The IRS has wizened up to the potential for fraudulent reporting in the reported values of donated vehicles. The IRS has changed their reporting requirements since so many people were donating clunkers and deducting for Rolls-Royces. Some organizations are beginning to be concerned about the risk of accepting high-mileage, low value vehicles.
Here is a breakdown to help with the new guidance:
What is my organization’s reporting responsibility?
- The Charity must file Form 8282 only if the vehicle is valued at $5,000 or more and the donor must obtain a written appraisal from a qualified appraiser. Otherwise the organization is required only to give the donor an official acknowledgement (Form 1098-C), which now includes subsequent gross sales information. The donor is required to submit a copy of 1098-C to the IRS as filled out by the organization, regardless of value threshold.
- The Charity is required to submit Copy A of Form 1098-C to the IRS to report any vehicle with value claimed over $500 if the form is not utilized as the acknowledgement form. If it used as the acknowledgement form then the organization does not have to file it for amounts of $500 or less.
When can the donor claim Fair Market Value and how is that determined?
- The donor can deduct the fair market value of the vehicle IF the charity intends to make significant intervening use of the vehicle, material improvement, or subsequent charitable gift by organization to the needy significantly below fair market value
- The definition of “significant intervening use” – the charity must actually use the vehicle to substantially further its regularly conducted activities, and the use must be considerable. “There is no significant intervening use if the charity’s use is incidental”. In addition, significant intervening use does NOT INCLUDE use of the vehicle to provide training in general business skills.
- The definition of “material improvement” – major repairs that result in significant increase in the vehicle’s value. Cleaning, minor repairs, routine maintenance do not qualify.
- The charitable purpose exception applies only if the purpose is relieving the poor, distressed or underprivileged in need of transportation. Exception does not apply if the charity applies the proceeds from the sale to a needy individual for any charitable purpose.
- If the donated vehicle subsequently sells for $500 or less the donor may claim a deduction for the lesser of the fair market value or $500
- If the vehicle is sold without significant intervening use or material improvement, the donor may only deduct to the extent of the proceeds.
What if the Blue Book/ Kelly Price is more than what my organization can sell the vehicle for?
- If the vehicle’s fair market value is more than the donor’s cost or other basis, the fair market value may have to be reduced by any amount that would have been the donor’s long-term capital gain if the donor had sold the car for its fair market value. This must be done if the contributed property is tangible personal property that is put to an unrelated use by the charity.
- Definition of “unrelated use” – use that is unrelated to the exempt purpose or function of the charitable organization.
What’s the real risk of accepting a clunker and letting the donor claim what we think might be a higher value?
- Penalties – there is a penalty if a charity knowingly furnishes the donor with a false or fraudulent acknowledgment and the value is not sales based but fair market value. The penalty is calculated as the amount of the highest tax rate (35%) times the fair market value stated on the acknowledgment OR $5,000 – whichever is GREATER. The penalty if the false information is sales based is calculated the same as above but whichever is the lesser amount.
See IRS brochure 4302 for more information: http://www.irs.gov/pub/irs-pdf/p4302.pdf