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A Taxing Situation
GRAND RAPIDS — The Internal Revenue Service is willing to take a lot of information from taxpayers on faith, but when it comes to putting a price tag on a donated vehicle, the federal tax agency says: Leave this one to the experts.
On Jan. 1, a change in tax law made it more difficult for unscrupulous taxpayers to inflate the value of donated vehicles. Under the new law, more responsibility is placed in the hands of the charity, along with more paperwork. In some cases, though, that has affected the number and the quality of donated vehicles.
In past years, the value of a donated vehicle was left to a filer’s judgment. Individual donors might use a guide such as the Kelley Blue Book to determine the vehicle’s fair market value, or they might just make an educated guess. According to Jerry Coon of Action Tax Service in Rockford, those guesses were sometimes a bit fanciful.
“You know, somebody gives a 1990 LeSabre away and it’s worth $300. The Blue Book actually says $1,300, but the thing is smashed up and beat up and so they take a deduction for $1,300. The charity sends the car to auction and only gets $300. So technically the deduction is only $300. But there was no mechanism to trace that $300 back to the taxpayer,” said Coon. “Well, this law puts that mechanism into place.”
Under the new law, when a charity accepts the donation of a vehicle, it has three choices. It can choose to keep the vehicle for its own use. It can give it to someone in need for a below-market price or even for free. In both these cases the filer is able to claim a deduction of the vehicle’s fair market value, as determined by the charity. Third, the charity can sell the car, and it then must provide a written receipt verifying the sale price. So in the case of Coon’s LeSabre example, the filer would be eligible for a $300 deduction, and the charity would hold records reflecting both the sale price and the vehicle identification number (VIN).
Coon said that this form may allow the IRS to cross-reference VINs with Social Security numbers to verify the sale values. He said, however, that it would be unlikely for the IRS to do this in every case. It would simply make the audit process easier. If nothing else, seeing the vehicle information in writing might dissuade those filers who might be tempted to stretch the value of their donation.
“If a person has a form from a charity that’s got the car and the VIN number and ‘we sold it for $700,’ they aren’t probably going to be quite so apt to put $1,400 on their tax returns,” said Coon. “Because they don’t really know what the charity is doing with (that information).”
Although the new law reduces the likelihood of tax fraud, it does so at the price of more work for the charities that rely on donated vehicles as a funding source. Jack Phillips manages the vehicle donation program for the Salvation Army of Greater Grand Rapids. He said that he has had a difficult time adjusting to the volume of paperwork required by the new law.
“I’m in the process of filling out these forms from the first of the year for the IRS,” he said. “And it’s four forms — two for us and two for the donor.”
And Phillips doesn’t fill out that extra paperwork for free. Captain Joe Irvine, the head of the Grand Rapids area Salvation Army, said that the change in the law has increased his labor costs. It has also made his group look like the bad guy when a vehicle sells for less than the owner believes.
“They’re the ones that have to accept whatever value we can get for them,” said Phillips. “Their idea of a very nice car sometimes proves to be a not very nice vehicle.”
“So it causes a problem for us,” said Irvine.
Irvine said that “little Mrs. O’Malley” could have a car she has barely driven and expect it to be worth much more than the Salvation Army can get for it.
Although the new law has not affected the number of cars the Salvation Army has taken in, Phillips said that they are seeing a decrease in quality. He suspects that is because people are afraid that they will get small deductions, so they simply choose to sell their more valuable cars, in lieu of donating them. Regardless of the cause, it has meant a decrease in the funds from the program.
That is not the case for Mel Trotter Ministries, home to the largest-volume auto donation program in the area.
“I am literally hundreds of units ahead of last year at this time,” said Brett Betten, who runs Mel Trotter’s vehicle donation program in Grand Rapids. “Right now I think I have 275 cars in stock and anywhere between 30 and 40 for sale. I probably pick up between 10 to 15 a week. It is just amazing … I sell a thousand cars a year here.”
Despite the increase in volume, Betten said that, like the Salvation Army, he has been taking in lower quality cars this year.
“But on average,” he said, “they’re still decent cars that we can retail.”
In general, fewer people are taking the deduction for donated vehicles, but not because they aren’t making the donations. Coon pointed out that the deduction only applies to filers who itemize their deductions. Since the standard deduction has increased in recent years, fewer people bother to itemize. So it seems that many people who donate vehicles to charitable organizations aren’t doing so to score a tax break. They’re making their donations simply for the sake of charity.