Latest News from The IRS

IRS Officials Urge Caution and Care for Those Making a Car Donation

No Change in Interest Rates for the First Quarter of 2004

Businesses Using IRS.gov to Get Employer Identification Numbers

Simple Steps Can Help Taxpayers with Charitable Donations

2004 Standard Mileage Rates Set — 800,000 More Businesses Eligible

Don't Pay Too Much Tax — or Too Little

Simple Steps Can Help Taxpayers with Charitable Donations

IR-2003-134, Dec. 1, 2003

WASHINGTON — As the end of the year approaches, the Internal Revenue Service reminds taxpayers that they may be able to use their gifts to tax-exempt charitable and religious groups to reduce their taxes.

Taxpayers also need to keep in mind some simple steps to make sure they get appropriate benefit for their generous donations. In particular, there are some important guidelines for donating used cars and other property, such as stocks and bonds.

The tax benefit for charitable contributions is only available for taxpayers who itemize deductions — about one-third of all filers. Those who take a standard deduction receive no additional tax benefit for their contributions.

In 2000, the last year for which complete data is available, about 37.5 million taxpayers made deductible charitable contributions totaling nearly $140.7 billion. Of these gifts, nearly $98.2 billion were cash donations.

Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your 2003 deduction would be $200. You include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

Those itemizing deductions reduce their taxable income by the total contributed to qualified tax-exempt organizations, with some limits. The tax saving usually equals the deduction times the marginal tax rate – the top rate for the person’s income level.

For example, an individual with a taxable income of $50,000 donates $2,000 to his or her church. The tax savings from this generosity will be $500 — $2,000 times the taxpayer’s marginal tax rate of 25 percent.

Donations of stock or other property are usually valued at the fair market value of the property. For stocks and bonds with an active market, the fair market value is the average price between highest and lowest selling price on the valuation date. Figuring the value of other personal property can be more complicated.

For example, determining the value of a donated used car requires weighing several factors. Some car donation program operators have mistakenly suggested that donors can take as a deduction the full value listed in an established used car pricing guide. For additional information, see IRS News release 2001-112, IRS and State Charity Officials Urge Care When Making a Car Donation.

The tax law, however, allows a deduction for only the fair market value of the car. Fair market value takes into account not only the year, the model and the mileage of the car, but also the local market and the vehicle’s condition. As a result, the fair market value of the taxpayer’s car may be substantially different than the average price listed in an established used car guide.

The IRS also reminds taxpayers to keep appropriate records to substantiate the value of their gifts. For example, for any single gift of $250 or more, a taxpayer must have a written acknowledgement from the charity by the earlier of the date the person files the tax return or the filing deadline, including extensions. A person donating property valued at more than $5,000 must obtain a qualified written appraisal.

Taxpayers can find help regarding the donations they make in Publication 526, Charitable Contributions. A second reference, Publication 561, Determining the Value of Donated Property, answers many of the questions that donors have when they make noncash contributions.

Businesses Using IRS.gov to Get Employer Identification Numbers

IR-2003-136, Dec. 8, 2003

WASHINGTON — Businesses and tax professionals are turning to an online application form on IRS.gov to get new employer identification numbers. The Internal Revenue Service has issued more than 498,081 of the numbers through its online application since it became available in April.

The online application form immediately issues a new employer identification number, or EIN, eliminating both paperwork and the usual four-to-10 day wait to receive an EIN through paper processes. The IRS assigns the nine-digit numbers to identify taxpayers. The number is required for a host of purposes and getting it quickly is important for someone starting a business. A business cannot establish a bank account, for instance, without a federal EIN.

“Making EINs available to IRS customers on an immediate and permanent basis is an important step in improving our partnership with the business community,“ Commissioner Mark W. Everson said. "We want to reduce burden for businesses and tax professionals wherever possible."

By the end of November 2003, the IRS was receiving 37.5 percent of all EIN applications through the Internet. The online application mimics the paper Form SS-4, Application for Employer Identification Number. EIN applications can also be submitted by phone, fax or by mail. Applications faxed or mailed are often incomplete, contain errors and frequently require additional contact with the applicant by an IRS employee. The online application requires that all information needed to process the application be submitted before the EIN is assigned to the taxpayer.

