Tax Compliance
Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes Gao ID: GAO-07-1090T July 24, 2007As of September 2006, nearly 1.8 million entities were recognized as tax exempt organizations by the Internal Revenue Service (IRS). As such, they do not have to pay federal income taxes. Exempt organizations are still required to remit amounts withheld from employees' wages for federal income tax, Social Security and Medicare, as well as other taxes. Previous GAO work identified numerous government contractors, Medicare providers, and charities participating in the Combined Federal Campaign (CFC) with billions in unpaid federal taxes. Today's testimony, based on a report that we are releasing today, summarizes the results of work we performed at the request of Representative Ramstad, Ranking Member of the Subcomitte on Oversight, Committee on Ways and Means, to audit exempt organizations. Specifically, this testimony covers whether and to what extent (1) exempt organizations have unpaid federal taxes, including payroll taxes; (2) selected case study organizations and their executives are involved in abusive or potentially criminal activity; and (3) exempt organizations with unpaid federal taxes received direct grants from certain federal agencies. GAO reviewed unpaid taxes and exempt organization data from IRS and selected 25 case studies for audit and investigation. GAO also reviewed data from 3 major grant disbursement systems.
Nearly 55,000 exempt organizations had almost $1 billion in unpaid federal taxes as of September 30, 2006, with charitable organizations being responsible for more than 85 percent of the $1 billion in debt. About 1,500 of these entities each had over $100,000 in federal tax debts, with some owing multi-million dollars in federal taxes. The majority of this debt represented payroll taxes and associated penalties and interest dating as far back as the early 1980s. Willful failure to remit payroll taxes is a felony under U.S. tax law. The $1 billion figure is understated because some exempt organizations have understated tax liabilities or did not file tax returns. GAO selected 25 exempt organizations for investigation based primarily on amount of tax debt and number of periods delinquent. In all 25 cases, we found abusive and potentially criminal activity, including repeated failure to remit payroll taxes withheld from employees. Officials diverted the money to fund their operations, including paying themselves salaries ranging from hundreds of thousands of dollars to over $1 million. Many of the officials accumulated substantial assets, such as multimillion-dollar homes and luxury vehicles. Key officials and employees at 4 entities were engaged in criminal activities, including attempted bribery of an IRS official and illegal gambling. Despite repeatedly abusing the federal tax system, these entities continued to retain their exempt status. IRS does not have the authority to revoke an organization's exempt status because of unpaid federal taxes. Over 1,200 of these exempt organizations with unpaid federal taxes received over $14 billion in federal grants in fiscal years 2005 and 2006. Six of the 25 exempt organizations GAO investigated received grants; of those 6 entities, 5 appear to have violated the False Statement Act by not disclosing their tax debt as required. For example, one entity that received millions of dollars in grants did not disclose unpaid taxes on multiple applications. Taxpayer privacy statutes prevent granting agencies from verifying an applicant's tax status with IRS unless the taxpayer authorizes such disclosure.
GAO-07-1090T, Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other 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 10:00 a.m. EDT:
Tuesday, July 24, 2007:
Tax Compliance:
Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1
Billion in Payroll and Other Taxes:
Statement of Gregory D. Kutz, Managing Director:
Forensic Audits and Special Investigations:
GAO-07-1090T:
GAO Highlights:
Highlights of GAO-07-1090T, a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives
Why GAO Did This Study:
As of September 2006, nearly 1.8 million entities were recognized as
tax exempt organizations by the Internal Revenue Service (IRS). As
such, they do not have to pay federal income taxes. Exempt
organizations are still required to remit amounts withheld from
employees‘ wages for federal income tax, Social Security and Medicare,
as well as other taxes.
Previous GAO work identified numerous government contractors, Medicare
providers, and charities participating in the Combined Federal Campaign
(CFC) with billions in unpaid federal taxes. Today‘s testimony, based
on a report that we are releasing today, summarizes the results of work
we performed at the request of Representative Ramstad, Ranking Member
of this subcommittee, to audit exempt organizations. Specifically, this
testimony covers whether and to what extent (1) exempt organizations
have unpaid federal taxes, including payroll taxes; (2) selected case
study organizations and their executives are involved in abusive or
potentially criminal activity; and (3) exempt organizations with unpaid
federal taxes received direct grants from certain federal agencies.
GAO reviewed unpaid taxes and exempt organization data from IRS and
selected 25 case studies for audit and investigation. GAO also reviewed
data from 3 major grant disbursement systems.
