News and analysis
January 16, 2013

IRS Lax Action on Noncash Gifts Costs U.S. $1-Billion, Audit Says

Richard White/Chronicle of Philanthropy

The Internal Revenue Service is so lax in asking taxpayers to prove the value of gifts of art, real estate, cars, and other noncash contributions to charities that the federal government may be losing $1-billion a year, according to a new audit by a federal watchdog agency.

This is not a new problem. This week’s report marks the fourth time since 2007 that the U.S. Treasury’s inspector general for tax administration has found such weaknesses and urged the IRS to improve its process for checking that donors have provided proper records to document the value of their gifts.

The inspector general estimated that more than 273,000 taxpayers claimed $3.8-billion in deductions for 2010 without providing sufficient paperwork to prove the value of the items. Given tax-deduction rates, that’s more than $1-billion in lost revenue, the inspector general said.

The IRS said it did not believe it was costing the federal government such steep losses. Even if the tax agency hasn’t been as rigorous at it could have been in making sure donors properly valued their gifts, that doesn’t mean that people were necessarily cheating on their taxes, the tax agency said.

Car Gifts

One of the big areas of concern for the IRS has been how to police the donation of cars and other vehicles.

The audit found that the IRS is not doing enough to identify taxpayers and charities that fail to follow the reporting rules for donations of cars. Donors must show the IRS proof of the amount the charity received from selling a car for cash.

The inspector general identified 35,846 tax returns in the 2011 tax year that claimed $77-million in motor-vehicle gifts that lacked proper paperwork.

Obama Action Urged

Sen. Charles Grassley, an Iowa Republican, raised questions about the amount of inflated claims by donors of cars and other goods nearly a decade ago, and in 2005 a law he drafted started to require taxpayers to prove the worth of items they donate.

After the audit was released, Sen. Grassley criticized the IRS for failing to enforce the 2005 law vigorously and also said President Obama should pay more attention to the issue.

“Instead of rushing to raise taxes, the administration should do more to collect the taxes already owed,” Mr. Grassley said in an e-mail statement. “The president has insisted on raising taxes on upper-income taxpayers, yet the report shows the administration is giving a free pass to those claiming high-value deductions for donations of vehicles, art, or securities.”