Tax Debt
Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes Gao ID: GAO-06-755T May 25, 2006The Office of Personnel Management (OPM) administers the annual Combined Federal Campaign (CFC), which gave more than 22,000 charities access to the federal workplace, helping those in need by collecting more than $250 million in donations during the 2005 campaign. The success of the campaign is predicated on each donor's confidence in a system that ensures donations reach charitable organizations that have met the CFC's specific eligibility requirements and are legitimate charities. For example, to be eligible, each charity must have formally received from the Internal Revenue Service (IRS) tax-exemption designation under 501(c)(3) of the Internal Revenue Code. The Subcommittee on Oversight is reviewing tax-exempt status entities and asked GAO to determine whether charitable organizations participating in the CFC were remitting their payroll and other taxes to the IRS as required by law. Specifically, GAO was asked to investigate and determine whether and to what extent (1) charities listed in the 2005 CFC have unpaid payroll and other taxes; (2) selected charities, their directors or senior officers are abusing the federal tax system; and (3) OPM screens charities for federal tax problems before allowing them to be listed with the CFC.
More than 1,280 CFC charities, or about 6 percent of charities in the OPM- administered 2005 campaign, had tax debts totaling approximately $36 million as of September 30, 2005. The majority of delinquent charities owed less than $10,000. Approximately $28 million of this debt represented payroll taxes, penalties, and interest dating back as far as 1988. The remaining $8 million represented annual reporting penalties, excise taxes, exempt organization business income, unemployment taxes, and other types of taxes and penalties during this same period. Further, at least 170 of the charities with tax debt received about $1.6 billion in federal grants in 2005. GAO investigated 15 CFC charities, selected primarily for the amount and age of their outstanding tax debt. All 15 charities engaged in abusive and potentially criminal activity related to the federal tax system. Although exempt from certain taxes (e.g., federal income tax), these charities had not forwarded payroll taxes withheld from their employees along with other taxes to the IRS. Willful failure to remit payroll taxes is a felony under U.S. law. However, rather than fulfill their role as trustees of this money and forward it to the IRS, the directors and senior officers diverted the money for charity-related expenses, including their own salaries, some of which were in excess of $100,000. We referred all 15 of these charities to the IRS for consideration of additional collection or criminal investigation. OPM does not screen CFC charities for federal tax problems or independently validate with the IRS whether the charity is truly a tax-exempt organization. Federal law prevents OPM from accessing taxpayer information required to screen for tax delinquency, although information on exempt status is available to the public. Consequently, OPM was unaware of the charities that owed federal tax debt and cannot provide assurance that the more than 22,000 participating charities are tax-exempt organizations. To demonstrate the vulnerability of this process, GAO created a fictitious charity and successfully applied to three large local campaigns.
GAO-06-755T, Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes
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Testimony:
Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 11:00 a.m. EDT:
Thursday, May 25, 2006:
Tax Debt:
Some Combined Federal Campaign Charities Owe Payroll and Other Federal
Taxes:
Statement of Gregory D. Kutz, Managing Director Forensic Audits and
Special Investigations:
GAO-06-755T:
GAO Highlights:
Highlights of GAO-06-755T, a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives.
Why GAO Did This Study:
The Office of Personnel Management (OPM) administers the annual
Combined Federal Campaign (CFC), which gave more than 22,000 charities
access to the federal workplace, helping those in need by collecting
more than $250 million in donations during the 2005 campaign. The
success of the campaign is predicated on each donor‘s confidence in a
system that ensures donations reach charitable organizations that have
met the CFC‘s specific eligibility requirements and are legitimate
charities. For example, to be eligible, each charity must have formally
received from the Internal Revenue Service (IRS) tax-exemption
designation under 501(c)(3) of the Internal Revenue Code.
The Subcommittee on Oversight is reviewing tax-exempt status entities
and asked GAO to determine whether charitable organizations
participating in the CFC were remitting their payroll and other taxes
to the IRS as required by law. Specifically, GAO was asked to
investigate and determine whether and to what extent (1) charities
listed in the 2005 CFC have unpaid payroll and other taxes; (2)
selected charities, their directors or senior officers are abusing the
federal tax system; and (3) OPM screens charities for federal tax
problems before allowing them to be listed with the CFC.
What GAO Found:
More than 1,280 CFC charities, or about 6 percent of charities in the
OPM- administered 2005 campaign, had tax debts totaling approximately
$36 million as of September 30, 2005. The majority of delinquent
charities owed less than $10,000. Approximately $28 million of this
debt represented payroll taxes, penalties, and interest dating back as
far as 1988. The remaining $8 million represented annual reporting
penalties, excise taxes, exempt organization business income,
unemployment taxes, and other types of taxes and penalties during this
same period. Further, at least 170 of the charities with tax debt
received about $1.6 billion in federal grants in 2005.
GAO investigated 15 CFC charities, selected primarily for the amount
and age of their outstanding tax debt. All 15 charities engaged in
abusive and potentially criminal activity related to the federal tax
system. Although exempt from certain taxes (e.g., federal income tax),
these charities had not forwarded payroll taxes withheld from their
employees along with other taxes to the IRS. Willful failure to remit
payroll taxes is a felony under U.S. law. However, rather than fulfill
their role as trustees of this money and forward it to the IRS, the
directors and senior officers diverted the money for charity-related
expenses, including their own salaries, some of which were in excess of
$100,000. We referred all 15 of these charities to the IRS for
consideration of additional collection or criminal investigation.
