Charity

The Most Recent GAO Investigations Into Fraudulent Durable Goods and Vehicle Donations to Charity

There are many events that encourage the IRS to act and chief among them is people taking advantage of charity deductions. In the case of durable goods or non-cash donations to charity, reports issued in late 2003 found that over half a billion dollars was slipping through the IRS's proverbial fingertips. In an effort to stem this revenue hemorrhaging, new rules took effect in 2005, largely due to just a single scathing report from the US General Accounting Office (GAO) in late 2003.

Of course, this report was the first of its kind to actually focus exclusively on automobile and vehicle donations to charity. And what it found shocked the IRS and the Senate Finance Committee that it was delivered to. Indeed, an immediate response was garnered from the IRS to publicly concur with the recommendations of the report that called for rule changes and greater oversight of vehicle donations to charity.

It is interesting to note the the timing of this report was just a year after an influential and scathing article on this very topic appeared in the Washington Post. Though the increased prevalence of ads cajoling people to donate their car to charity certainly merited inspection by someone. Whether an employee of the GAO saw this, or a constituent of one of the Senators on the Finance Committee is unknown.

Regardless, the report, entitled, "Vehicle Donations: Benefits to Charities and Donors, but Limited Program Oversight," found some glaring problems with the system of automotive donations to charity, even when taxpayers followed the letter of the law when determining their allowable deduction.

For instance, the average deductible represented only between 1-5% of the actual monies accepted by the charity in most cases. The rest of this money was lost by selling the vehicle as quickly as possible on the wholesale market, often taking in less than 10% of the automobile's value according to even conservative estimates by valuation services such as the Kelly Blue Book.

Of course, part of the confusion arises from the generally unsatisfactory condition of many donations – a condition that was found to be exasperated by offers of free towing of any vehicle with a free and clear title. In fact, most donation organizations (whether operating as a profitable business or non-profit charity) will tow cars as a matter of course, whether they run or not. In contrast, the Kelly Blue Book rating of "poor" still requires the car to move under its own power.

The very prevalent use of third-party donation organizations that represented various charity organizations (sometimes several) caused a great deal of concern, too. It was found that on average, between 60-70% of the relatively paltry revenues from wholesale market sales was then eaten up by the overhead of the facilitating organization that was operated as a for-profit business enterprise over 95% of the time.

Even more disconcerting, many of these third party organizations were found to be engaging in fraudulent or at least shoddy bookkeeping – often lumping all their expenses for a given sale into a single unlikely category. Sometimes, it was found that in many cases the charity that some such companies represented wasn't even legitimate, making the practice of taking a deduction from such a gift to "charity" technically illegal.

That said, despite the large number of advertisements found on TV, radio and websites, less than a single percent of tax returns filed in 2000 included a vehicle donation to charity. Of course, in a country as large as the United States, that still means that over 700,000 tax returns had itemized deductions for vehicle donations to charity By claiming the "fair market value" of the cars in question rather than the actual sale price, just about each and every one of the nearly three-quarters of a million returns deducted a value that was, on average, 90% higher than the actual revenues received at auction.

It comes as no surprise to anyone that the IRS acted the very next year, especially given the betrayal of public trust that predatory for-profit enterprises represented when invoking the name of charity to solicit donations from unsuspecting Americans who were just trying to do the right thing.

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