December 13, 2003

    A General Accounting Office report released yesterday found big discrepancies between the dollar amounts many Americans claim as deductions for car donations on their tax returns and the money charities actually receive from the sales of the vehicles.
    "The proceeds received by charities from vehicle donations were 5 percent or less of the value donors claimed as a deduction on their tax returns for the majority of the ... vehicle donations we tracked," the General Accounting Office, the investigative arm of Congress, said in its report that was requested by the top Republican and Democrat on the Senate Finance Committee.
    Sen. Charles E. Grassley, Iowa Republican and committee chairman, and Sen. Max Baucus, Montana Democrat and ranking member, sought the report with an eye toward making changes in the law that would require taxpayers who donate cars — as well as land, planes, boats, art and intellectual property — to make more accurate valuations of the gifts on their tax forms.
    On the car-donation front, one strategy receiving strong consideration would be to require donors to limit the value of their car gift to the amount a charity can sell it for.
    "Right now, this is an area where no one is watching the henhouse," said Dean Zerbe, senior counsel for the Senate Finance Committee.
    The GAO report estimates that in the 2000 tax year alone, "Vehicle donation deductions lowered taxpayers' income by $654 million.
    "When you add in intellectual property, land and art, it adds up to billions of dollars [of tax revenues] that are lost year after year," Mr. Zerbe said in an interview.
    He pointed out that taxpayers who value donated vehicles at $5,000 or more must provide an independent appraisal of its worth. But vehicles valued at less than $5,000 do not require this appraisal.
    The report documented situations in which the owner of a donated 1986 Toyota 4-Runner claimed its value to be $3,950 on his income tax return. But the charity that received the sport utility vehicle sold it for $300 and netted only $5 from its sale.
    Likewise, the owner of a red Honda Accord LX1 2D with an unlisted model year put its value at $4,175 for tax-deduction purposes. But the charity that was given the vehicle sold it for only $150 and got only $10 in net proceeds.
    "As the GAO report on car donations highlights, charities are receiving only pennies on the dollar from the donations of used cars," Mr. Baucus said in a statement. "And even more concerning, the tax breaks individuals receive for these donations are costing the government millions of dollars a year."
    Said Mr. Grassley: "This report further exposes what's proving to be a rat's nest of problems in the area of aggressive valuation of in-kind gifts ... the Finance Committee will look at significant reforms in this area as we consider the charitable giving bill early next year."
    The GAO said annual net proceeds from car donations for 2002 reported by charities it interviewed ranged from as little as $1,000 for two vehicles donated to a senior center to more than $8.8 million for one national charity that received more than 70,000 vehicles.
    The report tracked 54 specific vehicle donations.
    In talks with officials of charities and third-party agents responsible for selling the donated cars, the GAO came up with two reasons, it said, explained "in part" why charity proceeds from vehicle donations were "much less than the value deducted by donors on their tax returns."
    One reason, the agency said, is that donated vehicles are "often sold at auto auctions for salvage or at wholesale prices, which are typically lower than prices that would be received if the donor sold the vehicle themselves."
    What's more, the agency said, "processing costs and fees are deducted from gross sales revenue, further reducing charity proceeds."
    Pete Sepp, spokesman for the National Taxpayers Union, says it's not clear whether these are cases of "taxpayers misrepresenting the value of deductions" or of "middlemen taking large cuts that whittle down the value [of a donated vehicle] to a charity."
    Until Congress finds out what's going on, "taxpayers should not be taking the brunt."
    Mr. Grassley expressed concern that the GAO report found evidence the IRS may be "turning a blind eye to charitable gifts that have been red-flagged as possible problems."