Table: Examples of Abusive and Potentially Criminal Activity by CFC
Charities:
Type of charity: Museum:
Tax debt: Over $100,000:
Charity activity: Repeatedly underpaid payroll taxes. Federal and local
liens were filed against the charity. The IRS assessed a penalty
against personal assets of the director who admitted to underpaying
payroll taxes to fund operations.
Type of charity: Health service provider: Tax debt: Over $400,000:
Charity activity: Repeatedly remitted payroll taxes late while accruing
interest and penalties. Executives were paid through a contractor that
received $3 million from the charity. Received more than $2 million in
federal grants from the Department of Health and Human Services.
Type of charity: Mental health clinic: Tax debt: Over $1.5 million:
Charity activity: Repeatedly failed to remit or to remit timely payroll
taxes for the last 15 years. Director diverted payroll tax to pay his
and employee salaries.
Source: GAO‘s analysis of IRS, public and other records.
[End of Table]
OPM does not screen CFC charities for federal tax problems or
independently validate with the IRS whether the charity is truly a tax-
exempt organization. Federal law prevents OPM from accessing taxpayer
information required to screen for tax delinquency, although
information on exempt status is available to the public. Consequently,
OPM was unaware of the charities that owed federal tax debt and cannot
provide assurance that the more than 22,000 participating charities are
tax-exempt organizations. To demonstrate the vulnerability of this
process, GAO created a fictitious charity and successfully applied to
three large local campaigns.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-755T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory D. Kutz at (202)
512-7455 or kutzg@gao.gov.
[End of Section]
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to assist the subcommittee as it reviews
tax-exempt organizations. This testimony builds on our experience
investigating entities that have abused the federal tax system[Footnote
1] while benefiting from doing business with the federal
government.[Footnote 2] Today, our testimony addresses whether
organizations exempt from federal income taxes were delinquent in
remitting payroll and other federal taxes to the Internal Revenue
Service (IRS) while participating in the 2005 Combined Federal Campaign
(CFC).
The CFC, which is administered and promoted by the Office of Personnel
Management (OPM) and about 300 local campaigns, gave more than 22,000
charities access to the federal workplace, where they collected more
than $250 million in donations during the 2005 campaign. The success of
CFC has made a notable difference in the benefits provided to those in
need. The CFC represents that it brings three unique qualities to those
it serves--"the three C's of CFC"--by offering donors a "choice" to
select from thousands of charities to support, allowing the
"convenience" of making payroll deductions, and ensuring donors'
"confidence" that charities listed with the campaign meet CFC's
specific eligibility requirements. In the spirit of ensuring that
donors can trust their contributions are going to organizations that
have met CFC's specific eligibility requirements, and are legitimate
charities, you asked us to investigate charities listed with the CFC.
Specifically, you asked us to investigate and determine whether and to
what extent (1) charities listed in the 2005 CFC have unpaid payroll
and other federal taxes; (2) selected charities, their directors or
senior officers are abusing the federal tax system; and (3) OPM screens
charities for federal tax problems before allowing them to be listed
with the CFC.
As you know, to qualify as exempt from federal income taxes, an
organization must meet the requirements set forth in the Internal
Revenue Code[Footnote 3] and formally receive tax-exemption designation
under 501(c)(3) to participate in the CFC. Regardless of tax-exempt
status, all employers are required to withhold from their employees'
wages payroll taxes for Social Security and Medicare and other taxes.
Willful failure to remit payroll taxes is a felony under U.S.
law.[Footnote 4]
To determine whether and to what extent CFC 501(c)(3) charities had
unpaid payroll and other federal taxes, we obtained and analyzed IRS
unpaid tax debt data as of September 30, 2005. We matched organizations
with unpaid tax debts to the CFC's list of charities that participated
in the 2005 campaign.[Footnote 5] To further analyze abuse of the
federal tax system by selected charities, their directors, or senior
officers, we applied certain criteria--the amount of outstanding tax
debt, the number and age of reporting periods for which taxes were due,
and the type of outstanding tax--to select 15 organizations for
detailed audit and investigation. For these 15 organizations, we
reviewed tax records and performed additional searches of criminal,
financial, and other public records.
To determine whether OPM screens organizations for federal tax problems
before allowing them to be listed with the CFC, we identified the legal
criteria for doing so and gained an understanding of the screening
process through meetings with OPM's Office of CFC Operations and others
responsible for processing applications. To test OPM's process of
screening for legitimate charities, we created a fictitious charity and
applied to three large campaigns in various parts of the country. We
also matched the CFC's list of charities that participated in the 2005
campaign against the list of all tax-exempt organizations identified by
the IRS to determine whether non-tax-exempt organizations participated
in the 2005 campaign. For further details on our scope and methodology,
see appendix I.
We conducted our audit work from January 2006 through May 2006 in
accordance with U.S. generally accepted government auditing standards.
We performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Summary:
More than 1,280 CFC charities had tax debts totaling at least $35.6
million as of September 30, 2005. This represented nearly 6 percent of
the charities that participated in the OPM-administered 2005 campaign.
Of this debt, $27.7 million represented payroll taxes, penalties, and
interest dating back as far as 1988. The remaining $7.9 million
includes annual reporting penalties, excise taxes, exempt organization
business income taxes, unemployment taxes, and other types of taxes and
penalties. The majority of the 1,280 delinquent charities, 78.6
percent, owed less than $10,000 in delinquent taxes. The $35.6 million
in delinquent taxes is likely understated because we took a
conservative approach to identifying the amount of tax debt owed to the
IRS by CFC charities. The delinquent tax totals do not include amounts
for charities that do not file required tax returns and related taxes
or charities that underreport unrelated business income or payroll
taxes.
