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