depth interviews with officials from 10 of these charities[Footnote 15]
    and learned that changes in the number of donated vehicles did not
    appear to correspond with changes in the quality of vehicles donated or
    with changes in overall fund-raising. Also, some charities have
    developed innovative ideas to increase revenue from vehicle donations.

    Charities Continue to Operate Vehicle Donation Programs:

    Almost all of the charities contacted still operated their vehicle
    donation programs as of August 2007. In 2003, we interviewed officials
    from 65 charities when collecting data for our previous
    report.[Footnote 16] We attempted to contact all of these charities and
    successfully reached 58 of them.[Footnote 17] Through these contacts,
    we learned that all but 5 of the 58 charities still operated vehicle
    donation programs. During these contacts, we asked about changes in the
    numbers of vehicles being donated before and after the rule changes.
    Not all of the charities in our screening interviews provided
    information about the number of donated vehicles; 30 charities gave us
    this information and 21 of them said that they had seen a decrease, and
    the rest said that they saw increases or no change. Some of these
    changes were large, while others were fairly small.

    We conducted an in-depth interview with an official from one of the
    five charities that no longer operates a vehicle donation program.
    According to the official, charity managers decided to discontinue the
    vehicle donation program before the rules were changed, choosing
    instead to focus their fund-raising activities on a large fund-raising
    campaign that lasted for a few years. The official said that by
    reallocating the resources that had been devoted to the vehicle
    program, the charity could raise more money by focusing on obtaining
    large donations from selected donors for its fund-raising campaign. At
    the remaining four charities that no longer had vehicle donation
    programs, officials told us either that the employees who used to
    operate the vehicle donation program no longer worked for the charity
    and no other program officials could speak about the decision to
    discontinue the program or that the charity has not received any
    vehicles for the past 2 to 3 years.

    Some Selected Charities Reported Substantial Declines in Number of
    Vehicles Donated and Had Varied Experiences with the Quality of
    Vehicles Donated:

    For the 10 charities covered in our in-depth interviews, 6 reported
    decreases from 2003 to 2006 in the number of vehicles donated, 3
    reported increases and 1 did not provide data, as shown in table 2;
    however, the latter reported that the number of donated vehicles is
    about the same since the rule change.[Footnote 18] One charity's
    donations declined by over 37,000 vehicles, while others realized much
    smaller decreases ranging from about 350 to 600 vehicles when comparing
    2003 and 2006 data. However, when comparing years 2005 to 2006, 4 of
    the 5 charities that reported using one of the exceptions to the gross
    proceeds of sale rule reported an increase in the number of vehicles
    donated. It is important to note that not all of the vehicles donated
    to a charity that can use one of the exceptions to the gross proceeds
    of sale rule are eligible for the exception. For example, a charity
    that gives donated vehicles to needy individuals in direct furtherance
    of its charitable purpose may sell some of the donated vehicles it
    receives. The vehicles given to needy individuals are eligible for the

    exception, but the vehicles that are sold to non-needy individuals are
    not.

    Table 2: Number of Vehicles Donated by Year:

    Charity: A[B];
    Year: 2003: 519;
    Year: 2004: 304;
    Year: 2005[A]: 204;
    Year: 2006: 114.

    Charity: B[C];
    Year: 2003: -;
    Year: 2004: -;
    Year: 2005[A]: -;
    Year: 2006: -.

    Charity: C;
    Year: 2003: 9,134;
    Year: 2004: 9,529;
    Year: 2005[A]: 11,564;
    Year: 2006: 15,963.

    Charity: D;
    Year: 2003: 16,154;
    Year: 2004: 18,801;
    Year: 2005[A]: 11,025;
    Year: 2006: 10,914.

    Charity: E;
    Year: 2003: 13;
    Year: 2004: 30;
    Year: 2005[A]: 28;
    Year: 2006: 26.

    Charity: F;
    Year: 2003: 246;
    Year: 2004: 267;
    Year: 2005[A]: 134;
    Year: 2006: 296.

    Charity: G;
    Year: 2003: 631;
    Year: 2004: 478;
    Year: 2005[A]: 384;
    Year: 2006: 288.

    Charity: H;
    Year: 2003: 76,765;
    Year: 2004: 81,470;
    Year: 2005[A]: 70,738;
    Year: 2006: 39,501.

    Charity: I;
    Year: 2003: 1,719;
    Year: 2004: 1,267;
    Year: 2005[A]: 1,204;
    Year: 2006: 1,229.

    Charity: J;
    Year: 2003: 2,362;
    Year: 2004: 1,985;
    Year: 2005[A]: 1,425;
    Year: 2006: 1,754.

    Source: Data reported by charity officials.

    Notes: Some charities use a calendar year and some use a fiscal year
    for reporting purposes and the latter did not all use the same fiscal
    year. In this report, when we cite a year, we are using data based on
    the 12-month period used by each charity. Further, we did not
    independently verify the number of vehicles donated for each charity.
    Finally, the experiences of these charities cannot be generalized to
    all charities because these selected charities were not drawn from a
    statistical sample of all charities with vehicle donation programs. See
    app. III for more information.

    [A] The rule changes became effective in 2005.

    [B] The charity reorganized the vehicle donation program after the rule
    changes to make one office responsible for the entire state. For
    purposes of consistency, these data represent only the portion of the
    state the office was responsible for prior to the change.

    [C] This charity was not able to provide the number of vehicles donated
    each year.

    [End of table]

    All of the six officials who reported a decrease in the number of
    vehicles donated to their charities attributed this decrease, at least
    in part, to the change in the rules. Some charity officials noted other
    factors that also may have affected the number of vehicles donated. For
    example, officials at two charities noted that there is more
    competition in the marketplace for donated vehicles. An official at
    another charity noted that vehicle donations often follow the trends in
    new vehicle sales, and if people are not buying as many new vehicles,
    they are less likely to donate vehicles.[Footnote 19] An official at a
    different charity said that she could not attribute reduced donations
    fully to the rule changes because the charity had decreased its
    advertising of the vehicle donation program over the past few years.

    Charity experiences with the quality of donated vehicles also varied.
    Three of the 10 charities reported an increase in quality, 3 charities
    reported a decrease in quality, and 4 charities reported no change in
    the quality of vehicles donated. One of the charities that uses one of
    the exceptions to the gross proceeds of sale rule reported that the
    quality of donated vehicles generally increased and more of these
    vehicles could be refurbished and given to needy individuals. The
    official said that in 2002 the charity was only able to refurbish about
    75 vehicles to give to clients while the charity gave away about 200
    vehicles to clients in 2006. An official at another charity noted that
    the quality of the vehicles may be related to the demographics of the
    areas where the charity operates. In one area of the state, the charity
    tends to receive higher-quality vehicles because many of the area
    residents are retirees who are financially comfortable and able to
    donate their old vehicles, which are still in good condition, while
    donors in less-affluent parts of the state tend to donate vehicles that
    need to go straight to salvage yards.

    Officials from eight charities said that they will take any vehicle in
    any shape, although some charities stipulate that the cost to tow the
    vehicle cannot be more than the value of the vehicle. Some of those
    charities sell the vehicles to salvage yards for the price of the metal
    or to salvage yards that pay a flat fee to the charity for the
    vehicles.

    Some Selected Charities Reported Decreases in Vehicle Donation Revenue:

    Officials we interviewed from 6 of the 10 charities reported a decrease
    in vehicle donation revenue from 2003 to 2006, 3 reported an increase,
    and 1 did not provide data but reported that the rule changes had no
    effect on vehicle donations or revenue. We did not find a consistent
    pattern when comparing the number of vehicles donated with the revenue
    from the vehicle donation program or the charity's overall revenue. For
    example, 3 of the 6 charities that reported decreases in revenue from
    vehicle donation programs from 2003 to 2006 also reported a decrease in
    total revenue while the other 3 reported increases in total revenue.
    For 1 of these charities, the number of vehicles donated increased,
    while the revenue from those vehicles and total revenue decreased. In
    another case, a charity reported a decrease in the number of vehicles
    donated but increases in both the revenue from the vehicle donation
    program and total revenue.