The easiest way to get to the online EIN application is to type “EIN” in the IRS Keyword search on the IRS.gov home page.

The online EIN application form joins several IRS Business Systems Modernization products already working to reduce taxpayer burden and improve IRS employee’s service to taxpayers. These new products and services include:

• Where’s My Refund? — Provides taxpayers with their refund status over the Internet. Taxpayers used the service more than 17.6 million times in 2003.
• Where’s My Advance Child Tax Credit? — Gives taxpayers the status of their Advance Child Tax Credit checks over the Internet. So far, taxpayers have used the service nearly 15 million times.
• e-services — A suite of products that provide tax professionals and those who file select information returns, such as banks and other financial institutions, with new choices for working electronically with the IRS.
• Customer Communications — Modernized call systems cut by half taxpayers’ call-waiting time and the number of abandoned calls. It also introduced bilingual voice recognition capabilities, which helped double the number of Spanish calls.
• Customer Relationship Management — Provided nearly 4,000 revenue agents with direct laptop access to tax computation software.
• HR Connect — Allows 73,000 IRS users to perform many personnel actions online.
  

No Change in Interest Rates for the First Quarter of 2004

IR-2003-138, Dec. 12, 2003

WASHINGTON — The Internal Revenue Service today announced there will be no change in the interest rates for the calendar quarter beginning Jan. 1, 2004. The interest rates are as follows:

four (4) percent for overpayments [three (3) percent in the case of a corporation];

four (4) percent for underpayments;

six (6) percent for large corporate underpayments; and

one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during October 2003.

IRS Officials Urge Caution and Care for Those Making a Car Donation

IR-2003-139, Dec. 15, 2003

WASHINGTON — The Internal Revenue Service issued a consumer alert today to help taxpayers avoid potential pitfalls when they donate their automobiles to charities.

The IRS advises that taxpayers contemplating such donations should ask many questions and carefully consider just how much of the proceeds from the car will go to their intended charity.

A recent federal study indicates that in many instances such vehicle contributions may help the intended charities far less than taxpayers think.

“We encourage people to proceed carefully when donating vehicles,” said IRS Commissioner Mark W. Everson. “Supporting charitable activities through tax deductible contributions is an important element of tax law and serves the national interest. But people should know that in some cases the donation is providing little value."

In one donation reviewed by the General Accounting Office (GAO), a taxpayer donated a 1983 truck valued at $2,400, but after the fundraiser sold the vehicle at auction and deducted administrative and advertising costs, the charity received $31.50.

A California study revealed that 80 percent of charities contracting with fundraisers to run their car donation program received less than 60 cents for every dollar value of vehicle donated.

Across the nation, an increasing number of charities have turned to car-donation programs in recent years as an effective way to raise money. And these programs, if well managed by the charity, can offer significant benefits for the exempt organization and the taxpayer.

In addition, IRS officials are concerned that, as the end of the tax year approaches and taxpayers finalize their charitable donations, many may not know enough about IRS recordkeeping and filing requirements.

Of 129 million individual returns filed for tax year 2000, the GAO estimates 733,000 returns had a tax deduction for a vehicle donation. These donations were valued at about $2.5 billion, reducing taxpayer liability by an estimated $654 million.

For a taxpayer, the appeal of a car donation is simple: Unload an old car, help a worthy cause and take advantage of tax provisions designed to support the generosity of Americans. Taxpayers who itemize deductions on their tax return can deduct no more than the fair market value of their contributions to qualified charities.

The proliferation of car donation programs, however, has taken place without taxpayers always understanding what they must do to take advantage of the deduction.

“A few simple steps can help avoid headaches for taxpayers,” Everson said.

IRS officials recommend that people who want to donate their vehicle take the following steps:

Check that the Organization Is Qualified — Taxpayers must make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can use the IRS Web site to check that an organization is qualified by searching Publication 78 at www.irs.gov/bus_info/eo/ eosearch.html. Publication 78 is an annual, cumulative list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. They frequently are not listed in Publication 78. Donations to these institutions are tax deductible.

