A donated car can be your ride to an IRS audit

Don't claim too much

be sure the charity has nonprofit status

Sell auto and give the money

On the money

Your Money

February 29, 2004|By Lorene Yue

The advertisements promise a hassle-free and perk-filled process for getting rid of a clunker.

"Donate your vehicle to charity. Avoid the trouble of selling it yourself and get a tax break."

But what they aren't telling you is how doing it the wrong way can set off sirens at the Internal Revenue Service and shortchange the charity.

If you're thinking of donating a vehicle, there are a few things to keep in mind about the process.

Raising red flags

The IRS supports the idea of reducing your tax burden, as long as you do it legitimately. Saying a car is worth more than its actual value to bag a bigger deduction is not a smart idea. Doing so won't guarantee a tax audit, but it's never a good idea to take chances.

"That's where it gets sticky," said Michael Dobzinski, from the South Florida office of the IRS. "You just can't take the so-called Blue Book value. I could have a 1993 Honda and you could have one, but mine could be more beat up."

If you claim the car is worth more than $5,000, you'll need an independent appraisal to back that up.

The IRS has a department that scrutinizes returns with inflated noncash contributions, but so far, that division has been busy checking out other fraud, according to the federal General Accounting Office.

That doesn't mean taxpayers should push their luck, of course. Claiming an extraordinary amount of charitable deductions, say half your income, is likely to invite an audit.

"It's not all altruism," said Daniel Borochoff, president of the American Institute of Philanthropy. "Some people just want to get rid of a car. A lot of people don't even bother checking into the charity."

Some vehicle-donation programs can be fronts for profitmaking organizations. Don't be satisfied by a nonprofit status claim.

Do some research and make sure it's a legitimate operation. A Kidswish USA Inc. founder was sentenced in 2001 to two years in prison and a $5,000 fine for setting up a charity that claimed to help terminally ill children. Nearly all of the $1.7 million raised by Kidswish went to pay an affiliated company for fund-raising fees.

Ask the charity how much money it expects to get from your donation. Find out if the charity hires another company to collect the vehicle and sell it at an auction. If so, ask how much that company is charging for the service. Some third-party handlers take a huge cut of the sale proceeds, leaving the charity with little for its treasury.

$52 for charity

Take the outcome of a 1991 Plymouth Acclaim tracked by the Government Accounting Office. That car was auctioned by a third party and fetched $472, but the charity ended up with only $52 after paying all its fees.

"Some of these people will take 95 percent `of the profits,' and the charity will end up with 5 cents on the dollar," said Bob Owen, international director for World Vision US, which runs its own vehicle donation program. "We didn't feel comfortable that donors would find that most of the profits were going to a for-profit organization working with the charity."

If you want to find a way where both you and the charity get the most out of the transaction, consider selling the car on your own and donating the money. That way, you'll know the exact amount for your deduction and how much the charity will get to keep.

Another suggestion is to find a charity that could use the car, perhaps to deliver food.

Lorene Yue is a Your Money staff writer.

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