    Some of the charity officials we interviewed said that their
    organizations changed their fund-raising activities to offset the loss
    in revenue from their vehicle donation programs. For example, one
    charity started to increase the number of special events, such as
    tennis and golf tournaments and fund-raising dinners. In 2006, this
    charity held over 35 special events, which raised $1.2 million dollars.
    Another charity reported an increase in grant revenue to offset the
    loss in vehicle donation revenue but added that grant revenue is often
    earmarked for specific programs and activities unlike vehicle donation
    revenue, which can be used for general program administration.

    Five of the 10 charities we interviewed reduced services or made other
    changes in their programs because of the loss in revenue from their
    vehicle donation programs. For example, 1 charity curtailed some
    services, such as decreasing hours of operations at some homeless
    shelters. Previously, this charity operated a 24-hour facility targeted
    at single men and women, but now the charity only operates the facility
    in the evenings. This same charity instituted a hiring freeze and has
    postponed or canceled staff merit pay increases because of the loss in
    revenue. Another charity reported closing some local offices and
    reducing its staff. However, 2 charities noted that the total revenue
    from their vehicle donation programs was a small percentage of their
    overall budgets. As such, 1 of these charities said that the decline in
    vehicle donation revenue did not have much of an impact on its ability
    to provide services.

    Some of the Selected Charities Changed Their Vehicle Donation Business
    Operations in Order to Adapt to the New Environment:

    In order to offset decreased revenue from the vehicle donation
    programs, some charities have changed their vehicle donation business
    operations. Examples of changes include using minimum bids, selling
    vehicles online, and selling vehicles directly to the public.

    One charity started placing a minimum bid amount on the vehicles sold
    at auction to help secure a higher selling price. The charity takes the
    chance that the vehicles will not sell and it will have to reclaim them
    at the end of the auction. This practice helps ensure that the charity
    will receive the minimum sale amount for each vehicle at some point.
    The charity also sends a representative to the auction to oversee the
    vehicle sales. The charity official said that his organization found
    that it got better prices when it directly oversaw the auction than
    when it left the whole process to the auction house.

    One charity that provides services to needy persons has sold high-end
    vehicles on online auction sites such as eBay rather than giving them
    to needy individuals. Since high-end vehicles tend to have higher
    upkeep prices, the charity was concerned that the needy families would
    not be able to fix the vehicles if they broke down. Instead, the
    charity sells these vehicles at an online auction and uses the money in
    its program. This allows the charity to obtain more revenue than at a
    wholesale auction, since the general public is bidding on the vehicle,
    not just wholesale buyers.

    One of the charities we interviewed said that in response to the rule
    changes, it began operating a used car lot at the end of 2005. As a
    result, its revenue from vehicle donations doubled in 2006 over that of
    2005, according to the charity official.

    Selected Charities Reported Mixed Experiences with Administering the
    Changes in Vehicle Donation Rules:

    All of the charities said that administrative burdens have increased;
    however, some charity officials noted that they were able to
    accommodate the increase. The charity officials said that they had
    additional reporting requirements to contend with and that completing
    and filing the Form 1098-C was time consuming. For example, an official
    at one charity stated, "it takes time to fill out the Forms 1098-C and
    to prepare the acknowledgment that is sent to the donors. We have to
    keep track of each sale in order to provide the sale information to the
    donor. The donor cannot claim a deduction until the vehicle is sold."
    The official also noted that although it was a burden, the charity has
    been able to handle the increase in paperwork. An official at another
    charity noted that the money spent on donor mailings has increased
    because the charity sends out a donor package with explanations of how
    the vehicle will be used and the acknowledgment for the donation and
    then must also send the Form 1098-C to the donor. According to the
    official, the paperwork has quadrupled but the charity can handle it.
    An official at a different charity stated that although it now has to
    file the Form 1098-C, the charity has also become more efficient at
    using technology and can therefore handle the increase in paperwork.

    Six of the charities we interviewed reported difficulties with
    obtaining Social Security numbers from donors, while some of the others
    experienced few or no problems. Two charities noted that if donors do
    not want to provide their Social Security numbers, then box 7a on the
    Form 1098-C is checked and the donors cannot claim more than $500 for
    the vehicle donation. Two charities said that they explain why they
    need the donors' Social Security numbers in the letters sent to donors.
    Four charities found that donors were nervous about providing their
    Social Security numbers, possibly for fear of identity theft.

    Six of the charities we interviewed noted that IRS's guidance, forms,
    and publications are generally clear and user-friendly. In a few cases,
    charity officials were confused about some guidance. For example, one
    charity did not know the correct timing for sending the acknowledgments
    to the donors, questioning if it was 30 days from receipt of the
    vehicle or 30 days from when they evaluated the vehicle.

    Five charities noted that donors were asking more questions about the
    vehicle donation rule changes. One official noted that for about the
    first 6 months, some donors did not know that the rules changed but now
    most donors understand the new rules. Officials at the remaining 5
    charities said that the number of questions from donors remained the
    same or decreased. One official noted that most of the donors were
    doing their own research before deciding to donate a vehicle.

    Agency Comments:

    The Acting Commissioner of Internal Revenue was provided a draft of
    this report for her review and comment. IRS provided technical
    comments, and we incorporated them as appropriate.

    As agreed with your office, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days
    after its date. At that time, we will send copies of this report to the
    Secretary of the Treasury, the Commissioner of Internal Revenue, and
    other interested parties. This report will also be available at no
    charge on GAO's Web site at [hyperlink, http://www.gao.gov].

    If you or your staff have any questions, please contact me at (202) 512-
    9110 or brostekm@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last
    page of this report. Key contributors to this report were David Lewis,
    Assistant Director; Charlesetta Bailey; Amy Bowser; Laurie Ellington;
    Michele Fejfar; Robyn Howard; and Shellee Soliday.

    Sincerely yours,

    Signed by:

    Michael Brostek:

    Director, Tax Issues Strategic Issues Team:

    [End of section]

    Appendix I: Steps IRS Took to Implement Changes:

    The Internal Revenue Service (IRS) took several steps to implement the
    new rules for claiming charitable deductions for vehicles, including
    providing guidance to both charities and donors. After the enactment of
    the new rules in October 2004, and before the new rules became
    effective on January 1, 2005, IRS issued a news release in November
    2004 that explained the new rules.[Footnote 20] This news release
    explained that the charity must provide donors acknowledgment of their
    donations, and that if the claimed value of the donated vehicle exceeds
    $500 and the vehicle is sold by the charity, donors are limited to
    claiming the gross proceeds of the sale except in certain situations.
    During 2005 and 2006, IRS issued additional news releases, notices, and
    publications related to charitable contributions of vehicles including
    the following:

    * Issued a notice in June 2005 that described the new rules, including
    that the deduction is limited to the gross proceeds of the sale with
    some exceptions; what the exceptions are and that when an exception
    applies, the donor may claim the fair market value of the vehicle; what
    information must be included in the acknowledgment charities send to
    donors; and what charities must report to IRS.[Footnote 21]

    * Issued a news release in December 2005 reminding taxpayers that they
    must obtain a charity's written acknowledgment of their vehicle
    donation and that if the deduction is for more than $500, they must
    attach the acknowledgment to their tax return.[Footnote 22]

    * Issued a notice in January 2006 that describes the information
    reporting requirements for charities.[Footnote 23]

    * Issued a revised publication for donors in February 2006 that
    describes how much they can deduct, how their deduction is generally
    limited to the gross proceeds of the sale unless an exception applies,
    what the exceptions are, how to determine fair market value if they are
    entitled to claim fair market value, when an appraisal is required, and
    what documents must be attached to their returns.[Footnote 24]

