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The IRS Is Looking Under the Hood of Car Donations

Expect scrutiny if you claim top dollar for your rusting heap.

Is your old heap of a car worth little more than its scrap metal value? "Push, pull or drag it in," urge some charities and used-car dealers, and you'll get a tax write-off for your donation.

Not so fast, says the

Internal Revenue Service

. Concerned about inflated values for donated junkers and improper business dealings between some charities and car dealers, the IRS this week issued a warning.

Charitable car donations have moved to the top of its list of tax-exempt audit items, says Marcus Owens, director of the IRS' Exempt Organization division.

As noncash items, car donations always have been a red flag for IRS auditors. Now they're an even bigger one.

Let's Make a Deal

Donating a car can be a good deal for you and gravy for a charity. Most charities will come to pick up your car, and you'll get a charitable deduction for its fair market value (reported on

Schedule A

-- Itemized Deductions

). The charity can use the car or sell it and keep the proceeds. In 1998 alone, the

Salvation Army

grossed an estimated $17 million from donated cars.

But many charities don't have the facilities to handle car donations or don't want to deal with them. So they hire intermediary companies to act as brokers. These intermediaries advertise for donated cars, fix them up and auction them off. A percentage of their proceeds then goes to charitable organizations. Legitimate intermediaries send as much as 70% or more of the car-sale proceeds to charities.

But the IRS wants to crack down on arrangements that call for intermediaries to pay a fixed fee to charities, regardless of the amount the car fetches at auction.

In the IRS' view, that is a royalty arrangement, and if your car was involved in one, your donation would not be eligible for a tax deduction. That's because royalty arrangements are business transactions, and in most cases, the money paid isn't directly related to the value of your contribution. In effect, you've handed over your keys to the intermediary business, not the charity.

"People are being misled," says Owens.

If you take a deduction -- even unwittingly -- for a donation to an intermediary involved in such a royalty arrangement, you could be liable for back taxes and penalties.

"Penalties could be assessed on everyone from the donor to the dealer to the charity, depending on their level of knowledge and involvement," says Owens.

And if you knew what you were doing, you could be looking at civil tax penalties or even criminal charges.

Inflated Valuations and Freebies

The whole "push, pull or drag" advertising come-on also concerns the IRS.

It's common for car donation programs to determine your charitable deduction based on an industry average drawn from dealers' used-car auctions -- the so-called blue-book value. (Check out the

Kelley Blue Book

Web site for examples of these trade-in tables.)

"But the assumption of these tables is that the car is in driveable -- if not good -- condition," says Owens.

Many dealers, however, offer full blue-book value even if it doesn't run or have a motor. That pumped-up deduction won't fly if the IRS gets wind of it.

And be wary of freebies some intermediaries offer in return for a donation -- another practice that could land you in hot water with the IRS.

For example, the

Car Donation Charities

Web site offers incentives for donations that include three-day "mini-vacations" to major resorts, $500 in grocery coupons and 100 rolls of

Kodak

TheStreet Recommends

film.

But if you receive something in return for a donation, your charitable deduction must be reduced by the value of the freebie. So unless you're donating a new

BMW

, your free mini-vacation might wipe out your charitable deduction.

Use Protection

If you're thinking about donating your car, here are some suggestions to ensure your write-off:

Find a charity that has its own program, like the Salvation Army or the

American Cancer Society

. Be wary of intermediary companies.

Make sure the charity is a legitimate tax-exempt organization. Ask the organization for copies of its latest annual report and find how it spent its funds in the past fiscal year.

If you must deal with an intermediary, find out how much money from the sale of your car is going to the charity. If you hear "fixed rate," run for the hills.

Be aware of your title transfer. The title to your car should go to the charity, not the used-car dealer. If the title does go to the dealer, make sure it is part of the dealer's arrangement with the charity. There are some instances where the title is not transferred until the car is auctioned off to its new owner. But be very wary of this, too. The car is still in your name, so you might be held liable if something happens.

Substantiate the amount of your deduction. Keep a copy of the blue-book page, take pictures of your car and pull out classified ads of cars similar to yours so you can prove your deduction was the going rate. No matter what the charity tells you, you are ultimately liable for the amount you take as a deduction. If you exaggerate it, you run the risk of an audit, says Bennett Weiner, a vice president at the national office of the

Better Business Bureau

in Arlington, Va.

Remember, if you take a deduction for $250 or more for the value of your car, you'll need a receipt from the charity. And if the deduction is for more than $500, you'll have to file

Form 8283

-- Noncash Charitable Contributions

with your tax return. If the car's value is $5,000 or more, you'll need an independent appraisal as well.

The Right Way

There are many legitimate programs that take the proper precautions.

The Salvation Army, for example, gives a receipt but leaves it up to you to determine the value of the donation. "We have been very careful with this because we realize the jeopardy we can be placed in. That's why don't give a price," says Lt. Col. Rich Norris, commander of the Southern division of the Salvation Army in Atlanta.

The American Cancer Society also shuns intermediaries for its program, Cars for a Cure. "We're not paying anyone to broker this. Even the towers' time is donated," says Everett J. Merrill, director of communications in the society's Northeast office in New Jersey.

Some intermediaries are OK, too.

Charity Motors

of Detroit, for example, takes your car, fixes it up if necessary and sells it. The average donated car is worth $400, the company says. Of the sales proceeds, 70% go to charity, according to a company spokesman. Legitimate intermediaries won't mind answering questions about these figures.

So don't hesitate to donate. Just be sure where the car's going as it's being towed away.