Asbestos law firms. Personal injury attorney. Donating a used car. Online auto insurance.

These are among the most expensive keywords on Google AdWords. Companies pay from $60 to $110 per click for ads associated with these keywords to appear next to relevant Google search results. Less lucrative keywords cost as little as 5 cents per click.

Companies are willing to pay so much for these ads because each person that clicks on the ad has a good chance of making the company a lot of money. A sick patient interested in suing over asbestos poisoning represents a potential jackpot for a law firm. Auto insurance companies can make good money by signing up a new client.

But what is donating a car to a nonprofit doing up there? What is so lucrative about car donations?

Google search results are not the only place car donations are advertised. On billboards, in newspapers, and on the radio, charities exhort people to donate their old car in return for a tax write-off. They promise a win-win: easily get rid of an old car at a good rate, and help support charity.

Born out of an IRS policy that imagined the occasional car being donated to a family in need or a nonprofit that could use some wheels, the tax write-off for car donations has spawned a market worth hundreds of millions or perhaps even billions of dollars. Hundreds of thousands of Americans donate their used cars every year to charities, or, frequently, to for-profit companies that sell them and return a portion of the proceeds to charity. That portion that is donated to the nonprofit is often very small, raising the question of whether car donations are funding charities or subsidizing a surprisingly lucrative business.

At best, the car donation tax write-off seems to be a mediocre means of incentivizing charitable giving. A high percentage of the money written off or “donated” goes to the fees associated with selling used cars. At worst, the tax write-off is feeding a mini bonanza in which private companies profit handsomely off mundane work while donors are misled into thinking they are working with charities.

A Multi-Billon Dollar Space

The tax write-off for cars is part of an IRS policy that makes noncash contributions to charities tax deductible. The intent is to incentivize donating an old boat for use in oceanography research, old clothes to Goodwill, or a used car for a charity’s use.

In 1978, the Goodwill of the greater Washington DC area initiated a car donation drive as a way to raise funds. Instead of accepting cars that they could use or give away, they sold the 5 cars contributed by donors and put the proceeds toward their general budget. Charities across the country soon copied their creative use of the tax code. The IRS does not regularly collect statistics on car donations, but press coverage makes clear that the practice was popular and growing in the nineties. By 2000, Americans claimed $654 million in annual tax exemptions on the basis of car donations. That represented 733,000 tax returns, or .06% of all tax claims, donating a car for an average exemption of $890.

The car donation process goes as follows: Donors contact charities, often in response to posted advertisements that urge people to donate their old cars to help charity and earn themselves a tax write-off. The charity asks a few screening questions about the car (sometimes to make sure that the sale will be profitable, but many charities accept even the worst clunker as a way to engender goodwill) and then pays a tow truck to pick it up from the donor’s home and take it to an auto auction lot where it is sold. The donor transfers the title of ownership and receives a receipt and paperwork proving their donation.

The market for used car donations is likely around $2BN or more. If someone donates a car worth $2,500, they cannot reduce their tax liability by $2,500. The amount deducted reflects one’s tax bracket. In 2013, an individual with a yearly income from $87,850 to $183,250 is taxed at 28%. So, if Americans are lowering their taxes by about $654MM per year, they are donating over $2BN worth of cars.

Despite the multi-billion dollar size of the space, the US General Accounting Office, when it reported on the practice to Congress in 2003, found that only 4,300 major charities (those with annual revenues above $100,000) had car donation programs - less than 3% of such charities.

One reason that few charities pursue what seems to be a large and easy pool of funding is that relatively little of the money written off Americans’ taxes for car donations actually gets to the charities. In 2003, the General Accounting Office followed the donation of 54 vehicles to car donation drives and found that the amount received by charity for most of the vehicles was “five percent or less of the value donors claimed as a deduction on their tax returns.”

Some of that “lost” money reflects the costs of running car donation drives. Charities must pay for advertisements, towing, and often for a third party to auction of the car. But a major reason that the General Accounting Office found car donations to be such an ineffective means to fund charity (relative to the loss of tax revenue) is that people wrote off more than their car actually sold for.

IRS guidelines and policy encouraged donors to use independ resources to estimate used car prices or an independent appraisal to determine the value of their car and therefore their tax write-off. But those guidelines were written to reflect people donating goods that charities would use directly. But with the innovation of charities selling donated cars rather than using the cars themselves, that assumption no longer held. To efficiently sell cars, charities sold them at auction, where they received a lower price than they would if the owners spent time searching for a buyer willing to pay the full market value of the car.

In response, the IRS began requiring in 2005 that donors of cars valued higher than $500 receive from the charity a receipt detailing how much their car actually sold for at auction and then claim a deduction on their taxes based on that price.

We don’t know how many people donate their car today or how much money is raised through car donation drives because the Federal government does not keep tabs on car donations. Since the 2005 reform, no federal commissions or studies have investigated the practice. Some states collect data, but not all do.