Speak Directly to the Charity — Many donors also want to make sure their contribution is used for the charitable purpose they intend. The IRS urges donors to ask whether those soliciting the car donation are officials of the charity itself or a private fundraiser acting on the charity's behalf. If it is a private fundraiser, what will it do with the vehicle? Will the car be fixed up and given to the poor and needy? Or will it be resold? And if it is resold, what share of the proceeds will go to the charity? A donor can ensure the donation furthers the intended charitable purpose by obtaining acceptable responses to these questions.

Examine State Filings for More Information — Taxpayers can also review the organization’s state registration and financial filings. These documents are commonly filed with a state charity regulator suss ch as the State Attorney General’s Office or the Secretary of State’s Office. Donors can use these records to find out how long a charity has been in existence and to compare the percentage of revenue the charity spends on its charitable programs to the percentage it spends on administrative costs.

Itemize in Order to Benefit — Many taxpayers can’t take a deduction for car donations because they don’t itemize deductions on their personal tax return. For taxpayers, the decision to itemize is determined by whether their total itemized deductions are greater than the standard deduction (for 2003, the standard deduction will be $4,750 for single; $9,500 for married filing jointly). Just under one-third of the nearly 129 million individual taxpayers itemized in 2000, the last year for which complete data is available.

Calculate the Fair Market Value — The donor must take many factors into consideration to establish the value of the car. Many used-car buying guides contain step-by-step instructions so that readers can make adjustments to the value of a car for accessories, mileage and other indicators of its general condition. Both IRS Publication 526, Charitable Deductions, and IRS Publication 561, Determining the Value of Donated Property, provide detailed instructions.

Deduct Only The Car’s Fair Market Value — Some car donation program operators have mistakenly claimed that donors can take the full “Blue Book’’ value of their car for a deduction. The IRS, however, will only allow a deduction for the fair market value of the car. Fair market value takes into account many factors, including the vehicle’s condition. The fair market value of the taxpayer’s car may be substantially different from the “Blue Book” value.

Document the Charitable Contribution Deduction — For vehicle donations, taxpayers must document the car donation and its fair market value. Recordkeeping requirements are comprehensive and vary depending on the amount of the contribution and the total amount of the charitable deduction. IRS Publication 526 details requirements for the types of receipts taxpayers must obtain and the forms they must file.

Contact State Charity and IRS Officials When in Doubt — Donors with questions about whether a contribution is deductible should call the IRS at 1-800-829-1040 or for TTY/TDD help, call 1-800-829-4059. Donors concerned that contributions are being solicited for fraudulent purposes should contact the appropriate state charity official, who is often located in the state attorney general's office. A list of state charity official offices can be found online at www.nasconet.org, and a list of state attorneys general can be found at www.naag.org.

In 2000, the last year for which complete data is available, about 37.5 million taxpayers made deductible charitable contributions totaling nearly $140.7 billion. Of these gifts, nearly $98.2 billion were cash donations.

2004 Standard Mileage Rates Set — 800,000 More Businesses Eligible

IR-2003-121, Oct. 15, 2003

WASHINGTON — The Internal Revenue Service today released the optional standard mileage rates to use for 2004 in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes.

To reduce a recordkeeping burden, the IRS also announced that taxpayers who use no more than four vehicles at the same time for business purposes may use the standard mileage rate, starting in 2004. Currently, those using more than one vehicle at a time cannot use the standard rate at all, leaving them to track the actual expenses for each vehicle.

“With this change, more than 800,000 businesses will become eligible to use the standard mileage rate,” said IRS Commissioner Mark W. Everson. “This reflects our ongoing interest in reducing the burden for businesses to comply with the tax laws.”

Although many taxpayers may still claim actual vehicle expenses for various reasons, the IRS estimates that small businesses will save 8-10 million hours a year in recordkeeping with this expansion of the standard rate option.

A taxpayer may not use the standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, or for any vehicle used for hire.