In addition to CFC donations, we found that more than 170 of these tax-
delinquent charities received about $1.6 billion in federal grants
during fiscal year 2005. Five of 15 case study charities we reviewed in
detail were among the more than 170 charities that received federal
grants. These 5 charities received grants from the Departments of
Health and Human Services (excluding Medicaid) and Education that
totaled more than $6.5 million.
Our detailed audit and investigation of the 15 CFC charities with tax
debt and their directors or senior officers identified abusive and
potentially criminal activity. Although charities are exempt from
certain taxes (e.g., federal income tax), the executives of the 15
charities we investigated were required by law but failed in their
roles as "trustees" to forward payroll taxes to the IRS, which include
amounts withheld from their employees' wages for Social Security,
Medicare, and the employer's matching portion of these taxes and
individual income taxes.
During interviews, three of the 15 selected charities' executives
denied owing payroll and other taxes when IRS records showed otherwise.
Executives from 5 other charities explained that they knowingly
withheld payroll taxes in order to have enough funds available to pay
for charity activities and the salaries of charity employees. As a
result of remitting tax payments late, the charities accumulated tens
of thousands of dollars in penalties and interest. Our investigations
also showed that several of the executives who potentially could be
assessed trust fund recovery penalties for the debts of their charities
had salaries in excess of $100,000 and owned significant personal
assets. In addition, according to independent audit reports, some of
the charities appeared to have significant cash flow problems. Willful
failure to remit payroll taxes is a felony under U.S. law.[Footnote 6]
We referred all 15 cases detailed in our report to the IRS so that it
can determine whether additional collection action or criminal
investigation is warranted.
Neither OPM nor the approximately 300 local campaigns dispersed
throughout the United States screen charities for federal tax problems
before allowing the charities to be listed with the CFC. OPM policies
do not require such screening. Additionally, federal law generally
prohibits the disclosure of taxpayer data and, consequently, even if
OPM had specific policies to check for unpaid taxes, it has no access
to a specific charity's tax data. The administration of CFC does not
have the internal controls necessary to assure donors that charities
listed with and backed by the CFC are meeting federal laws.
We also found that OPM, its local campaigns, and federations do not
validate with the IRS each CFC applicant's tax-exempt status. To be
eligible for the CFC, a charity must submit as part of its application
a copy of a standard IRS letter showing that it has received tax-
exemption status from the IRS under 501(c)(3) of the Internal Revenue
Code.[Footnote 7] To demonstrate the vulnerability of OPM's lack of
validation of tax-exempt status, we applied as a fictitious charity to
three local campaigns using fake documents and an erroneous IRS
taxpayer identification number. In all three cases, our fictitious
charity was accepted into the local CFC. Furthermore, our match of CFC
charities from the 2005 campaign against IRS's database of tax-exempt
organizations identified charities whose 501(c)(3) status could not be
confirmed. Therefore, we referred these charities to OPM and IRS for
further review and confirmation of their tax-exempt status.
More Than 1,280 CFC Charities Had Tax Debts Totaling $35.6 Million:
Based on our analysis, more than 1,280 CFC charities had federal tax
debts totaling $35.6 million as of September 30, 2005. This represented
nearly 6 percent of the charities that participated in the OPM-
administered 2005 campaign. $27.7 million of this debt represented
payroll taxes, penalties, and interest dating as far back as 1988. The
remaining $7.9 million includes annual reporting penalties, excise
taxes, exempt organization business income, unemployment taxes, and
other types of taxes and penalties. In performing our analysis, we took
a conservative approach to identifying the amount of tax debt owed by
the CFC's charities, and therefore the number of delinquent charities
and amount due to the IRS are likely understated. We also found that at
least 170 charities with unpaid taxes also benefited by receiving about
$1.6 billion in federal grants.
Unpaid Payroll Taxes Comprised Almost 80 Percent of Charities' Federal
Tax Debt:
As indicated in figure 1, payroll taxes comprised $27.7 million, or
almost 80 percent, of the $35.6 million in unpaid federal taxes owed by
CFC charities. Unpaid payroll taxes included amounts that were withheld
from employees' wages for federal income taxes, Social Security, and
Medicare but not remitted to the IRS, as well as the matching employer
contributions for Social Security and Medicare. Employers who fail to
remit payroll taxes to the federal government may be subject to civil
and criminal penalties. Figure 1 shows the types of federal taxes owed
by CFC charities as of September 30, 2005.
Figure 1: Types of Federal Tax Debt Owed by CFC Charities:
[See PDF for image]
[End of figure]
The next largest component, annual reporting penalties, was $4.5
million or almost 13 percent of the unpaid taxes. Generally, the IRS
requires 501(c)(3) charities with more than $25,000 of income to file
an annual return (i.e., Form 990). This annual return serves as the
basis for review in determining whether an organization continues to
meet requirements for exempt status. Failure to file an annual return
at all or in a timely manner, as well as filing an incomplete return,
results in various types of penalties. Excise taxes related to employee
benefit plans, exempt organization business income taxes, unemployment,
and other types of taxes and penalties comprised the remaining $3.4
million.
