The Internal Revenue Service is not doing enough to make sure that donors of motor vehicles — and the charities that receive the gifts — are following the law so that donors do not take unsubstantiated tax deductions, according to a report from the Treasury Inspector General for Tax Administration.
In 2007, an estimated 92,037 taxpayers claimed unsubstantiated motor vehicle donations (which can include cars, boats, and airplanes) that totaled $204-million, the inspector general said. An estimated 63,972 of these taxpayers may have avoided paying about $17-million in taxes for 2007, the report said.
“The IRS’s procedures to ensure that taxpayers meet all of the requirements for deducting charitable contributions of motor vehicles continue to be inadequate,” J. Russell George, the Treasury Inspector General for Tax Administration, said in a statement.
The inspector general’s report recommended that the IRS establish additional procedures “to identify noncompliance with motor vehicle donation requirements during returns processing.”
The IRS agreed with one recommendation made by the inspector general and disagreed with two others, the report said.
Before January 1, 2005, donors could claim a tax break equal to the fair market value of a donated vehicle. After that, donors could generally deduct only the amount for which the charity later sold the vehicle.
Congress changed the law for donations of cars because the government found examples of large discrepancies between the market value claimed by donors and the actual sale price. The new law added reporting requirements for individuals seeking deductions for their donations.
The report from the Treasury Inspector General for Tax Administration concluded that some taxpayers did not provide the IRS with sufficient documentation to substantiate their deductions for gifts of motor vehicles.
The report also found that some charities did not properly report contributions of automobiles, boats, and airplanes. “Furthermore, the IRS did not match information filed by charities regarding motor vehicle contributions with information on taxpayer forms,” said a statement from the inspector general.
One recommendation from the inspector general was for the IRS to “use outreach, educational materials, and other methods to ensure charitable organizations comply” with a requirement to file a return, called a Form 1098-C, with the IRS for each contribution received of a motor vehicle with a claimed value of more than $500.
The report said the IRS “believes they already have a substantial outreach program and have already completed what is being recommended.”
However, the inspector general said that “the IRS has had more than two years to make charities aware of the change in the law but our analysis still identified an approximately 60 percent noncompliance rate.”
The report added: “The deficient cases in our samples were all filed after the IRS outreach was already available. Further, because the IRS is not identifying noncompliant charities and imposing penalties when the charities fail to submit the required documentation, compliance by charities may not improve.”