    * Issued a revised publication for charities in May 2006 that describes
    charities' responsibilities in relation to vehicle donations, including
    what must be included in an acknowledgment and when it must be sent to
    the donor, guidance about using the exceptions to the gross proceeds of
    the sale rule, and what information must be reported to IRS and when it
    must be provided.[Footnote 25]

    * Issued a notice in November 2006 that provided guidance related to
    the requirement for appraisals of noncash charitable contributions. An
    appraisal is required if the taxpayer is claiming more than $5,000 for
    a donated vehicle.[Footnote 26]

    Besides issuing these documents that specifically relate to charitable
    contributions of vehicles, IRS also included information about vehicle
    donations in other publications.[Footnote 27]

    In addition to news releases, notices, and publications, IRS also
    created Form 1098-C (Contributions of Motor Vehicles, Boats, and
    Airplanes) to be used by charities to report each contribution of a
    qualified vehicle with a claimed value of more than $500.[Footnote 28]
    Charities must send a written acknowledgment of vehicle donations to
    donors, and they can use Form 1098-C for this purpose. The form
    includes all the information required by law to be included in the
    written acknowledgment. Form 1098-C has four copies--Copy A, which the
    charity files with IRS; Copy B, which the charity sends to the donor
    and the donor attaches to his or her return; Copy C, which the charity
    sends to the donor and the donor keeps for his or her records, and Copy
    D, which the charity keeps for its records.

    The Treasury Inspector General for Tax Administration (TIGTA) agreed in
    its September 2007 report that IRS took several steps to implement the
    new rules and that IRS properly updated tax forms and publications,
    provided training and information to employees to facilitate the
    implementation of the requirement, and added a link on the Large and
    Mid-Sized Business Division's Web site to guidance related to vehicle
    donations.[Footnote 29] However, TIGTA also found that in 80 percent of
    the sample cases reviewed, taxpayers, preparers, or both did not
    prepare/file the required forms for claiming the deduction. TIGTA
    recommended that IRS develop a comprehensive outreach plan for
    taxpayers and preparers on the reporting requirements for vehicle
    donations. IRS management disagreed with this recommendation because
    they believe the actions IRS was taking in response to a similar
    recommendation in an earlier TIGTA report, related to noncash
    contributions that did not cover vehicle donations, would address the
    new reporting requirement for vehicle donations.[Footnote 30] TIGTA
    disagreed with IRS management's response because the deficient returns
    included in TIGTA's sample were filed after IRS provided outreach to
    the public. TIGTA agreed that taking additional actions to publicize
    reporting requirements for noncash contributions may address the new
    reporting requirements for vehicle deductions but added that the
    outreach efforts must specifically emphasize that the documentation
    requirements for donated vehicles are different than those for other
    noncash contributions. Currently, IRS's proposed outreach plan does not
    emphasize vehicle donations; however, according to a Wage and
    Investment Policy Analyst, IRS intends to include information in this
    outreach effort that will address vehicle donations.

    [End of section]

    Appendix II: IRS's Plans to Ensure Charity and Donor Compliance:

    Internal Revenue Services' Tax Exempt and Government Entities Division
    (TE/GE) is responsible for determining if charities are complying with
    the vehicle donation tax rules and the Wage and Investment Division
    (W&I) and the Small Business/Self Employed Division (SB/SE) are
    responsible for determining if donors are complying with the vehicle
    donation tax rules. Officials in these divisions said that they
    currently are not concentrating on charity or donor compliance with the
    vehicle donation rules in part because of competing priorities for
    compliance resources. However, if a charity or donor is selected for an
    examination, one of the items that could be reviewed is compliance with
    the vehicle donation rules.

    The Exempt Organizations Examinations Office staff in TE/GE, which
    determines if charities are complying with tax rules, used input from
    its Strategic Planning Work Group, which brainstorms ideas to determine
    if issues should be addressed, and information obtained from Congress,
    IRS staff, TIGTA reports, and the media to prioritize its work. Using
    this information and because of limited compliance resources, officials
    of that office said that they determined that issues other than vehicle
    donations had a higher priority. In addition, in July 2007, the TE/GE
    Commissioner testified that IRS is focusing on noncash contributions,
    but the problems are greatest for noncash contributions for which there
    is no ready market.[Footnote 31] Based on our interviews with officials
    from 10 charities that operate vehicle donation programs, there is a
    ready market for donated vehicles.

    W&I officials said that they decided not to focus compliance resources
    on donated vehicles after conducting correspondence examinations in
    2005 of a sample of 204 tax returns that included deductions for
    donated vehicles and closing 88 percent of the examinations with no
    changes.[Footnote 32] The average tax change made to the remaining
    returns was $382. They concluded that the high rate of no change cases
    and the low audit results in terms of dollars indicated that vehicle
    donations were not conducive for correspondence examinations. In
    addition, according to the W&I Automated Under Reporter (AUR) Program
    Chief,[Footnote 33] IRS has not done any studies to determine if there
    would be a high return on investment from instituting automated
    document matching related to vehicle donations.

    An SB/SE Division Program official said that when identifying special
    compliance initiatives, for example in vehicle donations, IRS considers
    the amount of possible increased tax revenue that could be realized
    from an examination in comparison to the resources spent on the
    examination. Currently, IRS is not developing a special compliance
    initiative for vehicle donations. However, in response to a TIGTA
    recommendation, IRS is adding an audit indicator to returns claiming
    charitable deductions for donated vehicles over a specific dollar
    threshold that did not have Form 8283 (Noncash Charitable
    Contributions) attached. Thus, according to the SB/SE official, if a
    tax return is selected for an examination for other reasons, the audit
    indicator will let examination staff know that they should also look at
    the vehicle donation.

    Besides recommending that IRS add an audit indicator to certain returns
    with vehicle donations, TIGTA also recommended in its September
    2007[Footnote 34] report on charitable donations of vehicles that IRS:

    * lower the dollar threshold for reviewing returns with unsubstantiated
    deductions for donated vehicles and:

    * correspond with taxpayers to obtain missing documentation.

    IRS management responded that they consider vehicles a small subset of
    the overall population of noncash charitable contributions, they will
    not lower the threshold, and they will continue to correspond with
    taxpayers who do not provide documentation if their noncash
    contribution is over a specific dollar threshold. They also said that
    they are exploring alternative ways to address lower-dollar vehicle
    donation compliance issues. According to an SB/SE senior program
    analyst involved with exam policy, IRS is revising Form 8453 (U.S.
    Individual Income Tax Declaration for an IRS e-file Return). This form
    will be used to transmit supporting paper documents that are required
    to be submitted to IRS by taxpayers who are filing electronically. The
    Form 8453 will include a list of paper forms that can be submitted with
    Form 8453. These will include Form 1098-C and Form 8283. This should
    remind filers that they must file these forms with IRS. TIGTA disagreed
    with IRS's policy of treating vehicles as a small subset of the overall
    population of noncash contributions. In TIGTA's opinion, since Congress
    specifically provided substantiation levels for vehicles that were
    different than the requirements for other noncash contributions, to
    ignore this when administering the tax law is not in keeping with
    Congress's intent.