The majority of the approximately 1,280 delinquent charities, 78
percent, owed less than $10,000 in delinquent taxes. Fifteen percent
owed from $10,000 to $50,000, and 7 percent owed more than $50,000 in
delinquent taxes. Also, 91 percent of 1,280 charities were delinquent
for up to 4 tax periods, 7 percent of charities for 5 to 9 tax periods,
and 2 percent for 10 or more tax periods.[Footnote 8]
Amount of Unpaid Federal Taxes Is Understated for CFC Charities:
The amount of unpaid federal taxes we identified among CFC charities--
$35.6 million--is understated. To avoid overestimating the amount owed
by CFC charities, we intentionally limited our scope to tax debts that
were affirmed by either the charity or a tax court for tax periods
prior to 2005.[Footnote 9] We did not include the most current tax year
because recently assessed tax debts that appear as unpaid taxes may
involve matters that are routinely resolved between the taxpayer and
the IRS, with the taxes paid, abated,[Footnote 10] or both within a
short period. We eliminated these types of debt by focusing on unpaid
federal taxes for tax periods prior to calendar year 2005 and
eliminating tax debt of $100 or less.
Also limiting our estimate of CFC charities' unpaid federal taxes is
the fact that the IRS tax database reflects only the amount of unpaid
taxes either reported by the charity on a tax return or assessed by the
IRS through various enforcement programs. The IRS database upon which
we relied exclusively does not reflect amounts owed by charities that
have not filed tax returns or that have underreported the owed taxes in
their return and for which the IRS has not assessed tax amounts due.
According to the IRS, underreporting of payroll taxes accounts for
about $60 to $70 billion of the estimated $345 billion annual gross tax
gap. Consequently, the true extent of unpaid taxes for these charities
is unknown.
Some CFC Charities with Delinquent Tax Debt Also Received Substantial
Federal Grants:
In performing our analysis, we identified at least 170 of the CFC
charities with delinquent tax debt that also received federal grants
totaling about $1.6 billion from the Departments of Health and Human
Services (excluding Medicaid), Education, and others in 2005. These
charities are benefiting from the federal government through their tax-
exempt status and receipt of substantial amounts of federal grants,
while not meeting their responsibility to pay required federal taxes.
Included in the $1.6 billion are grants to 5 of the 15 charities we
selected, totaling more than $6.5 million.
Certain CFC Charity Executives We Investigated Abused the Federal Tax
System:
Executives responsible for the tax debts of the 15 charities we
investigated abused the federal tax system and may have violated the
law by diverting payroll or other taxes due to the IRS. Willful failure
to remit payroll taxes is a felony under U.S. law,[Footnote 11] and the
IRS can assess a trust fund recovery penalty (TFRP) equal to the total
amount of taxes not collected or not accounted for and paid against all
individuals who are determined by the IRS to be "willful and
responsible" for the nonpayment of withheld payroll taxes.[Footnote 12]
In this regard, one executive from these 15 case study CFC charities
was assessed a TFRP for what IRS determined to be his abusive behavior.
Table 1 highlights 5 of the 15 case study CFC charities that we
investigated with payroll tax issues.
Table 1: CFC Charities with Unpaid Federal Taxes:
Charity: 1;
Nature of the charity: Museum;
Tax debt[A]: Over $100,000;
Comments: * Payroll tax debt covers more than 12 tax periods dating
back to the mid 1990s; * The IRS assessed a TFRP against the charity's
director; * Federal and local tax liens have been filed against the
charity; * The charity filed for bankruptcy protection in the past but
the court denied the petition; * The executive director admitted to
underpaying payroll taxes to fund the charity's operations.
Charity: 2;
Nature of the charity: Hospital;
Tax debt[A]: Nearly $1 million;
Comments: * Payroll tax debt covers more than 5 periods dating back
several years; * The charity paid two of its executives a salary of
more than $200,000 each; * The charity received about $1.5 million in
federal grants from the Department of Health and Human Services (non-
Medicaid) and the Department of Education.
Charity: 3;
Nature of the charity: Mental health clinic;
Tax debt[A]: Over $1.5 million;
Comments: * Payroll tax debt covers more than 12 tax periods dating
back to the early 1990s; * The charity recently signed an installment
agreement; * Federal, state, and local tax liens have been filed
against the charity; * The executive director received a salary of more
than $100,000; * The executive director admitted to underpaying payroll
taxes to fund the charity's operations, which includes the director's
salary.
Charity: 4;
Nature of the charity: Homeless shelter;
Tax debt[A]: Over $300,000;
Comments: * Charity failed to submit payroll tax payments for more than
5 tax periods over several years; * The executive director received a
salary of more than $100,000 per year.
Charity: 5;
Nature of the charity: General health clinic;
Tax debt[A]: Over $700,000;
Comments: * Payroll tax debt covers 7 tax periods dating back over 5
years; * The charity submitted an offer in compromise, which is
pending; * The chief executive officer received a salary of more than
$100,000 per year.
Source: GAO's analysis of IRS, OPM, public, and other records.
[A] Tax debt amount includes principal, interest, and penalties as of
September 30, 2005.
[End of table]
For the five charities in table 1, tax debt ranged from about $100,000
to more than $1.5 million, and the unpaid taxes spanned a period
ranging from 5 to more than 12 payroll tax periods. In addition to the
federal tax debt, two of the five CFC charities had unpaid state and/or
local taxes, where state and/or local taxing authorities filed multiple
tax liens against them.