Despite this reform, car donations remain an inefficient means of transferring money to charities. A 2005 report (on data from the first year after the IRS reform) from the California Attorney General found that only half of the proceeds of car donation drives accrued to charities. The disappearance of the other half is explained by the rise of for-profit car donation fundraisers.

Selling Cars is a Full Time Job

The charities benefitting from car donation drives include Susan G. Komen for the Cure, the largest and most well-funded breast cancer organization in the United States, and the Purple Heart Foundation, which assists American veterans and their families. A minority of charities raise most of their funding from car donations, and therefore deal with most to all of the donation process themselves. But the majority see it as one of many revenue streams, and prefer to streamline as much of the process of raising money as entrepreneurs do during funding rounds.

As car donation drives proliferated, private companies offering to raise money through car donations for charities have popped up. These companies have names like Car Donation Services and Car Program (LLC). They take care of every aspect of the donation, from advertising to speaking to the donor to picking up the car and selling it. In return for their services, they retain a portion of the profits.

People donating their cars to charity rarely realize that a private company is involved. Their websites are built to look like a nonprofit’s. They feature pictures of veterans, breast cancer awareness walks, or smiling children, the names of the charity or charities for whom they raise money, and the language of charitable giving. Their customer service representatives generally maintain the fiction of working for a charity when they talk to donors on the phone.

There are no laws that regulate third party car donation services, other than requirements in less than a quarter of states that they fill out paperwork to be certified or contribute regular financial disclosures. The government merely recommends that people “be generous and informed donors.”

Given that these private companies are indirectly subsidized by the government in the form of the tax breaks donors receive and that they attract customers partly by appealing to their charitable impulses, their legitimacy would seem to rest on how well they achieve their mission of fundraising for the charities they represent. The verdict is decidedly mixed.

Some of the only data available comes from the Office of the California Attorney General. California requires commercial fundraisers in the state to file financial reports, and the Office of the Attorney General has released reports on the percentage of profits going to charities.

In 2001, private car donation services in California raised $45.8 million in gross proceeds from car auctions. (Gross in the sense of the “profit” left after the company paid for the expenses of selling the car, including fees charged to pay its own administrative costs and employee salaries.) Of that, charities received $16 million - about 35 percent. In 2005, charities did better, receiving 49.03% or $17.02 million of the $34.72 million raised. As the IRS disincentivized car donation slightly with their policy adjustment so that donors could only write off the amount the car actually sold for at auction - rather than the generally higher market value - this suggests that private companies took the hit from the drop in donations rather than passing it on to charities.

Is it exorbitant for a commercial fundraiser to take 50% of gross proceeds? Reports from national and local government express scorn at 50% takes, and they seem to have some reason. That 50% figure comes after fundraisers have already paid themselves fees. The true amount that goes to the for profit fundraising company likely signficantly over 50%.

What these averages may cover up, however, is that the percentage of proceeds given to charities by more civic-minded companies may disguise the greedy actions of others. State Attorney Generals investigating car donation practices, as well as the Better Business Bureau, have reported on corporations that give charities only a small, flat rate per car sold or a cut dramatically lower than 50%. The California Attorney General’s 2001 data showed that the cut of proceeds given to charities by private companies ranged from 2% to 80%. The companies that keep most of the money for themselves are likely the ones that can bid $85 for a visitor from Google.

The Car Donation Nonprofit Profiteers

Just as private companies popped up to run car donation schemes for charities that cannot or do not want to sell donated cars themselves, a number of large nonprofits that focus on selling used cars to fundraise for charities have been founded as well. This is generally good news for charities, as a nonprofit fundraiser can pass on all of its gross proceeds to the charities it represents. But there is good reason to believe that many large nonprofit fundraising organizations may be more interested in paying fees to themselves than maximizing their contributions to charity.

One of the organizations that advertises in Google search results for the phrase “donate a car” is CarsFightingCancer.org. The website has pictures of cancer survivors undergoing chemotherapy and the pink ribbon that represents breast cancer awareness, and it proudly states that is an official IRS 501-C3 charity. Only with some digging can a viewer find that Cars Fighting Cancer is part of Others First Inc, a nonprofit that the Better Business Bureau advises donors to regard with extreme caution.

It reports that Others First pays 30% of its proceeds to consulting companies owned by Rick Frazier, a man who ran several prior car donation companies that charities accused of fraud. The Better Business Bureau writes that “the Virginia-based Military Order of the Purple Heart Foundation alleged in a court suit that an audit found widespread problems with Frazier's role in that program, including self-dealing, illegal practices and destruction of incriminating records.” Nevertheless, Others First has deals with many charities to run donation drives in their name, some worth tens of millions of dollars.

Kars 4 Kids, a nonprofit that raises nearly $30 million annually and advertises on Google and on the radio nationwide, also points to how deceptive organizations can be about whom their fundraising benefits. Although the Kars 4 Kids website shows pictures of young children and speaks of work benefitting disadvantaged children, it is actually an assumed name of Oorah Inc, a charity that “provides religious education for kids of non-observant Jews.” It is only the largest of several organizations pulling in millions of dollars in donations from car donations in New York whose proceeds go toward exclusively religious purposes under the guise of more standard charitable work.