    [End of section]

    Appendix III: Objectives, Scope, and Methodology:

    Our objective was to determine how charities have been affected by the
    2005 changes to the amounts donors can claim on their tax returns for
    donated vehicles. To address this objective, we reviewed the new
    vehicle donation rules that became effective January 1, 2005, and
    compared them to the previous vehicle donation rules. In addition, we
    contacted 58 of the 65 charities[Footnote 35] we interviewed for our
    November 2003 report about the vehicle donation process,[Footnote 36]
    and determined which of these charities still operated a vehicle
    donation program as of August 2007 and if they used a contractor to
    operate the program. In our screening contacts, we also asked about
    changes in the number of donated vehicles in 2006 or 2007 in comparison
    to 2002. About half of the charities--30 out of the 58--provided a
    response to this question, and 21 of them said they had seen decreases
    and the rest said they had seen increases or no change in numbers of
    donated vehicles. We selected 10 of the 58 charities that still
    operated programs and 1 that no longer operated a program and
    interviewed officials to obtain their views about how the changes
    affected the number and quality of donated vehicles, vehicle donation
    revenues, their vehicle donation programs, and administrative burden.
    To ensure that we obtained the views of officials who operated a wide
    variety of vehicle donation programs, we selected charities that did
    and did not use the exceptions to the gross proceeds of sale
    rule[Footnote 37] and charities that used or did not use a contractor
    to operate their vehicle donation programs. The charities we selected
    also reflected changes in the numbers of donated vehicles from 2002 to
    2006 or 2007 in similar proportion to what we found in our screening
    contacts. The information provided by charity officials is anecdotal
    and cannot be generalized to other charities that operate vehicle
    donation programs. We did not independently verify the information
    provided by the charity officials.

    In addition, to provide information on the steps IRS took to implement
    these changes and to ensure charity and donor compliance, we analyzed
    documents and interviewed officials. To provide information about
    implementation, we reviewed the guidance IRS issued to implement the
    changes, including news releases, notices, publications, and forms and
    instructions and TIGTA's evaluation of IRS's implementation of the
    changes in the rules.[Footnote 38] To provide information about IRS's
    efforts to ensure compliance, we analyzed TE/GE, W&I, SB/SE, and LMSB
    documents related to charitable contributions of vehicles and other
    noncash contributions, including TE/GE's implementing guidelines for
    its annual work plans for fiscal years 2005 through 2007, a W&I
    analysis of a sample of taxpayers who claimed a deduction for a vehicle
    donation to determine if it should conduct correspondence examinations
    of vehicle donations, SB/SE's analysis to determine if it should lower
    the threshold for examining returns that claim deductions for donated
    vehicles, and LMSB's proposed outreach plan for providing information
    about noncash contributions. We also interviewed officials from those
    divisions about compliance issues, and interviewed TIGTA officials and
    reviewed the results of TIGTA's evaluation of IRS's controls over the
    processing of deductions for donated vehicles reported on individual
    tax returns.[Footnote 39]

    We performed our work from June 2007 through January 2008 in accordance
    with generally accepted government auditing standards.

    [End of section]

    Appendix IV: Information Charity Must Include in Written
    Acknowledgment:

    As shown in table 3, the information charities must include in the
    written acknowledgment they send to donors varies depending on the
    value of the donated vehicle.

    Table 3: Information That Charity Must Include in Written
    Acknowledgment Sent to Donor:

    Information charity must include in the written acknowledgment sent to
    donor: Information on what the charity did or intends to do with the
    vehicle--see below for further information required about a charity's
    use of a donated vehicle;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: X;
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Donor's name and taxpayer identification number;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: X;
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Vehicle identification number;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: X;
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Date of the contribution;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: X;
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: One of the following: (a) statement that no goods or services
    were provided by the charity in return for the donation, if that was
    the case; (b) description and good faith estimate of the value of goods
    or services, if any, that the charity provided in return for the
    donation; or (c) statement that goods or services provided by the
    charity consisted entirely of intangible religious benefits, if that
    was the case;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: X;
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    X.

    Information charity must include in the written acknowledgment sent to
    donor: Statement certifying that the vehicle was sold in an arm's
    length transaction between unrelated parties;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: [Empty];
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Date the vehicle was sold;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: [Empty];
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Gross proceeds from the sale;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: [Empty];
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Statement that the donor's deduction may not exceed the gross
    proceeds from the sale;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: [Empty];
    If the charity sells the vehicle for more than $500: X;
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    [Empty].

    Information charity must include in the written acknowledgment sent to
    donor: Description but not the value of the vehicle;
    If the donor claims the value of the vehicle is more than $500 and the
    charity's intended use of the vehicle meets one of the exceptions to
    the gross proceeds of sale rule: [Empty];
    If the charity sells the vehicle for more than $500: [Empty];
    If the gross proceeds from the sale are $500 or less or the donor is
    claiming a charitable deduction of at least $250 but no more than $500:
    X.

    Source: IRS Publication 4302, A Charity's Guide to Vehicle Donations.

    [End of table]

    If a charity intends to (1) make a significant intervening use of the
    vehicle, (2) make a material improvement to the vehicle, or (3) give or
    sell the vehicle to a needy individual, the charity must include
    additional information in the acknowledgment in addition to the
    information included in table 3. For a significant intervening use, the
    letter must include:

    * a statement certifying that the charity intends to make a significant
    intervening use of the donated vehicle,

    * a detailed statement of the intended use,

    * a detailed statement of the duration of that use, and:

    * a certification that the vehicle will not be sold before completion
    of the use.

    For a material improvement, the letter must include:

    * a statement that the charity intends to make a material improvement
    to the donated vehicle,

    * a detailed description of the intended material improvement, and:

    * a certification that the vehicle will not be sold before completion
    of the improvement.

    For giving or selling a vehicle to a needy individual, the letter must
    include a certification that:

    * the charity intends to give or sell the vehicle to a needy individual
    at a price significantly below fair market value and:

    * the gift or sale is in direct furtherance of the charity's charitable
    purpose of relieving the poor and distressed or the underprivileged who
    are in need of a means of transportation.

    [End of section]

    Appendix V: Charity and Donor Filing Requirements:

    If a donor contributes a qualified vehicle to a charity with a claimed
    value of more than $500, the charity must file a Form 1098-C
    (Contributions of Motor Vehicles, Boats, and Airplanes) for that
    vehicle. This form has four parts:

    * Copy A which the charity files with IRS;

    * Copy B which the charity sends to the donor and the donor is to
    attach it to his/her tax return;

    * Copy C which the charity sends to the donor for his/her records; and:

    * Copy D which the charity retains for its records.

    Charities can use Copy B as the contemporaneous written acknowledgment
    that charities must send to donors. Charities are not to file Form 1098-
    C for contributions of qualified vehicles with a claimed value of not
    more than $500; however, they may provide the donor with Copy C as the
    acknowledgment. Donors must attach Copy B, or a copy of the
    acknowledgment if the charity does not use Copy B for this purpose, to
    their returns if they are claiming a deduction of more than $500.

    In addition, if a charity receives a donated vehicle that has a claimed
    value greater than $5,000 and sells or otherwise disposes of the
    vehicle within 3 years after the donation, the charity must file Form
    8282 (Donee Information Return) within 125 days of the disposition. The
    charity must also provide a copy of the filed Form 8282 to the original
    donor.

    Besides filing the acknowledgment, donors must also complete Section
    A[Footnote 40] of Form 8283 (Noncash Charitable Contributions) if the
    deduction they are claiming for a donated vehicle is greater than $500,
    but not more than $5,000, and attach it to Form 1040 (U.S. Individual
    Income Tax Return). If the deduction the donor is claiming is greater
    than $5,000, he/she must complete Section B[Footnote 41] of the Form
    8283, which must include the signature of an authorized official of the
    charity, and attach it to the return. In addition, if the deduction is
    over $5,000 and the deduction is not limited to the gross proceeds from
    the sale of the vehicle, the donor must get a written appraisal of the
    vehicle. Table 4 lists the donor's recordkeeping and filing
    requirements.

    Table 4: Donor's Recordkeeping and Filing Requirements for Vehicles
    Donated to Charities:

    Requirement: Recordkeeping requirements;
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: [Empty];
    Deductions greater than $5,000: [Empty].