During the time frames for which these charities were not paying their
taxes, funds were available to cover other charity expenses, including
officer salaries. Executives at two charities explained that they
knowingly withheld payroll taxes in order to have enough funds
available to pay their own salaries and the salaries of charity
employees, in addition to charity expenses. One executive we
investigated denied owing payroll or other taxes when IRS records
showed otherwise. In at least one case, the charity's executives
remitted payroll taxes later than the IRS required to pay their
salaries, while the charity accumulated tens of thousands of dollars in
penalties and interest for remitting late.
We also identified directors and senior executives who potentially
could be assessed TFRPs by the IRS for the debts of their charities.
Some of these directors and executives had salaries in excess of
$100,000 and owned significant personal assets. One of these executives
has already been assessed a TFRP.
See appendix III for the details on the other 10 CFC charities reviewed
in detail. We referred all 15 cases discussed in our report to the IRS
so that it can determine whether additional collection action or
criminal investigation is warranted.
OPM Does Not Screen Charities for Delinquent Tax Debt:
OPM does not screen charities for federal tax debt prior to granting
CFC eligibility, thereby making charities with unpaid federal taxes
eligible to receive donations from federal civilian employees and
military personnel. OPM policies do not specifically require CFC
charities to be screened for these problems. Additionally, federal law
generally prohibits the disclosure of taxpayer data and, consequently,
even if OPM had specific policies to check for unpaid taxes, it has no
access to a specific charity's tax data. OPM determines the
completeness of a charity applicants' paperwork, but it does not
perform third-party verification of documents as part of that process.
For example, OPM does not verify with the IRS the tax-exempt status of
CFC applicants and relies solely on each applicant's submission of IRS
documentation that it is a bona fide charity. To demonstrate the
vulnerability of OPM's lack of validation of tax-exempt status, we
applied to three of CFC's largest local 2006 campaigns using a
fictitious charity with entirely false documents and an erroneous IRS
taxpayer identification number. We were accepted into all three
campaigns.
Tax Debts Are Not Considered When Granting Charities Eligibility to
Participate in the CFC:
OPM does not screen charities for tax debts prior to granting CFC
eligibility and, ultimately, charities with unpaid federal taxes are
eligible to receive donations from federal civilian employees and
military personnel. Federal law implemented in the Code of Federal
Regulations does not require OPM to screen charities for federal tax
delinquency nor does it explicitly authorize CFC to reject charity
applicants that have delinquent tax debt from participation in the CFC.
Consequently, CFC's processes for determining eligibility are based on
and limited to what is required of the CFC in Part 950 of Title 5,
C.F.R.
Restrictions on Tax Data Hamper Identification of Charities with
Delinquent Taxes:
Federal law does not permit the IRS to disclose taxpayer information,
including tax debts.[Footnote 13] Thus, unless the taxpayer provides
consent, certain tax debt information can only be discovered from
public records when the IRS files a federal tax lien against the
property of a tax debtor.[Footnote 14] However, public record
information is limited because the IRS does not file tax liens on all
tax debtors, and, while the IRS has a central repository of tax liens,
OPM officials do not have access to that information. Further, the
listing of a federal tax lien in the credit reports of an entity or its
key officials may not be a reliable indicator of a charity's tax
indebtedness because of deficiencies in the IRS's internal controls
that have resulted in the IRS not always releasing tax liens from
property when the tax debt has been satisfied[Footnote 15].:
OPM Does Not Verify Charity Applicant's Exempt Organization Status:
Part 950 of Title 5 of the Code of Federal Regulations requires that
applicants to the CFC include in their application packages a copy of
their most recent IRS determination letter[Footnote 16] showing the
charity's 501(c)(3) status. OPM does not perform any independent
verification of charity applicants' tax-exempt status. The IRS does
have publicly available data wherein OPM could verify an applicant's
tax exempt status, but this is not an OPM-required procedure in the CFC
eligibility determination process. Other documents OPM requires
applicants to include in the CFC application package are a copy of the
charity's most recent form 990, their most recent annual audit report,
and an application with various self-certifications. According to an
official from one of the CFC's largest local campaigns, the single most
frequent reason for rejecting an applicant from the CFC is the
applicant's failure to submit its IRS determination letter.
Control Weaknesses Allowed GAO to Enroll Fictitious Charities in the
CFC:
To determine whether and to what extent CFC's eligibility determination
processes are vulnerable, we applied to three local campaigns with a
fictitious charity using fake documents and an erroneous IRS taxpayer
identification number. In all three campaigns, our application for
participation in the 2006 CFC was accepted. Figure 2 shows one example
of the three letters we received regarding our acceptance into the 2006
CFC. Immediately after our applications were accepted, we notified CFC
officials and withdrew our charity from the campaigns in order to
prevent donations to our fictitious charity.
In addition to our direct testing of OPM's screening process, our match
of CFC charities from the 2005 campaign against IRS's database of tax-
exempt organizations identified charities whose 501(c)(3) status could
not be confirmed. Therefore, we referred these charities to OPM and IRS
for further review and confirmation of their tax-exempt status.
Figure 2: Copy of an Acceptance Letter from One of the Three Local CFC
Campaigns for Our Fictitious Charity:
[See PDF for image]
[End of figure]
Concluding Observations:
The success of the OPM's CFC is predicated on each donor's confidence
in a system that ensures that their donations reach charitable
organizations that have met the CFC's specific eligibility requirements
and are legitimate charities. The bona fide charities participating in
the annual campaign have the most to lose when such confidence is
shaken because of the abuse of a minority of participating charities.