What GAO Found:
Nearly 55,000 exempt organizations had almost $1 billion in unpaid
federal taxes as of September 30, 2006, with charitable organizations
being responsible for more than 85 percent of the $1 billion in debt.
About 1,500 of these entities each had over $100,000 in federal tax
debts, with some owing multi-million dollars in federal taxes. The
majority of this debt represented payroll taxes and associated
penalties and interest dating as far back as the early 1980s. Willful
failure to remit payroll taxes is a felony under U.S. tax law. The $1
billion figure is understated because some exempt organizations have
understated tax liabilities or did not file tax returns.
GAO selected 25 exempt organizations for investigation based primarily
on amount of tax debt and number of periods delinquent. In all 25
cases, we found abusive and potentially criminal activity, including
repeated failure to remit payroll taxes withheld from employees.
Officials diverted the money to fund their operations, including paying
themselves salaries ranging from hundreds of thousands of dollars to
over $1 million. Many of the officials accumulated substantial assets,
such as multimillion-dollar homes and luxury vehicles. Key officials
and employees at 4 entities were engaged in criminal activities,
including attempted bribery of an IRS official and illegal gambling.
Despite repeatedly abusing the federal tax system, these entities
continued to retain their exempt status. IRS does not have the
authority to revoke an organization‘s exempt status because of unpaid
federal taxes.
Table: Examples of Abusive and Potentially Criminal Activity by Exempt
Organizations:
Source: GAO analysis of IRS data and available public records.
[End of table]
Over 1,200 of these exempt organizations with unpaid federal taxes
received over $14 billion in federal grants in fiscal years 2005 and
2006. Six of the 25 exempt organizations GAO investigated received
grants; of those 6 entities, 5 appear to have violated the False
Statement Act by not disclosing their tax debt as required. For
example, one entity that received millions of dollars in grants did not
disclose unpaid taxes on multiple applications. Taxpayer privacy
statutes prevent granting agencies from verifying an applicant‘s tax
status with IRS unless the taxpayer authorizes such disclosure.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1090T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory 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 discuss issues related to exempt
organizations and their adherence to the federal tax system. This
testimony builds on your concern about the $290 billion annual federal
tax gap. This testimony also builds on a large body of work, conducted
over the past few years,[Footnote 1] in which we investigated entities
that have abused the federal tax system[Footnote 2] while benefiting
from doing business with the federal government. Our testimony, and the
accompanying report that we are releasing today,[Footnote 3] address
whether organizations exempt from federal income taxes were delinquent
in remitting payroll and other federal taxes to the Internal Revenue
Service (IRS). All employers, regardless of tax exempt status, are
required to withhold from their employees' wages payroll taxes for
Social Security, Medicare, and other federal taxes. Willful failure to
remit payroll taxes is a felony under U.S. law.
Exempt organizations are granted exemption from federal income taxes by
statutes contained in the Internal Revenue Code (I.R.C.), most notably
I.R.C. § 501(c). Income tax exemption is a significant benefit
unavailable to the vast majority of taxpayers. To qualify, an
organization's purpose and operations must meet the criteria explicitly
contained in the I.R.C. While the range of types of exempt
organizations varies greatly, from large national charities to local
athletic leagues and social clubs, the majority of exempt organizations
are charities, churches, and educational institutions that qualify for
their exemption under I.R.C. § 501(c)3. Many exempt organizations also
receive the added benefit of being able to provide a tax deduction to
their contributors, meaning the donors can deduct the amount of the
donation on their individual income tax returns. This statutory
privilege, subsidized by the federal government, encourages donations
to these organizations and aids them in raising revenue.
Our previous work on a small portion of the nation's exempt
organizations, specifically those that participated in the federal
government's Combined Federal Campaign,[Footnote 4] indicated that some
of these exempt organizations were ignoring their payroll and other
federal tax obligations. Based on this previous work and at the request
of Representative Ramstad, Ranking Member of this subcommittee, we
expanded our audit to include all organizations considered actively
exempt by IRS. We also investigated whether tax delinquent exempt
organizations were receiving additional federal support in the form of
grants. Today's testimony covers whether and to what extent (1) exempt
organizations have unpaid federal taxes, including payroll taxes; (2)
selected case study organizations and their executives are involved in
abusive or potentially criminal activity; and (3) exempt organizations
with unpaid federal taxes received direct grants from certain federal
agencies.