    Requirement: Name/address of charity;
    Deductions of less than $250: X;
    Deductions of $250 or more, but not more than $500: X;
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Date of donation;
    Deductions of less than $250: X;
    Deductions of $250 or more, but not more than $500: X;
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Place where you donated vehicle;
    Deductions of less than $250: X;
    Deductions of $250 or more, but not more than $500: X;
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Description of vehicle;
    Deductions of less than $250: X;
    Deductions of $250 or more, but not more than $500: X;
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Contemporaneous written acknowledgment from charity;
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: X;
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Filing requirements;
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: [Empty];
    Deductions greater than $5,000: [Empty].

    Requirement: Written acknowledgment;
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: X.

    Requirement: Form 8283, Section A (Donated Property of $5,000 or Less
    and Certain Publicly Traded Securities);
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: X;
    Deductions greater than $5,000: [Empty].

    Requirement: Form 8283, Section B (Donated Property Over $5,000 Except
    Certain Publicly Traded Securities);
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: [Empty];
    Deductions greater than $5,000: X.

    Requirement: Written appraisal--if deduction is not limited to gross
    proceeds;
    Deductions of less than $250: [Empty];
    Deductions of $250 or more, but not more than $500: [Empty];
    Deductions greater than $500, but not more than $5,000: [Empty];
    Deductions greater than $5,000: X.

    Source: IRS Publication 4303, A Donor's Guide to Vehicle Donations.

    [End of table]

    [End of section]

    Appendix VI: Detailed Descriptions of Charities:

    We profiled 10 charities that operated a vehicle donation program as of
    August 2007. Tables 5 through 14 highlight information provided to us
    in interviews with charity officials about their vehicle donation
    programs.

    Table 5: Charity A:

    Main purpose or mission: To fight lung disease and promote lung health.

    Charity is independent or affiliated with a national charity:
    Affiliated.

    Operate vehicle donation program independently or as part of a program
    operated by the national charity: Independent.

    Operate vehicle donation program in-house or use a third party: In-
    house.

    Types of vehicles accepted: Passenger cars, trucks, motorcycles,
    recreational vehicles/campers, boats.

    Condition of vehicles accepted: Any condition.

    What is done with vehicles: All vehicles are sold at auction or to
    salvage yards.

    Charity is able to use an exception to the gross proceeds of sale rule:
    No.

    Recent vehicle donation statistics[A]:

    Fiscal year (July 1-June 30): 2002;
    Number of vehicles donated: 380;
    Net revenue for donated vehicles: $133,148;
    Total charity revenue (vehicle and nonvehicle): $3,031,121.

    Fiscal year (July 1-June 30): 2003;
    Number of vehicles donated: 519;
    Net revenue for donated vehicles: 202,305;
    Total charity revenue (vehicle and nonvehicle): 1,837,832.

    Fiscal year (July 1-June 30): 2004;
    Number of vehicles donated: 304;
    Net revenue for donated vehicles: 145,290;
    Total charity revenue (vehicle and nonvehicle): 1,063,888.

    Fiscal year (July 1-June 30): 2005;
    Number of vehicles donated: 204;
    Net revenue for donated vehicles: 120,268;
    Total charity revenue (vehicle and nonvehicle): 1,121,058.

    Fiscal year (July 1-June 30): 2006;
    Number of vehicles donated: 114;
    Net revenue for donated vehicles: 50,800;
    Total charity revenue (vehicle and nonvehicle): 1,126,184.

    Fiscal year (July 1-June 30): 2007 (through 8/31/07);
    Number of vehicles donated: 57;
    Net revenue for donated vehicles: 42,201;
    Total charity revenue (vehicle and nonvehicle): 1,686,280.

    Sources: The charity's area executive director and the vehicle donation
    program director.

    [A] The charity reorganized the vehicle donation program after the rule
    change to make one office responsible for the entire state. For
    purposes of consistency, these data represent only the portion of the
    state the office was responsible for prior to the change.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The total number of donated vehicles has decreased since the rules
    changed.

    - The quality of vehicles has stayed about the same since before the
    rules changed. The quality of the vehicles may be related to the
    demographics of the state. In one area of the state where this charity
    operates, the charity tends to receive higher-quality vehicles because
    many of the residents are retirees who are financially comfortable and
    able to donate their old vehicles, which are still in good condition,
    while donors in less-affluent parts of the state tend to donate
    vehicles that need to go straight to salvage yards.

    * Revenue:

    - The net revenue from the donated vehicles decreased since the rules
    changed.

    - To increase other revenue-producing activities to offset decreases in
    revenue from the vehicle donation program, the charity started to
    increase the number of special events, such as tennis and golf
    tournaments and fund-raising dinners. In 2006, the charity held over 35
    special events, which raised $1.2 million.

    * Business operations:

    - The charity decreased the number of staff working for the vehicle
    donation program and streamlined the business operations by
    consolidating all locations that ran the vehicle donation program in
    the state into one office.

    - The charity uses a scrap recovery company for the vehicles that need
    to go to the salvage yard.

    * Administration of rule changes:

    - Administrative burden increased because of more time-consuming
    paperwork.

    - The IRS guidance and documents have improved since the vehicle
    donation rules originally changed and they are now clearer and simpler
    to use.

    - Donors are asking about the same number of questions as before the
    rules changed.

    * Other:

    - Many vehicle auctions that include vehicles donated to charities are
    only open to dealers, not the public. Consequently, the cars are not
    selling for what they would in a retail market.

    Table 6: Charity B:

    Main purpose or mission: To provide people and organizations access to
    jobs, transportation, housing, and training to realize their potential
    as contributing members of the community.

    Charity is independent or affiliated with a national charity:
    Independent.

    Operate vehicle donation program independently or as part of a program
    operated by the national charity: Independent.

    Operate vehicle donation program in-house or use a third party: In-
    house.

    Types of vehicles accepted: Passenger cars, trucks, motorcycles,
    recreational vehicles/campers.

    Condition of vehicles accepted: Any condition as long as the donor can
    get it to the location of the charity.

    What is done with vehicles: 75 percent are sold; 25 percent are sent to
    scrap metal yards.

    Charity is able to use an exception to the gross proceeds of the sale
    rule: No.

    Recent vehicle donation statistics:

    Fiscal year (July 1-June 30): 2002;
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Fiscal year (July 1-June 30): [A];
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Fiscal year (July 1-June 30): 2004;
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Fiscal year (July 1-June 30): 2005;
    Number of vehicles donated: 204;
    Net revenue for donated vehicles: 120,268;
    Total charity revenue (vehicle and nonvehicle): 1,121,058.

    Fiscal year (July 1-June 30): 2006;
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Fiscal year (July 1-June 30): 2007 (through 8/31/07);
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Source: The charity's office manager who is responsible for answering
    questions about vehicle donations and sales.

    [A] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The charity did not experience any change in the number or quality of
    vehicles donated even though there are now more programs with vehicle
    donations in its geographical area.

    - The rules changes have not affected donors' decisions about whether
    to donate a vehicle based on what they can claim on their tax returns.

    * Revenue:

    - The net revenues from the vehicle donation program have not
    decreased.

    * Business operations:

    - The charity repairs most of the donated vehicles at an auto-repair
    shop that it uses to train people in automotive repair. It then sells
    the vehicles to the public for $800 to $2,500. The charity operated in
    the same manner prior to the rule change.

    * Administration of rule changes:

    - Administrative burden increased slightly, but officials are able to
    handle the increase.

    - Some donors do not want to provide their Social Security numbers. The
    charity informs the donors that if they do not provide their Social
    Security numbers, then they cannot claim more than $500 on their tax
    returns. It is a burden on the charities to obtain the donors' Social
    Security numbers.

    - The guidance on the rule changes is better than it was in the past
    because it is more user-friendly.

    - The charity has not noticed any increase in the number of questions
    donors ask. Donors do not ask many questions.

    Table 7: Charity C:

    Main purpose or mission: To provide free vehicles to disadvantaged
    people throughout the nation.