Until OPM takes steps to independently validate whether applicants are
legitimate 501(c)(3) organizations, the campaign is vulnerable to
entities that fraudulently purport to be charities. Further, tax-
abusing charities will continue to benefit by being eligible to
participate and receive donations unless OPM is provided access to
their tax debt information and determines whether sanctions such as
expulsion from the CFC are warranted. OPM and each local CFC cannot
provide the assurance needed to sustain such confidence. This could
have devastating consequences for the vast majority of eligible and tax-
compliant charities that are dependent on donor contributions to
support their critical missions.
Mr. Chairman and Members of the Subcommittee, this concludes my
statement. I would be pleased to answer any questions that you or other
members of the committee may have at this time.
Contacts and Acknowledgments:
For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this testimony.
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to investigate and determine whether and to what
extent (1) charities listed in the 2005 Combined Federal Campaign (CFC)
have unpaid payroll and other federal taxes; (2) selected charities,
their directors, or senior officers are abusing the federal tax system;
and (3) the Office of Personnel Management (OPM) screens charities for
federal tax problems before allowing them to be listed with the CFC.
To determine whether any of the charities listed in the 2005 CFC have
unpaid payroll and other federal taxes, we first identified charities
that participated in the 2005 campaign. To identify CFC charities we
requested data from CFC headquarters. To obtain these data, CFC
headquarters requested data from the 299 local campaigns throughout the
United States. We received data from 291 of the 299[Footnote 17] local
campaigns.
To identify CFC charities with unpaid federal taxes, we obtained and
analyzed the Internal Revenue Service's (IRS) September 30, 2005,
Unpaid Assessments file. We matched the CFC charity data to the IRS
unpaid assessment data using the taxpayer identification number (TIN)
field. To avoid overstating the amount owed by charities with unpaid
federal tax debts and to capture only significant tax debt, we excluded
tax debts meeting specific criteria. The criteria we used to exclude
tax debts are as follows:
* tax debts the IRS classified as compliance assessments or memo
accounts for financial reporting,[Footnote 18]
* tax debts from calendar year 2005 tax periods, and:
* charities with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid and tax debts that are
recently incurred. Specifically, compliance assessments or memo
accounts were excluded because these taxes have neither been agreed to
by the taxpayers nor affirmed by the court, or these taxes could be
invalid or duplicative of other taxes already reported. We excluded tax
debts from calendar year 2005 tax periods to eliminate tax debt that
may involve matters that are routinely resolved between the taxpayers
and the IRS, with the taxes paid or abated within a short period. We
also excluded tax debts of $100 or less because they are insignificant
for the purpose of determining the extent of taxes owed by CFC
charities.
The 2005 pledged donation (pledges) information was unavailable at the
time we selected our charity cases for investigations. We requested
pledge information from the CFC and were in the process of receiving
these data, piecemeal, from the CFC's 299 campaigns as of the end of
our fieldwork. The pledge information we received through the end of
fieldwork lacked the detail necessary to efficiently determine the
amount of pledges for tax-delinquent charities. Consequently, we were
unable to determine the amount of pledges received for tax-delinquent
charities we identified.
To determine whether selected charities, their directors, or senior
officers are abusing the federal tax system, we selected 15 charities
for a detailed audit and investigation. We selected the 15 charities
using a nonrepresentative selection approach based on our judgment,
data mining, and a number of other criteria, including the amount of
unpaid taxes, number of unpaid tax periods, amount of payments reported
by the IRS, and indications that key officials might be involved in
multiple charities with tax debts.
We obtained copies of automated tax transcripts and other tax records
(for example, revenue officers' notes) from the IRS as of September 30,
2005, and reviewed these records to exclude charities that had recently
paid off their unpaid tax balances and considered other factors before
reducing the selection of charities to 15 case studies. For the
selected 15 cases, we reviewed the charity CFC application files and
performed additional searches of criminal, financial, and public
records. Our investigators also contacted several of the charities and
conducted interviews.
To determine whether and to what extent OPM screens charities for
federal tax problems before allowing them to be listed with the CFC, we
reviewed OPM's policies and procedures, performed process walkthroughs,
and interviewed key CFC officials at CFC Headquarters and three local
campaigns. We reviewed laws and regulations governing OPM's
administration of the CFC. We identified processes and procedures
performed by the CFC during the annual application period. To confirm
our understanding of the requirements placed on charity applicants and
to test whether OPM's processes would identify fraudulent charities, we
attempted to gain acceptance into the 2006 CFC by posing as a charity.
We prepared and submitted application packages for each of three local
campaigns using fake documentation for a fictitious charity. To test
the effectiveness of OPM's processes and procedures to identify charity
applicants that are not valid tax-exempt organizations, a primary
requirement for participation in the CFC, we matched the list of CFC
charities that participated in the 2005 campaign with the IRS's
database of tax-exempt organizations.
We conducted our audit work from January 2006 through May 2006 in
accordance with U.S. generally accepted government auditing standards,
and we performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Data Reliability Assessment:
For the IRS unpaid assessments data, we relied on the work we performed
during our annual audits of the IRS's financial statements. While our
financial statement audits have identified some data reliability
problems associated with the coding of some of the fields in the IRS's
tax records, including errors and delays in recording taxpayer
information and payments, we determined that the data were sufficiently
reliable to address this testimony's objectives. Our financial audit
procedures, including the reconciliation of the value of unpaid taxes
recorded in IRS's master file to IRS's general ledger, identified no
material differences.
