	The Vehicle Donation Process

Individuals often first learn about vehicle donation programs through  advertisements. Figure 2 identifies  the vehicle donation process for both in-house and fund-raiser vehicle  donation programs. A charity working with a fund-raiser may have no  oversight of the process, leaving the operation of the program, and  distribution of proceeds, up to the fund-raiser. Vehicle Donation Proceeds

The total proceeds a charity receives from a vehicle donation may be less  than what a donor expects. We identified two factors that contribute to  this difference. First, charities and fund-raisers often sell vehicles at auto  auctions for wholesale or liquidation prices or to salvage yards for parts,  rather than obtaining the amount they would receive if vehicles were sold  to private parties. Second, vehicle processing and fund-raising costs are  subtracted from vehicle revenue, further lowering proceeds. Proceeds received by charities participating in vehicle donation programs  run by fund-raisers also varied, in part due to the different processing costs  deducted by fund-raisers, as well as different agreements between charities  and fund-raisers for splitting net proceeds. We will identify  any concerns regarding the amount of net proceeds fund-raisers keep from  vehicle donations and the significance of vehicle donation programs to  charity operations. Charities may consider proceeds from vehicle  donations to be a welcomed, if not crucial, source of revenue to support  their operations. Of the 129 million returns filed that  year, a projected 0.6 percent, or an estimated 733,000 returns, had tax  deductions for vehicle donations. We estimate that in 2000, vehicle donations deductions  lowered taxpayers’ income tax liability by an estimated $654 million of the  $1 trillion tax liability reported on returns. IRS guidance limits the amount of an allowable deduction to the vehicle’s  fair market value, or the amount a willing, knowledgeable buyer would pay  for the vehicle. Taxpayer Guidance and Cautions

IRS and other organizations, including the National Association of State  Charity Officials and the Better Business Bureau, have issued guidance on  steps potential donors should take before donating their vehicles to charity  and claiming associated tax deductions. These steps include the following:  Verify that the recipient organization is a tax-exempt charity. Ask questions about how the donated vehicle will be used to determine  whether it will be used as intended. Deduct only the fair market value of the vehicle.
Why GAO Did This Study

According to the Internal Revenue Service (IRS), charities are increasingly turning to vehicle donation programs as a fund- raising activity, resulting in increased solicitations for donated vehicles. Therefore, to make informed decisions about donating their vehicles, taxpayers should be aware of how vehicle donation programs operate, the role of fund- raisers and charities in the vehicle donation process, and IRS rules and regulations regarding allowable tax deductions. Due to the increased use of vehicle donation programs, GAO was asked to describe (1) the vehicle donation process, (2) the amount of proceeds received by charities and fund-raisers, (3) donor tax deductions, and (4) taxpayer cautions and guidance.

What GAO Found

Revenue from donated vehicles is a welcomed, and sometimes crucial, source of income for a number of charities. Donors, by following available guidance and making careful selection of charities for their donations, can provide charity support while benefiting themselves through tax deductions or disposing of unwanted vehicles. Taxpayers generally first learn about vehicle donation programs through advertisements. Interested donors call the advertised number and either reach a charity that operates its program in-house, or a third-party fund-raiser acting on the charity's behalf. The charity or fund-raiser asks questions of the potential donor regarding the vehicle, and then collects and sells the vehicle for proceeds. The proceeds a charity receives from a vehicle donation may be less than what a donor expects. Two factors contribute to this difference. First, charities often sell vehicles at auto auctions for wholesale prices rather than the prices donors may receive if they sold their vehicles themselves. Second, vehicle processing costs--whether the charity's or the fund-raiser's--- as well as the fund-raiser's portion of net proceeds further reduces the amount of proceeds a charity receives. Of the 129 million individual returns filed for tax year 2000, an estimated 733,000 returns had tax deductions for vehicle donations that lowered taxpayers' tax liability by an estimated $654 million. No data exist on whether these deductions were appropriately claimed. To assist donors in making decisions regarding vehicle donations, IRS and other organizations have issued guidance on steps potential donors should take before making vehicle donations. These steps include verifying that the recipient organization is tax-exempt, asking questions about vehicle donation proceeds, and deducting only the fair market value of the vehicle on tax returns.