    To provide free vehicles to disadvantaged people throughout the nation:
    Independent.

    Operate vehicle donation program independently or as part of a program
    operated by the national charity: Independent.

    Operate vehicle donation program in-house or use a third party: In-
    house.

    Types of vehicles accepted: Passenger cars, trucks, motorcycles,
    recreational vehicles/campers, boats.

    Condition of vehicles accepted: Any condition unless the cost to tow
    the vehicle is more than the value of the vehicle.

    What is done with vehicles: Approximately 65 percent are sold at
    auction; 30 percent are sold to salvage yards; 5 percent are given to
    clients.

    Charity is able to use an exception to the gross proceeds of sale rule:
    Yes, for the 5 percent that are given to clients.

    Recent vehicle donation statistics:

    Fiscal year (July 1-June 30): 2002[A];
    Number of vehicles donated: [A];
    Net revenue for donated vehicles: [A];
    Total charity revenue (vehicle and nonvehicle): [A].

    Fiscal year (July 1-June 30): 2003;
    Number of vehicles donated: 9,134;
    Net revenue for donated vehicles: $2,624,177;
    Total charity revenue (vehicle and nonvehicle): 3,700,691.

    Fiscal year (July 1-June 30): 2004;
    Number of vehicles donated: 9,529;
    Net revenue for donated vehicles: 3,288,449;
    Total charity revenue (vehicle and nonvehicle): 4,928,696.

    Fiscal year (July 1-June 30): 2005;
    Number of vehicles donated: 11,564;
    Net revenue for donated vehicles: 4,461,297;
    Total charity revenue (vehicle and nonvehicle): 6,733,802.

    Fiscal year (July 1-June 30): 2006;
    Number of vehicles donated: 15,963;
    Net revenue for donated vehicles: 5,883,225;
    Total charity revenue (vehicle and nonvehicle): 8,684,333.

    Fiscal year (July 1-June 30): 2007;
    Number of vehicles donated: 13,698;
    Net revenue for donated vehicles: 5,200,549;
    Total charity revenue (vehicle and nonvehicle): 8,704,895.

    Sources: The charity's president and chief executive officer.

    [A] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The total number of vehicles donated has decreased from 2006 to 2007.

    - Some of the decrease in the number of donated vehicles may be because
    of the slowing of the economy, which results in fewer people buying new
    vehicles. Vehicle donations often follow the trend in new vehicle
    sales.

    - The charity official said that the quality of those vehicles has
    increased.

    * Revenue:

    - The increase in net revenue from the vehicle donation program is in
    part because of the charity's ability to use one of the exceptions to
    the gross proceeds of sale rule.

    * Business operations:

    - This charity is a licensed motor vehicle dealer in its state. The
    charity operated in the same manner prior to the rule changes.

    * Administration of rule changes:

    - The charity spends a lot of money on donor mailings and has
    experienced an increase in administrative burden because the charity
    sends out a donor package with explanations of how the vehicle will be
    used and the acknowledgment for the donation and then must also send
    the Form 1098-C to the donor. The paperwork has quadrupled but the
    charity can handle it, according to the official.

    - Donors are reluctant to provide their Social Security numbers. To
    help deal with this, the charity explains in a letter the need for the
    donor's number in order to claim a deduction for a donated vehicle.

    - Donors are asking more questions since the change in the rules than
    they did before.

    * Other:

    - The charity official was concerned about the lack of oversight of
    third-party contractors.

    Table 8: Charity D:

    [See PDF for image]

    Sources: The charity's vice president, vice president of retail,
    director of vehicle donation program, and chief financial officer.

    [A] The decrease was in part because of a decrease in bequests.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The number of vehicles donated decreased.

    - The quality of the vehicles donated has not been an issue since the
    rule changes.

    * Revenue:

    - The net revenue from donated vehicles has decreased. Revenue from
    vehicles decreased more than $3,000,000 in both 2005 and 2006 in
    comparison to 2004.

    - The decline in total charity revenue in 2005 was greater than the
    decline in net vehicle donation revenue. This was in part because of a
    decrease in bequests.

    - To offset the decrease in revenue from vehicle donations, the charity
    decreased some services, such as the hours of operation for a homeless
    shelter from 24 hours per day to the evening hours only. The charity
    also was unable to expand existing services or start new services. In
    addition, the charity reduced staff, instituted a hiring freeze, and
    has not given or has postponed merit pay raises.

    - An increase in grants and bequests has offset some of the loss from
    vehicle donations; however this revenue is often earmarked for certain
    activities or programs and may not be used for general program
    administration.

    * Business operations:

    - The charity operates its own auctions, which it also did prior to the
    rule changes.

    * Administration of rule changes:

    - The number of forms the charity must complete has increased, but the
    charity has also become more efficient in using technology to handle
    the increase.

    - Donors are nervous about providing their Social Security numbers for
    fear of identity theft. The charity informs the donors that if they do
    not provide their Social Security numbers, then they cannot claim more
    than $500 on their returns.

    - The officials did not identify anything in the IRS publications that
    was unclear.

    - The donors do not ask too many questions, mostly doing their own
    research before donating a vehicle.

    * Other:

    - The charity operates its vehicle donation program in-house and does
    not share the revenue from the program with a for-profit entity. Thus,
    all the revenue from the vehicle donation program is used to further
    the charitable purpose. In the officials' opinion, the donors of
    vehicles to charities that operate programs in-house and retain at
    least 80 percent of the net proceeds from the sales should be able to
    claim the fair market value of their vehicles on their tax returns. IRS
    could revise its guidance for the interpretation of the furtherance of
    charitable purposes exception to incorporate this concept. The
    officials have developed a legislative proposal that incorporates this
    concept and presented it to their state's congressional delegation.

    [End of table]

    Table 9: Charity E:

    [See PDF for image]

    Source: The charity's assistant director.

    [A] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - Although the changes may have had some effects on the number of
    vehicles donated, the charity has decreased its efforts to advertise
    this program in the past couple of years.

    - The quality of the vehicles has decreased, and the charity has
    received more calls from donors of vehicles that need to go to the
    salvage yard.

    * Revenue:

    - Because the charity raises most of its revenues through other means,
    the lost revenue from the vehicle donation program did not have a large
    impact.

    * Business operations:

    - No changes have been made to the business operations; however, the
    charity used to advertise in newspapers and had banners around town. It
    no longer uses those methods to advertise.

    * Administration of rule changes:

    - Recordkeeping and reporting requirements have increased.

    - IRS publications and guidance were not disseminated in a timely
    manner.

    - Donors are asking more clarifying questions about claiming a
    deduction for a donated vehicle, but overall donors are asking about
    the same amount of questions since the rules changed as they did before
    they changed.

    Table 10: Charity F:

    [See PDF for image]

    Source: The charity's executive director.

    [A] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - Initially, the number of vehicles decreased; however, the charity
    expects to receive about 330 vehicles in 2007.

    - The quality of the vehicles has increased since the rules changed.
    For example, in 2002 the charity was only able to use about 75 vehicles
    to give to low-income families or individuals, but in 2006 it was able
    to give about 200 vehicles to low-income families or individuals. Thus,
    although the number of donated vehicles increased in 2006, it sold
    fewer vehicles, resulting in a decrease in net revenue from donated
    vehicles.

    * Revenue:

    - The charity did not need to change its revenue-producing activities
    because of the program it operates in conjunction with the state.

    * Business operations:

    - The charity inspects and repairs donated vehicles which are given to
    low-income families and individuals. A department in the state that
    trains and finds jobs for low-income people pays the charity a flat fee
    per vehicle; the department's staff refers selected families or
    individuals to receive a vehicle from the charity for $1 after the
    vehicle has been repaired. The charity operated in the same manner
    prior to the rule change.

