CFC Charities

Responses to Posthearing Questions Gao ID: GAO-06-959R July 7, 2006

This letter responds to Congress's request for additional information related to the subcommittee's May 25, 2006 hearing on whether charities participating in the Combined Federal Campaign (CFC) are meeting their employment tax responsibilities. Our responses are based on work performed during GAO's audit, communication with the Internal Revenue Service, GAO's views of generally accepted accounting principles and generally accepted auditing standards, and on professional judgment.



GAO-06-959R, CFC Charities: Responses to Posthearing Questions This is the accessible text file for GAO report number GAO-06-959R entitled 'CFC Charities: Responses to Posthearing Questions' which was released on July 11, 2006. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. July 7, 2006: The Honorable Jim Ramstad: Chairman: Subcommittee on Oversight: Committee on Ways and Means: House of Representatives: Subject: CFC Charities: Responses to Posthearing Questions: Dear Mr. Chairman: This letter responds to your request for additional information related to the subcommittee's May 25, 2006 hearing on whether charities participating in the Combined Federal Campaign (CFC) are meeting their employment tax responsibilities. Enclosed are our responses to the supplemental questions you submitted. Our responses are based on work performed during our audit, communication with the Internal Revenue Service, our views of generally accepted accounting principles and generally accepted auditing standards, and on professional judgment. If you have any further questions or would like to discuss these responses, I can be reached at (202) 512-7455 or Kutzg@gao.gov. Sincerely yours, Signed by: Gregory D. Kutz: Managing Director: Forensic Audits and Special Investigations: Enclosure--1: Enclosure I: Responses to Supplemental Questions for the Record: Submitted by: Representative Jim Ramstad: Subcommittee on Oversight: Hearing on: Charities and Employment Taxes: Are Charities in the Combined Federal Campaign Meeting their Employment Tax Responsibilities? May 25, 2006: 1. It is my understanding that you came across a number of CFC charities about which the IRS has no current information, and which they classify as being in "unable to locate" status. Is that correct? How many of these did you find participating in the CFC? Answer: We referred Combined Federal Campaign (CFC) charities with questionable exempt status to the Internal Revenue Service (IRS) for further review. Based on preliminary research, the IRS classified as "unable to locate" more than 40 organizations that participated in the 2005 CFC. The IRS also classified more than 80 other organizations as "terminated or merged" that participated in the 2005 campaign. According to the IRS, this status indicates the IRS either revoked the 501(c) (3) status or received notification that the charity had merged with another charity. In addition, the IRS identified about 70 organizations from the 2005 CFC whose employer identification numbers (EIN) matched an EIN of a taxable organization with the same or similar name. Therefore, about 200 organizations of the 22,000 charities that participated in the 2005 CFC have questionable tax exempt status and may not be legitimate charities under 501(c)(3). 2. OPM emphasizes that it requires financial audits of an organization for admission into the CFC. Yet there were more than 1,280 charities with tax debt. Wouldn't an independent audit detect any tax debt when reviewing an organization's finances? Can you explain if GAO discovered this during its examination of CFC charities? Answer: A charity's outstanding tax debt may or may not be disclosed in a charity's financial statements prepared in conformity with Generally Accepted Accounting Principles (GAAP), depending on the specific facts and circumstances. Several factors affect (1) management's decisions about whether to separately disclose liabilities for taxes, and (2) the ability of a financial audit to detect a situation where the financial statements did not conform with GAAP. For example, management may decide to not separately report the liability in the financial statements or specifically disclose it in the related footnotes if the amount is not material to the financial statements taken as a whole. In addition, if charity management assesses the probability of payment to be remote,[Footnote 1] an amount would not be recorded or disclosed under GAAP. Generally accepted auditing standards require an auditor to plan and perform an audit to obtain reasonable, but not absolute, assurance about whether the financial statements are free of misstatements, including any material misstatement of tax debt. However, it is possible that an audit would not in all cases detect improper recording or disclosure of tax debt, particularly if the amounts involved are immaterial to the financial statements or the risk of material misstatement is very low. As part of our audit and investigative procedures, we requested from CFC copies of the charities' independently audited financial statements. We found that 4 of the 13 charities we investigated with significant tax debt had financial statements that separately reported outstanding tax debt either in the body or the footnotes to the financial statements.[Footnote 2] For the remaining 9 charities, we are unaware of the reasons why the tax debt was not disclosed. (192215): FOOTNOTES [1] For example, the entity may consider the likelihood of payment remote because management disagrees with the amount of a tax assessment or there may be disputed penalties and interest charges. GAAP defines remote as a slight chance of a future event or events occurring. [2] We investigated 15 charities and requested from CFC copies of audited financial statements included with each of the charity's application packages. As of the end of our fieldwork we received audited financial statements for 13 of the 15 charities we investigated. GAO's Mission: The Government Accountability Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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