To help ensure reliability of CFC-provided data, we performed
electronic testing of specific data elements in the databases that we
used to perform our work and performed other procedures to ensure the
accuracy of the charity data provided by the CFC.
Based on our discussions with agency officials, our review of agency
documents, and our own testing, we concluded that the data elements
used for this testimony were sufficiently reliable for our purposes.
[End of section]
Appendix II: Background:
The Combined Federal Campaign (CFC) is the only authorized solicitation
of employees in the federal workplace on behalf of charitable
organizations. The CFC's mission is to promote and support philanthropy
through a program that provides all federal employees the opportunity
to improve the quality of life for others through donations to eligible
nonprofit organizations. In 1971, the CFC began operation as a combined
campaign with donations solicited once a year. Also during this period,
charitable contributions in the form of payroll deduction were made
possible. Contributions grew dramatically from $12.9 million in 1964 to
$82.8 million in 1979. Growth in the number of participating charities
was slow through the 1970s, increasing from 23 charities in 1969 to
only 33 charities in 1979. Significant changes in CFC regulations
occurred in the late 1970s and early 1980s[Footnote 19] which in April
1984 opened the CFC to organizations that received tax-exempt status
under 501(c)(3) of the Internal Revenue Code. The CFC has grown to a
campaign consisting of approximately 1,700 (2005 campaign) national and
international charitable organizations and more than 21,000 local
charities. Contributions have also increased from about $95 million in
1981 to more than $255 million in 2004.
Each campaign is conducted during a 6-week period, varying by local
campaign from September 1 through December 15, at every federal agency
in the campaign community. During this period, current federal civilian
and active duty military employees, throughout the country and
internationally, donate tens of millions of dollars to these nonprofit
organizations that provide health and human service benefits throughout
the world.
The Director of the Office of Personnel Management (OPM) exercises
general supervision over all operations of the CFC and takes steps to
ensure the campaign objectives are achieved. The CFC is decentralized;
therefore, each of the approximately 300 campaigns manages its local
campaign and then reports statistics in aggregate to OPM. The Local
Federal Coordinating Committee (LFCC) is the leadership element of the
local CFC and is comprised of members from the federal community--
federal civilian, military, and postal. The LFCC solicits annually a
principle combined fund organization (PCFO), conducts local agency
eligibility, approves campaign material, conducts compliance audits, is
the liaison to federal agency heads, and is generally engaged in a host
of the scheduled campaign activities. The PCFO manages all aspects of
the campaign. The PCFO develops campaign materials; serves as fiscal
agent; collects, processes, and distributes pledges; and trains loaned
executives and campaign personnel. The PCFO and the LFCC are
responsible for reporting to the OPM summary data about their campaign
results.
[End of section]
Appendix III: CFC Charities with Unpaid Taxes:
Table 1 in the main portion of this testimony provides data on 5
detailed case studies. Table 2 shows the remaining case studies that we
audited and investigated. As with the 5 cases discussed in the body of
this testimony, for all 10 of these case studies we found abuse or
potentially criminal activity related to the federal tax system. All 10
charities in table 2 had unpaid payroll taxes.
Table 2: CFC Charities with Unpaid Federal Taxes:
Charity: 6;
Nature of charity: Rehabilitation services;
Tax debt[A]: Over $100,000;
Comments: * The charity failed to pay its payroll taxes in full or on
time, resulting in delinquent payroll taxes and subsequent interest and
penalties; * A federal tax lien has been filed against the charity; *
Although these taxes remain outstanding, one of the executives of this
charity recently placed property into a family trust.
Charity: 7;
Nature of charity: Psychiatric center;
Tax debt[A]: Over $1 million;
Comments: * This entity owes more than $600,000 in penalties and
interest; * A state tax lien of $200,000 has been filed against the
charity; * The charity repeatedly underpaid payroll taxes in 1 year
recently; * Executive director received a salary of more than $100,000;
* A recent independent auditor's report states there is substantial
doubt regarding the entity's ability to continue operating (i.e., a
going concern); * An officer of the charity told us that rather than
remitting the payroll taxes to the IRS, the officer used them to pay
operating expenses, which included the officer's own salary.
Charity: 8;
Nature of charity: Healthcare provider of hospital and nursing home
services;
Tax debt[A]: Over $400,000;
Comments: * Federal tax lien has been filed against the charity; * The
charity filed for Chapter 11 bankruptcy protection; * The top
executives of the charity and several part-time management personnel
were employed through a contracting firm and were paid wages that
totaled more than $3 million; * The charity received over $2 million in
grants from the Department of Health and Human Services.
Charity: 9;
Nature of charity: Drug and alcohol rehabilitation center;
Tax debt[A]: Over $70,000;
Comments: * The charity has substantial equity in a multi-acre parcel
of real estate located in a major metropolitan area; * The charity owns
a boat that is primarily used by the executive director.
Charity: 10;
Nature of charity: Charity provides social welfare programs;
Tax debt[A]: Nearly $300,000;
Comments: * A recent independent auditor's report states there is
substantial doubt regarding the entity's ability to continue operating
(i.e., a going concern); * The charity received federal grants of more
than $2.5 million from the Department of Health and Human Services.
Charity: 11;
Nature of charity: Social services for the blind;
Tax debt[A]: Nearly $100,000;
Comments: * The charity has more than 13 periods of payroll tax debt
dating back several years; * The charity entered into an installment
agreement that the IRS terminated after the charity did not make the
required payments.
