Several charity representatives have expressed concern about an IRS notice on vehicle donations that the IRS released January 6, saying the requirements in Notice 2006-1, 2006-4 IRB 1, will be burdensome to charities.
A notice on charitable donations of vehicles that the IRS released recently is getting a cool reaction from some charity representatives, who fear the reporting requirements in the guidance could place increased burdens on charitable organizations and make it more difficult for charities to carry out their programs.
The IRS released Notice 2006-1, 2006-4 IRB 1, on January 6. It says if a charity receives a donation of a qualified vehicle with a claimed value above $500 after December 31, 2004, it is required to give the donor a contemporaneous written acknowledgement. The charity also must provide the same information in the acknowledgment to the IRS by using Copy A of Form 1098-C, according to the notice.
Nancy Ortmeyer Kuhn of Powell Goldstein LLP, Washington, is unhappy with the 1098-C filing requirement and with the requirement that a donee organization required to file 250 or more Forms 1098-C during a calendar year must file them electronically or magnetically. "Notice 2006-1 clarifies that the donee organizations must utilize the official Form 1098-C to report each vehicle donation," she said. "This places a tremendous reporting burden on the donee organizations that handle a large number of donations. Notice 2006-1 indicates the IRS estimates a total annual reporting burden of 21,500 hours for all donee organizations. It seems that they could have devised a system that is less burdensome."
Kuhn said many charities may have to scale back their programs because of the new rules. "There are many remarkable programs developed by charities, in which they provide essential transportation through their car donation programs to the underprivileged," she said. "This enables the beneficiaries of the program to obtain employment, and otherwise improve their economic situation. This burdensome system discourages those charities from continuing their large-scale programs."
Others said the IRS must address unanswered questions about vehicle donation rules. Dave Dougherty, director of Family Self- Sufficiency Programs at the Family Services Center in Huntsville, Ala., said his charity, rather than selling at auction the vehicles it receives, gives them to needy individuals or sells them to the needy at prices well below fair market value, thereby enabling donors to take the full fair market value deduction. He said he would like the IRS to provide guidance that would explain how to handle inadvertent changes in a vehicle's condition after it is donated.
"We are curious what will happen if we get the vehicle and we're test driving it and it blows up," he said. "It wouldn't make sense then to transfer it to a needy individual because it needs a new engine or a new transmission, and it would be too expensive and the cost would far exceed the value of the vehicle. So we would send the vehicle to the junkyard. They probably wouldn't give us anything for it, maybe $50."
Dougherty said it is unclear how to fulfill IRS reporting requirements in those situations. "I assume we'd have to file a revised 1098-C form saying the vehicle actually was sold, even though it was basically just sent to the junkyard," he said. "That would change the deductibility of the person's donation. But the donor, when it provided the vehicle, may not have known that the transmission was about to go out. It was a good-faith donation on [the donor's] part, and the [donor] donated it to us because he expected to be able to deduct the full fair market value, and then [the donor] can't [deduct] anything, or maybe just $50."
Harvard E. "Pete" Palmer Jr. of the Vehicle Donation Processing Center, which handles the car donation programs of more than 300 charities, said the notice's estimate of the annual reporting burden of the information reporting requirements -- 21,500 hours -- is too low, as is the notice's estimate of donee organizations (4,300).
"I think they massively underestimated the total annual hours at 21,500, and I think they massively underestimated the number of affected donee organizations," Palmer told Tax Analysts. "Nobody has hard evidence as to how many charities are taking car donations. But we believe it's in excess of 10,000."
Palmer said that though large charities may not suffer much from the 1098-C requirement, smaller organizations will. "Who this really hurts is the little charities, who are going to have to try to figure all this out and try to respond to it," he remarked. "It's an unfortunate and unnecessary extra administrative burden for the charities."
Palmer wants the IRS to consider allowing fair market value appraisals for newer donated cars. Charities "get a lot fewer of the top-end cars because people don't want to get burned," he said. "They understand now that the charities are liquidating these cars at less than fair market value, and they feel if they can't get a fair market value write-off, somebody eventually is going to pay fair market value," such as a body shop, he said. "So we'd like [the IRS] to look again at allowing the donors to get the fair market value on the newer cars that really have that value."
Despite his displeasure with the new requirements, Palmer stressed that donating vehicles to charity is still a good idea. "It's not quite as good a deal as it was for either party, but it's still a wonderful thing for the charities and still a terrific thing for the donors," he said. Donors "still get the tax write-off, and they still get rid of an unwanted vehicle."