It is also not uncommon for sham charities to make millions from car donations without donating a single penny. For example, in 2010 Shoba Bakhsh, the head of “Hope for the Disabled Kids, Inc,” pled guilty to charges of fraud. She received $2 million in donations over two years, but did not contribute any to charity. She simply forged testimonials from local hospitals that made it seem as if they received support from Hope for the Disabled Kids.

The New York Attorney General discovered Bakhsh’s fraud during an investigation into car donation drives. While it may seem like her clumsy operation would inevitably be discovered, we suspect that many other frauds go undetected for years. The IRS does not audit the deductions taxpayers claim for donating vehicles - instead prioritizing larger scale deductions - so there is no one to check that tax deductions actually benefit charity. Nor do attorney generals in most states regularly investigate car donation companies and nonprofits. The only way for a fraud to be caught is for a suspicious donor to refer it to the state attorney general. Until then, faux charities can continue to bring in “donations.

Fundraising for Profit

As we investigated the ecosystem surrounding the donated car tax write-off - from legitimate, if not terribly efficient, fundraising efforts to outright fraud - we realized that it represented just one part of the private sector’s role in fundraising for nonprofits.

The reason private companies (or shady nonprofits) can give charities such a small cut of the funds they raise in charity’s name is that the charities often have no incentive to hold the commercial fundraisers accountable. Yes, big name charities have power that allows them to extract good deals from commercial partners. And concerns about their reputation will lead them to make sure that the company running car donations in their name operates honestly.

But the majority of nonprofits are small organizations with limited capacity and a desperate need of funds. When a company or nonprofit offers to provide them with more funding in exchange for signing a contract, they have no reason to refuse and not many better options. As one of countless nonprofits, they have little leverage to negotiate a larger cut of the proceeds. And given that the fundraising company has no legal requirement to disclose their profits or inner workings, charities could have no idea how many cars the fundraiser is selling in their name and no reason to question the modest size of the checks they receive.

These same incentives are at work for companies that offer to solicit donations over the phone and on street corners on behalf of charities. Just like with car donation services, private telemarketers and canvassers cut deals with nonprofits to fundraise in their name. When they solicit donations from people, they introduce themselves as if they are part of the charity, and make no mention of their quotas and commissions.

A report from the state of Washington found that charities received 46% of funds raised by commercial fundraisers. A 2009 Charity Navigator analysis of states that require disclosure from commercial fundraisers wrote that the companies in each state passed on an average of 32 to 59 percent of the proceeds to charity, and that the costs of running telemarketing and canvassing campaigns ate up much of the charitable contributions made by donors. Every year New York releases a “Pennies for Charity” report on commercial fundraising. It regularly finds that charities receive less than 50% of the proceeds of the fundraising performed by private telemarketers and canvassers. In 2011, it also reported that “61.47 percent, or $147,874,686, of the funds raised by 82 telemarketers in 2011 was paid to fundraisers for fees and/or used to cover the costs of conducting the campaigns.”

With well over half of the money raised going to the private fundraising companies, donors’ money and tax write-offs seem to be furthering the goal of keeping telemarketers and canvassers employed more than the goals of supporting veterans and advancing cancer research. No national level data exists on commercial fundraising, but with New York State alone bringing in hundreds of millions of dollars every year, the market is easily worth billions.

Conclusion

An IRS loophole has lead to a quirky situation where charities are in the business of acquiring and selling used cars. Charities can make some money from car donations and often outsource selling donated cars and other aspects of fundraising. By doing so, they can focus on their programming: running after school programs, sending care packages to soldiers overseas, or running awareness and outreach events for terminal illnesses.

But car donation drives, along with other forms of commercial fundraising like telemarketing and canvassing, seem to be an inefficient means of supporting charitable work. Less than half of the proceeds accrue to charities, with private companies retaining the rest, and fees eat up over half of the value of the donations. This not only means that people support charities less than they intend, it also cheats the US government of revenue.

Since the IRS neither audits nor compiles any data on these tax deductions and commercial fundraisers, we also don’t know how many fundraising organizations, whether for-profit or nonprofit, exaggerate their expenses or even commit outright fraud. In many instances, it doesn’t seem that charities are making an informed decision to get into the car donation game. Instead, charities are shrugging their shoulders when approached by predatory private companies and lending them the charitable mirage they need to build a business of tax write-offs in exchange for modest contributions to their budget.

How much of people’s donations and tax write-offs have to go toward private companies fees and salaries to reach the point that it is charity for the companies, not the causes they claim to support?

There is no law against profiting off fundraising for charities. It is up to donors to do their research and donate in a way that will maximize the support they provide for charities. But donors seem to be overwhelmingly more interested in claiming tax deductions or getting rid of pesky solicitors than in asking how much of their donation will support charity. For that reason, commercial fundraisers are doing brisk business by strongly implying they are nonprofits, even though they are not.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google Plus. To get occasional notifications when we write blog posts, sign up for our email list.