In July, the IRS released what is likely to be the first sign of attack against taxpayers taking aggressive tax deductions for used car donations to charities. The new IRS Publication 4303, A Donor's Guide to Car Donations, provides guidelines and information regarding the major issue at hand in deductions for charitable vehicle donations: the "proper" value of the car that was donated and its corresponding tax deduction. It also provides a reminder on other various rules that are important to bear in mind regarding charitable deductions. When followed correctly, you (or the client you advise) can be confident in your tax deduction-and mistakes will virtually ensure that an IRS audit will be an even more unpleasant experience than it already is.
The IRS publication emphasizes, first and foremost, that it is important to be certain that the organization you're donating to really is a charitable organization (established under IRC Section 501(c)), that leaves you eligible for a charitable deduction (meeting the requirements under IRC Section 170) when property is donated. One can find a list of most eligible charities in IRS Publication 78 (all IRS Publications are available at www.irs.gov). However, most religious institutions (churches, synagogues, mosques, etc.) are not required to apply for recognition of tax exemption, and consequently are often not listed in Publication 78. If you have questions or are uncertain about whether a charity qualifies, try contacting the IRS Customer Account Services division for Tax Exempt and Government Entities at 877-829-5500.
The most important aspect of Publication 4303, though, is its explanation about determining the value of your donated car and thus the amount of your tax deduction. Generally speaking, the Internal Revenue Code allows a deduction for the fair market value of property that is donated to charity. The issue at hand, though, is that many organizations, in their fundraising efforts, have been suggesting that anyone can deduct the full value of a car as found in a major used car price guide (e.g., the "Blue Book" value). The IRS has begun to actively challenge this, however, and assert that the "fair market value" guideline must be applied, above and beyond the "blue book" methodology-which means if your car is not in good shape, neither is your full tax deduction.
The "fair market value" doctrine of the IRS states that value is considered to be the price a willing buyer would offer for the car, and a willing seller would accept, if neither party is compelled to complete the transaction and both parties have reasonable knowledge of all the relevant facts. For example, if you have a car that lists in the "blue book" for $1,600, but is in need of major repairs and does not run properly, and could realistically only be sold for $750, then the fair market value of the car (and thus your tax deduction) is only $750, and not $1,600 as the listing might indicate. (The IRS provides additional general guidelines on determining the value of donated property in IRS Publication 561.)
If you claim an amount in excess of the real fair market value of the vehicle, and happen to be the subject of an audit, the IRS may very well challenge the excess deduction. If the IRS successfully adjusts the amount of the deduction, you will owe not only the additional taxes for the lesser tax deduction, but interest on the now-late taxes, and penalties as well that are affected by the size of the additional tax bill.
In addition, it's not enough to merely claim the correct amount of the deduction-several other guidelines must be followed if you want your vehicle charitable deduction to survive an audit. First, for most vehicle donations of any substantive value (a fair market value of more than $250), you must receive a written acknowledgement from the charity that received the donation. It must include the name of the charity, a description of what was donated (i.e., a general description of the car, including the make, model, and year), and a statement about the value of any goods or services received from the charity in exchange for the donation or that there was none, if applicable. The acknowledgement must be received by the due date (including extensions) for your tax return of the applicable year, or the date you actually file your return, whichever is earlier. An e-mail is sufficient to meet the requirement, though-a paper copy is no longer required. Although this important correspondence does not actually get filed with your tax return, it is vital to survive an audit.
The next hurdle that must be surpassed in the process of ensuring a tax deduction for your vehicle donation is IRS Form 8283, for "Non-Cash Charitable Contributions," that must be filed with your tax return for the year of the donation. Section A of Form 8283 must be filed if the deduction you are claiming for your car is at least $500. In addition, if the planned deduction is more than $5,000, you must receive a written appraisal of your vehicle.
The written appraisal must be obtained from a qualified appraiser (see Publication 561 for a further discussion of what counts as a "qualified" appraiser) no more than 60 days before your actually contribute the car. You must receive the appraisal by the due date (including extensions) of the tax return for the year that you donate the car. If you go through the appraisal process, you are also required to complete Section B of Form 8283. The IRS uses this information to match to a similar document the charity must file, Form 8282, if the charity actually sells the car within two years after the date of receipt. If the value on the charity's version of the form is substantially different than the value you claim on your own, your tax deduction might still hold-but expect to receive an inquiry from the IRS.
The release of Publication 4303 (and a matching Publication 4302 for charities on this topic), and the matching-of-tax-deductions system available to the IRS with Forms 8283 and 8282, are just the early salvos of what many anticipate will be a crackdown on these types of tax deductions. But if you guide your client to follow all of the guidelines spelled out in Publication 4303, you can be reasonably confident that the tax deduction will really survive an IRS audit. If these guidelines aren't followed properly, though, beware, because the IRS is starting to notice, and they might notice you and your client.Michael E. Kitces, MSFS, CFP, CLU, ChFC, RHU, REBC, is director of financial planning for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Md., that oversees more than $300 million of client assets. Michael welcomes your comments at firstname.lastname@example.org.