Charity: 12;
Nature of charity: Prevent and treat child abuse;
Tax debt[A]: Over $120,000;
Comments: * Charity owes over $120,000 in payroll taxes, penalties and
interest from the late 1990s; * Charity requested an offer in
compromise on the tax debt; * State and local tax liens have been filed
against the charity's real estate; * After the charity was delinquent
in paying its payroll taxes, it obtained more than $600,000 to
construct a new building; * An officer of the charity told us that
rather than remitting the payroll taxes to the IRS, the officer used
them to pay the charity's workers, which included the officer's own
salary; * The charity received federal grants of $40,000.
Charity: 13;
Nature of charity: Counseling service for adults, adolescents, and
children;
Tax debt[A]: Over $500,000;
Comments: * The charity's tax debt covers more than six tax periods; *
Charity paid consultant more than $100,000 for professional services.
Charity: 14;
Nature of charity: Adult and senior services;
Tax debt[A]: Nearly $200,000;
Comments: * Federal tax lien has been filed against the charity; * The
charity received federal grants of $140,000.
Charity: 15;
Nature of charity: Family social services;
Tax debt[A]: Over $500,000;
Comments: * The charity's tax debt covers more than 20 tax periods of
payroll taxes; * Federal tax lien has been filed against the charity; *
An officer of the charity told us that rather than remitting the
payroll taxes to the IRS, the officer used them to pay operating
expenses, which included the officer's own salary.
Source: GAO's analysis of IRS, OPM, public, and other records.
[A] Tax debt amount includes principal, interest, and penalties as of
September 30, 2005.
[End of table]
FOOTNOTES
[1] We considered activity to be abusive when a 501(c)(3)
organization's actions (e.g., diversion of payroll tax funds) or
inactions (e.g., failure to remit the annual Form 990 return, which is
the basis for review of whether an organization continues to meet
requirements for exempt status) took advantage of the existing tax
enforcement and administration system to avoid fulfilling federal tax
obligations and were deficient or improper when compared with behavior
that a prudent person would consider reasonable.
[2] See GAO, Financial Management: Thousands of GSA Contractors Abuse
the Federal Tax System, GAO-06-492T (Washington, D.C.: Mar. 14, 2006),
Financial Management: Thousands of Civilian Agency Contractors Abuse
the Federal Tax System with Little Consequence, GAO-05-637 (Washington,
D.C.: June 16, 2005), and Financial Management: Some DOD Contractors
Abuse the Federal Tax System with Little Consequence, GAO-04-95
(Washington, D.C.: Feb. 12, 2004).
[3] 26 U.S.C. § 501(c)(3).
[4] 26 U.S.C. § 7202.
[5] The campaign cycle for CFC consists of a 2-year reporting period,
which marks the beginning of a campaign and the end of a campaign. Most
campaigns will begin operation on or about March 15 of the first year
of the campaign and end around March 14 2 years later, depending on the
final disbursement for the campaign. For example, March 15, 2005,
begins the fall 2005 campaign and March 14, 2007, marks the end of the
fall 2005 campaign. Typically, the annual campaign runs for a 6-week
period from September 1 through December 15. Actual dates may vary from
one campaign to another.
[6] 26 U.S.C. § 7202. Under section 7202, it must be shown that a
defendant voluntarily and intentionally acted in violation of a known
legal duty. Cheek v. United States, 498 U.S. 192 (1991).
[7] Exempt from this requirement are organizations seeking local
eligibility in Puerto Rico or the U.S. Virgin Islands. However, these
organizations must include in their applications, the appropriate local
forms demonstrating their status as charitable organizations. 5 C.F.R.
Pt. 950.204(b)(2)(iii).
[8] A tax period varies by tax type. For example, the tax period for
payroll and excise taxes is generally one quarter of a year. The
taxpayer is required to file quarterly returns with IRS for these types
of taxes, although payment of the taxes occurs throughout the quarter.
In contrast, for income, corporate, and unemployment taxes, a tax
period is 1 year.
[9] We eliminated from our analysis all tax debt coded by IRS as not
having been agreed to by the taxpayer (for example, by filing a balance
due return) or a tax court. For financial reporting, those cases are
referred to as compliance assessments.
[10] Abatements are reductions in the amount of taxes owed and can
occur for a variety of reasons, such as to correct errors made by IRS
or taxpayers or to provide relief from interest and penalties. 26
U.S.C. § 6404.
[11] 26 U.S.C. § 7202.
[12] 26 U.S.C. § 6672. The amount of a TFRP does not include employers'
matching amounts.
[13] 26 U.S.C. § 6103.
[14] Under section 6321 of the Internal Revenue Code, IRS has the
authority to file a lien upon all property and rights to property,
whether real or personal, of a delinquent taxpayer.
[15] GAO, IRS Lien Management Report: Opportunities to Improve
Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10,
2005).
[16] A determination letter to an organization is the IRS's
notification that it has reviewed the organization's application
package and qualified it as exempt from federal income taxes.
[17] Data from the remaining 8 local campaigns were either not received
or not sufficient for analysis.
[18] Under federal accounting standards, unpaid assessments require
taxpayer or court agreement to be considered federal taxes receivables.
Compliance assessments and memo accounts are not considered federal
taxes receivable because they are not agreed to by the taxpayers or the
courts.
[19] Including a court order that prohibited OPM from excluding legal
defense and advocacy groups from the CFC because of their "indirect"
support of health and welfare or their lobbying/advocacy activities.
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