    - The charity sells high-end vehicles on online auction sites because
    low-income families or individuals may not be able to maintain these
    vehicles. Since high-end vehicles tend to have higher upkeep prices,
    the charity was concerned that the needy families would not be able to
    fix the vehicles if they broke down. This allows the charity to obtain
    more revenue than at a wholesale auction, since the general public is
    bidding on the vehicle and not just wholesale buyers. The charity uses
    the revenue to finance its program.

    * Administration of rule changes:

    - The amount of paperwork has increased, but the charity has been able
    to handle the increase.

    - The charity has not experienced any reluctance from donors when
    requesting Social Security numbers. The charity explains the need for
    the numbers in the letter sent to the donors.

    - Although IRS publications and notices have been generally clear, the
    officials were confused about the correct timing for sending the
    acknowledgments to the donors, questioning if it was 30 days from
    receipt of the vehicle or 30 days from when the charity evaluated the
    vehicle.

    - Donors are asking more questions; however, the charity is now
    receiving fewer calls from donors who want to donate vehicles that need
    to go to the salvage yard.

    Table 11: Charity G:

    [See PDF for image]

    Source: The director of the charity's vehicle program.

    [A] The statistics represent local and state affiliates that use the
    national vehicle donation program. Not all local and state affiliates
    choose to use the national program.

    [B] The dollar amounts for this charity are gross revenues.

    [C] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The quantity and quality of vehicles have decreased. The number
    decreased because donors are not able to receive fair market value for
    their donations.

    - Even though the number of vehicles donated in 2007 increased compared
    to 2006, more of the vehicles need to be sent to salvage yards.

    * Revenue

    - Net revenue from vehicle donations decreased.

    - The vehicle donation program contributes only a small part to the
    charity�s overall revenue.

    * Business operations:

    - The charity recently changed its business operations from operating
    the program in-house to contracting with a third party. Officials
    decided to use a third-party contractor because it was not cost-
    effective to operate in-house because of the decrease in donated
    vehicles.

    * Administration of rule changes:

    - Administrative burden has increased because it takes time to complete
    the Form 1098-C and to prepare the acknowledgments that are sent to the
    donors. Furthermore, the charity has to keep track of each sale in
    order to provide donors with the required information about the sale of
    the vehicle. However, the charity official noted it was able to handle
    the increase in paperwork.

    - Donors were asking more questions about the rule changes in the first
    6 months after the change. Now, most people understand the rule changes.

    Table 12: Charity H:

    [See PDF for image]

    Source: The director of the charity's vehicle program.

    [A] The statistics represent local and state affiliates that use the
    national vehicle donation program. Not all local and state affiliates
    choose to use the national program.

    [B] The dollar amounts for this charity are gross revenues.

    [C] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    Number and quality of vehicles donated:

    - The number of vehicles donated decreased.

    - The quality of donated vehicles has remained constant. However, in
    2007, the charity was receiving about $130 more per vehicle because of
    an increase in the value of steel and a decrease in fees associated
    with the auctioning of vehicles.

    * Revenue:

    - Revenue from donated vehicles as a percentage of gross income has
    decreased from almost 34 percent in 2003 to less than 19 percent in
    2006. Total charity revenues increased because of changes in other fund-
    raising activities.

    - The charity increased other revenue-producing activities, such as
    charity walks, golf tournaments, and other special events, to help
    offset the revenue losses from decreased vehicle donations.

    * The reduced revenue from vehicle donations has affected some local
    affiliates and led to reductions in staff and some office closures.

    * Business operations:

    - The charity changed its marketing for vehicle donations and shifted
    the focus more to the Internet. More donations are occurring from
    online donors.

    - There is more competition from other charities; therefore more money
    is now being spent on marketing the program.

    - Because of the increase in the price of steel, the charity now sells
    a higher percentage of vehicles at auction instead of sending some to
    scrap yards.

    * Administrative burden:

    - Administrative burden has increased, specifically with regard to
    donors not wanting to provide Social Security numbers over the
    telephone.

    - Based on a survey the charity conducted, donors prefer to provide
    their Social Security numbers in writing rather than over the
    telephone. This results in more work for staff.

    - Generally the IRS publications and notices have been clear. Some
    affiliates thought the instructions for electronic filing could be made
    clearer.

    - Generally, donors are asking fewer questions about the donation
    process than they were right after the rule changes took affect.

    * Other:

    - More vehicles are sent to auction because the price of steel has
    increased, which helps ensure that the charity receives more revenue
    per vehicle than if the vehicle was sent to the scrap yard. However,
    there are also increased fees associated with auctioning vehicles
    versus sending them to scrap yards, so this decreases the profit ratio.

    Table 13: Charity I:

    [See PDF for image]

    Source: The charity's business development director.

    [A] The dollar amounts for this charity are gross revenues.

    [B] Gross revenues are estimated at from $300,000 to $350,000.

    [C] Charity official did not provide this information.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The charity received fewer donated vehicles. This may be in part
    because of the rule changes and in part because of an increase in
    competition for the donated vehicles.

    - The quality of the vehicles has decreased. For example, in 2006 the
    charity spent about $156,000 on parts in order to repair donated
    vehicles, which is more than it spent in previous years. This may be
    because of potential donors selling or trading higher-value vehicles
    instead of donating them because they can get more money for the
    vehicles.

    * Revenue:

    - The revenue from donated vehicles has decreased since the rules
    changed.

    * Business operations:

    - The charity is licensed as a used car dealer and was also licensed as
    a used car dealer prior to the rule changes. The charity sells about 45
    percent of donated vehicles at retail prices.

    - Most of the vehicle donation revenues are from the vehicles sold at a
    used car lot. The charity makes repairs to some of these vehicles
    before selling them. As a result, some vehicles are eligible for the
    material improvement exception, and the donors can claim fair market
    value. The other vehicles are sold to a wholesaler or to salvage yards
    for the value of the metal.

    * Administration of rule changes:

    - Administrative burden has increased because of the notification and
    filing requirements.

    - Some donors have not wanted to provide their Social Security numbers.

    - The IRS publications and guidance are clear.

    - The charity received a lot of questions about the changes to the
    rules in 2005, but now donors are not asking as many questions.

    * Other:

    - The charity does not have any plans to eliminate the vehicle donation
    program. Even though it now receives fewer vehicles and lower-quality
    vehicles, it believes that the program is still worth operating. This
    is in part because of the flexibility in how the charity can use the
    revenues from the vehicle donation program. It uses the revenues from
    the vehicle donation program to pay for services that are not covered
    by federal grants.

    Table 14: Charity J:

    [See PDF for image]

    Source: The charity's president.

    [End of table]

    Effects of rule changes reported by charity:

    * Number and quality of vehicles donated:

    - The number of vehicles donated decreased; however, the quality of the
    individual vehicles has increased. The number of vehicles donated that
    could be sold to low-income individuals or families has about doubled
    since the changes in the rules.

    * Revenue:

    - The charity has doubled revenues from the vehicle donation program
    since it started operating a used car lot at the end of 2005.

    * Business operations:

    - The charity sells vehicles to low-income families for low amounts
    generally in the range of $900 to $1,100. Recipients of the vehicles
    must be sponsored by a social service agency and live in certain
    geographic areas. The charity operated in the same manner prior to the
    rule change.

    - The charity receives a higher dollar figure per vehicle than many of
    the other large charities receive because it sets a minimum value on
    all of the vehicles sent to wholesale auction. At auction, if a vehicle
    does not receive a bid equal to or greater than the minimum, it is not
    sold and the charity will try to sell it again at another auction. This
    ensures that the sale of the vehicle will bring in more revenue.

    - The charity began operating a used car lot at the end of 2005.

    * Administration of rule changes:

    - Administrative burden has increased because of the reporting
    requirements.

    - About 1 in 20 donors do not want to provide their Social Security
    numbers.

