You’ve heard some horror stories, and yes it’s true--scam car donation programs are out there. A 2003 Government Accounting Office study documented several for the U.S. Congress.
In one example the IRS had to yank the nonprofit status of a Florida organization whose leader used the net proceeds for solicited boat donations for personal gain.
A used car lot in California that claimed to be soliciting cars for charity got busted after it was discovered that it had pocketed all the money it raised-- $1 million.
In Massachusetts, a for-profit company misled car donors into believing that a substantial percentage of their donations would be used for charitable purposes.
More recently in New York, then- state Attorney General Andrew Cuomo in 2010 sued a New York City-based organization that allegedly fleeced car owners who thought they were donating to a real charity. The then-attorney general singled out Feed the Hungry in a lawsuit seeking to close the nonprofit’s doors because its owner allegedly solicited car donations that were supposed to benefit the nonprofit but instead kept the proceeds for himself.
Charitable organizations accepting donated vehicles tend to welcome the extra revenue they bring in. Donors, by being careful in the selection of the charities they give their autos to, are able to unload unwanted vehicles and get tax deductions in return.
Potential donors usually learn about these programs through advertisements.
What a charitable organization receives for the car is likely to be less than what the donor would make in the retail used car market because the vehicles are usually sold at auto auctions for wholesale prices, and there are costs involved in processing the donations.
Of 129 million returns filed for tax year 2000, roughly 0.6 percent, or 733,000 people, claimed the car donation deduction, lowering the collective tax liability of these filers by $654 million.
The Internal Revenue Services gives advice on how to avoid unscrupulous actors in the car donation market. It advises prospective donors to make sure their charity of choice is tax-exempt, to ask questions about how much of the proceeds go to the charity and how to determine the size of their tax deduction, and to follow state laws when transferring the car's title.
There is no national data identifying the percentage of charities that operate vehicle donation programs, but of those surveyed by the Government Accounting Office in 2003, anywhere between less than 1 percent to up to 98 percent of their budgets came from auto donations.
There are two kinds of vehicle donation programs: those operated by the charities themselves who do all the work and those operated by third-party fundraisers who advertise, pick up, and sell the vehicles, but also keep a portion of the net vehicle proceeds after expenses.
Advertisements often claim that car donors are eligible for tax deductions, that donations serve charitable purposes and donated vehicles are towed free of charge. After determining whether to accept the vehicle, it arranges to have the vehicle picked up, towed, and deposited to where it is stored until it's taken to auction or the salvage yard.
At the time the vehicle is turned over, the charity gets the title. The charity then gives a receipt to document for the IRS.
Once the donations are collected, they are generally sold at auto auctions, for parts, or sometimes to auto dealers or the general public.
Charities with in-house programs get 100 percent of the proceeds after expenses. In fundraiser programs, the fundraisers generally perform all these tasks and then take a percentage of net proceeds, giving the rest to the charities. Some fundraisers operate car donation programs for a wide range of nonprofits, who may also use multiple fundraisers.
A GAO report provides an example of what charities can expect to get for car donations, especially when they use a fundraiser.
In one case cited, a 1983 truck donated in 2001 went for $375 at auction. After taking off fund-raiser and advertising expenses, the net totaled $63.00, which was split between the fundraiser and charity. In this case, the donor claimed a $2,400 donation based on fair market value. That was pre-2005 before the IRS changed the way car donations are valued. Now, the donor can only deduct the lesser of what the charity gets at auction for the car or the fair-market value. If the car donation in question here had taken place without a fundraiser, the charity would have gotten the entire $63.00, which is still roughly one-sixth of the price garnered at auction.
It's not quite as easy as writing a check out to your favorite charity. There are costs incurred to collect people's auto donations. Thanks to IRS laws enacted after 2005, the car donation tax credit has become a little less appealing as taxpayers can't take off as much as in the past when they could use the fair-market value of their vehicle to determine their deduction. Now they have to settle for what charities get at auction, which is usually lower than what they'd get in the retail used car market.
So, when scams occur, it makes car donation even less appealing. But at Heritage for the Blind, a legitimate charity that has been collecting car donation for years, you can rest assured that the net proceeds from vehicle donations go to helping the blind. With a little diligence, taxpayers thankfully can avoid being the target of car donation scams.