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						 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
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 taxpayersï¿½ estimates of the value of their 
vehicles, claimed as tax deductions, were in excess of the charitiesï¿½ 
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 charityï¿½s 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 [email protected]. 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 
charityï¿½s 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 ï¿½ 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). 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability.  

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates."  

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to:  

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548:  

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061:  

To Report Fraud, Waste, and Abuse in Federal Programs:  

Contact:  

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: [email protected]: 
Automated answering system: (800) 424-5454 or (202) 512-7470:  

Congressional Relations:  

Ralph Dawn, Managing Director, [email protected]: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548:  

Public Affairs: 

Chuck Young, Managing Director, [email protected]: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

*** End of document. ***