    - IRS guidance is fairly clear; however the charity was disappointed by
    the lack of publicity for the use of the exceptions to the gross
    proceeds of sale rule. Because of this, the charity had to advertise
    the exceptions and explain that donors may be able to claim greater
    deductions if they donate their vehicles to it rather than to another
    charity. After this, the number of donated vehicles began to increase.

    - The charity receives more questions from donors, mostly relating to
    how much can be claimed on donors' tax returns.

    [End of section]

    Footnotes:

    [1] GAO, Vehicle Donations: Benefits to Charities and Donors, but
    Limited Program Oversight, GAO-04-73 (Washington, D.C.: Nov. 14, 2003).

    [2] Prior to this, the taxpayer could claim the fair market value of
    the donated vehicle.

    [3] We could not contact a representative sample of charities that
    operate vehicle donation programs because IRS officials and the
    President of the National Association of State Charity Officials said
    they did not know of any organization that maintained a list of
    charities that operate vehicle donation programs.

    [4] Many donors are limited to deducting the gross proceeds of the
    sales of their donated vehicles on their tax returns. However, there
    are three exceptions to this rule. The three exceptions are that the
    charity intends to make a significant intervening use of the vehicle,
    the charity makes a material improvement to the vehicle, or the charity
    sells the vehicle in direct furtherance of its charitable purposes. If
    a vehicle donation meets one of the exceptions, the donor can deduct
    the fair market value of the donated vehicle on his/her tax return.

    [5] The experiences of these charities cannot be generalized to all
    charities because these selected charities were not drawn from a
    statistical sample of all charities with vehicle donation programs.

    [6] Pub. L. No. 108-357 � 884 (Oct. 22, 2004).

    [7] A qualified vehicle is any motor vehicle manufactured primarily for
    use on public streets, roads, and highways; a boat; or an airplane.
    However, a vehicle held by the donor primarily for sale to customers,
    such as inventory of a vehicle dealer, is not a qualified vehicle.

    [8] Taxpayers can deduct contributions of vehicles if they itemize
    their deductions on Schedule A (Itemized Deductions) of Form 1040 (U.S.
    Individual Income Tax Return).

    [9] Publication 4303 (A Donor's Guide to Vehicle Donations; revised
    February 2006), provides an explanation of the exceptions and other
    guidance related to vehicle donations.

    [10] To be eligible, the taxpayer must itemize deductions on his/her
    Schedule A (Itemized Deductions) of Form 1040 (U.S. Individual Income
    Tax Return). The taxpayer must also file other required documentation.
    See app. V, table 4 for details.

    [11] To qualify as a significant intervening use, the charity must
    actually use the vehicle to substantially further its regularly
    conducted activities and the use must be considerable. For example, a
    charity that delivers meals to needy individuals and uses a donated
    vehicle to deliver meals every day for a year is making a significant
    intervening use of the donated vehicle.

    [12] A material improvement includes a major repair or improvement that
    results in a significant increase in the vehicle's value. Cleaning,
    minor repairs, and routine maintenance are not material improvements.

    [13] This six-step process is the usual course of handling vehicle
    donations according to the charities included in GAO-04-73 and the
    charities we contacted as part of this review.

    [14] These auctions are sometimes referred to as wholesale auctions.

    [15] See app. VI for details about each of the 10 charities.

    [16] GAO-04-73.

    [17] For the remaining seven charities we either could not identify a
    current telephone number or we attempted to contact the charity and the
    charity did not respond.

    [18] The 10 charities we selected for in-depth interviews experienced a
    similar proportion of increases and decreases in numbers of donated
    vehicles as the 30 that provided those data in our screening contacts.

    [19] According to the National Automotive Dealers Association, new
    vehicle sales increased from about 16.6 million in 2003 to 16.9 million
    in 2005 (a 1.87 percent increase) and then decreased in 2006 to about
    16.5 million (a 2.6 percent decrease).

    [20] Internal Revenue Service, "IRS Officials Urge Care for Those
    Making a Car Donation; New Law Changes Rules at End of Year," news
    release IR-2004-142, November 30, 2004.

    [21] Internal Revenue Service, "Charitable Contributions of Certain
    Motor Vehicles, Boats, and Airplanes," Notice 2005-44/Internal Revenue
    Bulletin 2005-25, June 20, 2005.

    [22] Internal Revenue Service, "IRS Reminds Taxpayers About Requirement
    of Written Acknowledgment for Donated Cars," news release IR-2005-149,
    December 22, 2005.

    [23] Internal Revenue Service, "Information Reporting by Organizations
    That Receive Charitable Contributions of Certain Motor Vehicles, Boats,
    and Airplanes," Notice 2006-1/Internal Revenue Bulletin 2006-4, January
    23, 2006.

    [24] Internal Revenue Service, A Donor's Guide to Vehicle Donations,
    Publication 4303 (revised February 2006).

    [25] Internal Revenue Service, A Charity's Guide to Vehicle Donations,
    Publication 4302 (revised May 2006).

    [26] Internal Revenue Service, "Guidance Regarding Appraisal
    Requirements for Noncash Charitable Contributions," Notice 2006-96/
    Internal Revenue Bulletin 2006-46, November 13, 2006.

    [27] Internal Revenue Service, Charitable Contribution, Publication 526
    (2006), and Determining the Value of Donated Property, Publication 561
    (2007).

    [28] A qualified vehicle is any motor vehicle manufactured primarily
    for use on public streets, roads, and highways; a boat; or an airplane.

    [29] Treasury Inspector General for Tax Administration, Improved
    Procedures Are Needed to Identify Noncompliance With the Reporting
    Requirements for Contributions of Motor Vehicles, Reference Number 2007-
    30-171 (Washington, D.C.: Sept. 17, 2007).

    [30] Treasury Inspector General for Tax Administration, The Internal
    Revenue Service Needs to Improve Procedures to Identify Noncompliance
    With the Reporting Requirements for Noncash Charitable Contributions,
    Reference Number 2007-30-049 (Washington, D.C.: Mar. 5, 2007).

    [31] Testimony of Steven T. Miller, Commissioner, Tax Exempt and
    Government Entities Division, Internal Revenue Service, before the
    Subcommittee on Oversight, House Committee on Ways and Means on the
    Oversight of Tax-Exempt Organizations, July 24, 2007.

    [32] The sample returns were for tax year 2004--before the new vehicle
    donation rules took effect.

    [33] The AUR program examines tax returns where the income reported on
    the tax returns is less than what is reported by third parties such as
    banks and employers.

    [34] Treasury Inspector General for Tax Administration, Improved
    Procedures Are Needed to Identify Noncompliance With the Reporting
    Requirements for Contribution of Motor Vehicles.

    [35] For the remaining seven charities, we could not identify a current
    telephone number or we contacted the charity but the charity did not
    return our calls.

    [36] GAO-04-73.

    [37] Many donors are limited to deducting the gross proceeds of the
    sale of their donated vehicles on their tax returns. However, there are
    three exceptions to this rule. The three exceptions are the charity
    intends to make a significant intervening use of the vehicle, the
    charity makes a material improvement to the vehicle, or the charity
    sells the vehicle in direct furtherance of its charitable purposes. If
    a vehicle donation meets one of the exceptions, the donor can deduct
    the fair market value of the donated vehicle on his/her tax return.

    [38] Treasury Inspector General for Tax Administration, Improved
    Procedures Are Needed to Identify Noncompliance With the Reporting
    Requirements for Contribution of Motor Vehicles.

    [39] Treasury Inspector General for Tax Administration, Improved
    Procedures Are Needed to Identify Noncompliance With the Reporting
    Requirements for Contribution of Motor Vehicles.

    [40] Donated Property of $5,000 or Less and Certain Publicly Traded
    Securities.

    [41] Donated Property Over $5,000 (Except Certain Publicly Traded
    Securities).

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