The IRS announced on December 20, 2005 that it will not treat vehicles sold at auction as qualifying for the sale to needy individuals exception that permits a fair market value deduction.  Under the American Jobs Creation Act of 2004, a donor’s deduction for a vehicle donation is generally limited to the amount of the gross proceeds from the charity’s sale of the vehicle.  Under an exception to this general rule, a donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the charity of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.  Because of reportedly questionable practices of some charities claiming the exception for vehicles sold at auction, the IRS announced its clarification that auction sales do not qualify and that "a charity may be subject to penalties under sections 6701 [aiding and abetting understatement of tax liability] and 6720 [fraudulent acknowledgments with respect to donations of motor vehicles] of the Internal Revenue Code if the charity sells a donated vehicle at auction and provides the donor an acknowledgement that indicates anything other than the deduction may not exceed the gross proceeds from the sale."

Read the IRS Announcement here.

Read Independent Sector’s summary of "Vehicle Donation Program Reforms" here.