Vehicle Donation Tax Law Reform: Sher & Blackwell, LLP GAO/Congressional Outline
The Government Accountability Office (GAO) has agreed to a congressional request to update its November 2003 reports on the benefits to charities and donors that result from vehicle donations (GAO Report 04-73). Local charities affected by changes enacted in 2004 believe a new GAO study could inform legislative debate during this congressional session.
The 2004 changes have significantly reduced the number and value of vehicle donations to charities – and as a result, have seriously impacted social services provided by non-profit groups across the country. These consequences were not anticipated by its proponents when the law was amended. The objective was to address abuses but the result was a classic “baby and bathwater” overreach. Tax incentives are critical to sustaining charitable contributions, including in-kind gifts. The decline in vehicle donations since 2004 could be addressed by minor legislative refinements that would also address potential abuses by buttressing IRS enforcement.
Under then-Chairman Grassley, the Senate Finance Committee pursued ways to address concerns about abuses relating to deductions for non-cash contributions to non-profit organizations. In that context, the Government Accountability Office (GAO) reported in November 2003 on the benefits to charities and donors that result from vehicle donations (GAO Report 04-73). The GAO found that the Internal Revenue Service (IRS) had some mechanisms to detect noncompliant claims for non-cash deductions; but GAO found that IRS oversight and enforcement focused on compliance relating vehicle donations was limited.
Before 2005, a taxpayer could deduct the fair market value (FMV) of vehicles donated to charity. Under Section 170 of Title 26 of the US Code, a donor could claim the FMV as determined by well-established used car pricing guides, as long as the FMV was under $5000.
However, there was concern that some taxpayers were gaming the system by claiming excessive deductions; the 2003 GAO study had documented cases in which taxpayers used published values for cars in better condition than those actually donated. The GAO had also concluded there was insufficient IRS oversight to detect or police these problems.
In its FY2005 budget request, the Administration proposed reforming the rules governing vehicle donations by allowing a deduction only if the taxpayer obtained a qualified appraisal for the vehicle. At the behest of Chairman Grassley, however, the Congress rejected that proposal and went much further. The final version, included in the American Jobs Creation Act of 2004 (PL 108-357), limited deductions over $500 to the actual proceeds of the ultimate sale of the vehicle, regardless of appraised value. Only if the charity actually keeps and uses the car (rather than sell it for the resulting revenue) can the donor deduct its FMV.
The rules took effect for tax year 2005. Today, a taxpayer with an older used car in poor condition can call many charities nationwide to have the vehicle towed at no cost and then claim a $500 deduction. However, a taxpayer with a newer-model car in good condition has no idea what deduction will be allowed until the vehicle is actually sold. That sale may not occur until months later, forcing the donor to roll the dice on the final deduction amount.
During debate, proponents argued that the changes would not add new burdens on vehicle donors or adversely impact charitable giving. To the contrary, evidence abounds that the changes have seriously disrupted charitable giving and forced many charities to curtail services to low-income beneficiaries. Meanwhile, the IRS has not made significant progress in analyzing their impact or improving oversight of abuses.
To feel informed enough to decide whether to donate a vehicle, taxpayers need a reasonable degree of certainty about the resulting deduction. Otherwise, alternatives such as a private sale or dealer trade-in become more attractive.
The change has affected not only the number of donations, but also the quality of donated vehicles. In some cases, charities report a drop of 50% in donations. News articles from across the country reflect plummeting donation rates and the precipitous decline in revenue of non-profit community organizations. The news coverage itself has exacerbated the problem; potential donors concerned about the changes are discouraged further by the perception of the new burdens associated with the amended rules.
Charities which had operated successful vehicle donation programs, either independently or though third-party fundraisers, have been hit hard. Those unable to cover overhead costs have eliminated vehicle donation programs and resolved to forego the resulting revenue stream. It appears that no charities have initiated or expanded vehicle donation programs over the past two years.
The objective of the original 1986 car donation provision in the federal tax code was to encourage charitable donations. The 2004 amendments have undermined that goal without improving IRS enforcement. As a result, charities and their beneficiaries are suffering.
The adverse impacts of the 2004 changes have been the focus of many press accounts across the country. Any effort to advance a legislative remedy, however, requires more careful documentation.
Toward this end, the GAO has agreed to a request from a key Member of Congress to undertake a follow-up review of the impact of the changes on donors, charities and IRS. The request to GAO expressed concern that the changes have had unanticipated consequences and that the IRS has not made significant progress in improving oversight and enforcement over these transactions. The GAO was asked to consider, among other areas, the impact of the amendment on the number and type of cars donated; charity revenue and services; how vehicle donation protocols relate to non-cash donations overall; and progress toward improving IRS oversight and enforcement.