Beginning Jan. 1, 2004, the standard mileage rates for the use of a car (including vans, pickups, or panel trucks) will be:

37.5 cents a mile for all business miles driven, up from 36 cents a mile in 2003;
14 cents a mile when computing deductible medical or moving expenses, up from 12 cents a mile in 2003; and
14 cents a mile when giving services to a charitable organization.
Members of Congress welcomed the change.

Senator Olympia J. Snowe of Maine, chair of the Senate Committee on Small Business and Entrepreneurship, said, "I applaud the IRS for adopting this simplification measure for small businesses. This change will allow certain small businesses to put a stop to the time-consuming, costly and inconvenient practice of maintaining detailed paper records and, instead, use a simpler, standard mileage rate for business travel expenses when preparing their taxes. The IRS is providing the kind of relief that small business owners critically need: relief that allows them to cut the time spent complying with tax laws while expanding the time left over to do what they do best, namely running their businesses and creating critical jobs for this economy."

Rep. Don Manzullo of Illinois, chairman of the House Small Business Committee, said,
"These changes by the Internal Revenue Service will provide additional needed tax relief to our struggling small businesses so they can once again lead us to recovery. More than 800,000 small businesses will benefit from these changes. In addition to the tax reductions, they will save eight to 10 million hours a year in record-keeping burdens so that they can now focus on their businesses. I congratulate IRS Commissioner Everson for his leadership in making these changes and helping America's small businesses."

Rep. Doug Ose of California, Chairman of the House Government Reform Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, which has principal oversight over paperwork reduction, said, "I applaud Commissioner Everson’s initiative, which will result in a 8-10 million hour burden reduction for small businesses. The paperwork burden on small business is enormous. This reduction in tax recordkeeping is a step in the right direction."

The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. The primary reason for the mileage rate increases is the rise in fuel prices during the study period, which ended on June 30. An independent contractor, Runzheimer International, conducted the study on behalf of the IRS. The charitable standard mileage rate is set by law.

Revenue Procedure 2003-76 contains additional information on these standard mileage rates. It will appear in Internal Revenue Bulletin 2003-43, dated October 27, 2003.

Don't Pay Too Much Tax — or Too Little


With the year winding down, you may want to take a few minutes to make sure what is being withheld from your paycheck matches your actual 2003 tax liability. It's especially important in light of tax law changes enacted during this year.

If you're having too much tax withheld, that's money you can't use until you get your refund. If you're not having enough withheld, you will owe tax at the end of the year, and you may even have to pay a penalty. Generally, a penalty will apply if your withholding and estimated tax payments total less than 90 percent of your current year’s tax liability and less than 100 percent of the previous year's tax.

But if you act now, you'll still have time to get on track with your withholding and avoid any unforeseen tax surprises next year. You should pay particular attention to your withholding if you received a big refund check this year or if you had to make a tax payment that was more than you could comfortably pay.

Also check your withholding if you had a significant change in your life this year, like marriage, divorce, birth or adoption of a child, purchase or sale of a home, or retirement. And there is a good chance you're not having enough withheld if you have more than one job, your spouse works, you have income not subject to withholding, such as rent, interest, dividends or capital gains, or you owe other taxes like self-employment or household employment taxes.

Some tax law changes this year may also have thrown your tax payments off track, although the result is probably in your favor. Lower tax rates and higher standard deductions for married persons will save you taxes — employees have already seen these tax cuts in their paychecks. Lower tax rates for capital gains after May 5, 2003, also apply to qualified dividend income for the whole year. If you had already planned for higher taxes on these items, you may be able to reduce your withholding or estimated tax payments.

You can adjust the amount withheld from your paycheck by giving your employer a new Form W-4. Or you may revise the estimated taxes you pay with Form 1040-ES.

Need help in figuring out whether you are withholding enough? Look at Publication 919, How Do I Adjust My Tax Withholding? Or you can check out our online Withholding Calculator. With the help of current pay stubs and a copy of last year’s tax form, you can see if you are withholding the right amount. You can then use the calculator results to fill out a new Form W-4.

So go ahead and get on track with your withholding. It makes good financial sense to bring the tax you pay closer to the tax you owe.