IRS Reminds Taxpayers About Car Donation Requirements

WASHINGTON — Internal Revenue Service officials are reminding taxpayers that they must obtain a charity’s written acknowledgment of their vehicle donation before they claim a deduction for the donation.

There was a second notice this week from the IRS, also regarding donated cars: The IRS will not recognize certain deductions that taxpayers may be claiming relating to donated vehicles sold at auction.

For deductions of more than $500 when a vehicle is donated to a charity, the taxpayer is required to attach the acknowledgment to the taxpayer’s return for the year of the donation.

Effective for vehicles donated to charity on or after January 1, 2005, The American Jobs Creation Act of 2004 (IR-2005-149)provides that, generally, a taxpayer’s deduction is limited to the gross proceeds from the sale of the vehicle by the charity. The charity must provide a written acknowledgment within 30 days after the vehicle is sold that notifies the taxpayer of the amount of the gross sales proceeds.   

 The IRS is aware that questions have arisen as to whether the charity must sell the vehicle in 2005 in order for the donor who donated a vehicle in 2005 to receive a deduction for 2005. The charity does not need to sell the vehicle in 2005. A taxpayer can take a charitable contribution deduction only for the year the vehicle is transferred to the charity, even if the vehicle is not sold by the charity until a later year. (Only taxpayers who itemize their deductions can take a charitable contribution deduction.)

A taxpayer cannot take a charitable contribution deduction of $500 or more for a vehicle donation, however, unless the taxpayer has received a written acknowledgment of the donation from the charity and attached the acknowledgment to the return.

If the taxpayer receives the written acknowledgment after filing the tax return for the year of the donation, the taxpayer may, after receiving the acknowledgment, file an amended return for that year and claim the deduction on the amended return. The taxpayer must attach the acknowledgment to the amended return.

Meanwhile, IRS officials took the step of not recognizing deductions following the auction of a vehicle after becoming aware of questionable practices that have surfaced recently. Some charities have sold donated vehicles at auction and claimed that the sales are to needy individuals at prices significantly below fair market value. By doing so, these charities have claimed that the sales trigger an exception to the general rule that the deduction allowed to the donor is limited to the proceeds from the charity’s sale.

The IRS’ position is that vehicles sold at auction are not sold at prices significantly below fair market value. Therefore, the IRS will not treat vehicles sold at auction as qualifying for the exception for sales to needy individuals at prices below fair market value. 

If a charity sells a donated vehicle at auction, the IRS will not accept as substantiation an acknowledgment from the charity stating that the vehicle is to be transferred to a needy individual for significantly below fair market value (Box 5b on IRS Form 1098-C). In such cases, the donor may claim a deduction of more than $500 only to the extent that the gross proceeds from the sale exceed that amount and the donor substantiates the contribution with an acknowledgment from the charity that indicates the gross proceeds from the sale (Box 4c on IRS Form 1098-C).

The rules for determining the amount that a donor may deduct for a charitable contribution of a qualified vehicle, including an automobile, with a claimed value of more than $500 changed at the beginning of 2005 as a result of the  American Jobs Creation Act of 2004. In general, that Act limits a donor’s deduction to the amount of the gross proceeds from the charity’s sale of the vehicle.

Under an exception to this general rule, a donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the recipient organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.  In this case, the charity provides to the donor an acknowledgment indicating that the donor may claim a fair market value deduction for the vehicle.  

Because this exception does not apply to sales at auction, a charity may be subject to penalties under sections 6701 and 6720 of the Internal Revenue Code if the charity sells a donated vehicle at auction and provides to the donor an acknowledgment that indicates anything other than the deduction may not exceed the gross proceeds from the sale.