To determine the extent to which exempt organizations have unpaid
federal taxes, including payroll taxes, we matched IRS's unpaid tax
data as of September 30, 2006 to IRS's database of exempt organizations
as of September 30, 2006.[Footnote 5] To identify specific instances of
abusive and potentially criminal activities by selected exempt
organizations and their executives, we performed investigative work on
a nonrepresentative selection of 25 exempt organizations. We selected
these 25 organizations using primarily the amount of tax debt and
number of delinquent tax periods as selection factors. The
investigative work included obtaining and analyzing tax, financial,
criminal history, and other public records. We also reviewed the
statutory authority provided in I.R.C. § 501 and interviewed IRS
officials on their process for revoking tax exempt status.
To determine the extent to which exempt organizations with tax debt
received federal grants,[Footnote 6] we matched the data set of tax
delinquent exempt organizations we identified from our first objective
to selected agencies' grant disbursement data for fiscal years 2005 and
2006.[Footnote 7] We reviewed six grant applications of selected exempt
organizations with tax debts that received federal grant payments in
fiscal years 2005 and 2006 to determine whether they reported federal
tax debt as required. We also interviewed grant officials at selected
federal agencies on whether they considered tax debts in grant award
decision making. For further details on our scope and methodology, see
appendix I of the accompanying report.[Footnote 8]
We conducted our audit work from August 2006 through March 2007 in
accordance with U.S. generally accepted government auditing standards.
We performed our investigative work, conducted during the same period,
in accordance with standards prescribed by the President's Council on
Integrity and Efficiency.
Summary:
While the vast majority of exempt organizations pay their fair share of
federal taxes, tens of thousands abused the federal tax system. Our
analysis of IRS data shows that nearly 55,000 exempt organizations owed
nearly $1 billion in unpaid payroll and other federal taxes as of
September 30, 2006. Nearly 40,000 of the 55,000 delinquent exempt
organizations were charitable, or 501(c)(3), organizations. These
organizations owed almost $830 million of the nearly $1 billion in
delinquent taxes. Seventy-one percent of the nearly $1 billion in
unpaid taxes owed by tax exempt organizations consists of payroll taxes
and related penalties and interest dating as far back as 1981.[Footnote
9] Over $600 million of the nearly $1 billion is accounted for by about
1,500 exempt organizations that individually owed over $100,000. Some
of these entities owed more than $10 million in unpaid federal taxes.
Also, the nearly $1 billion in delinquent taxes is understated because
we did not include IRS data on tax debts for current periods and
disputed debts because they may be routinely resolved or not represent
a fully valid tax debt. Our estimate is also understated because the
IRS data used in our analysis did not include, among other items, debts
owed by organizations that did not file federal tax returns or
underreported their tax liability, or for which IRS had not yet
assessed the amount of the tax debt.
For all 25 cases that we investigated, we found abusive and potentially
criminal activity related to the federal tax system, including failure
to remit to IRS payroll taxes withheld from employees. Rather than
fulfill their role as "trustees" of this money, these case study
entities and their executives diverted the money for other purposes.
Willful failure to remit these payroll taxes, which included amounts
withheld from employee wages for income taxes, Social Security, and
Medicare, is a felony. The failure to properly segregate payroll taxes
can be a criminal misdemeanor offense.[Footnote 10]
We found multiple instances in our case studies in which the payroll
taxes were diverted to fund operations or to pay hundreds of thousands
of dollars in compensation to the organization's top officials. In one
case, over $1 million in compensation was paid to the organization's
top official at the same time that the exempt organization owed
millions of dollars in delinquent taxes. Many of the top officials of
selected case study entities owned significant personal assets,
including multimillion-dollar homes and luxury vehicles. Other top
officials of the exempt organizations in our case studies neglected to
remit millions of dollars in delinquent taxes while at the same time
paying millions of dollars in management fees to related entities. We
also found several instances in which the same individuals who were top
officials of the tax exempt entities in our case studies also operated
other tax exempt or taxable (for-profit) entities with significant
delinquent tax debts. For instance, one of our case study exempt
organizations, with over $10 million in tax debt, was affiliated with
several other for-profit entities, providing a variety of services from
health care to management services, that were also delinquent in paying
their federal taxes. The related for-profit entities owed more than $15
million in additional tax debts, primarily payroll taxes. Despite
repeatedly abusing the federal tax system, all the exempt organizations
in our case studies continued to retain their exempt status. We found
that existing federal statutes do not authorize IRS to use tax debt as
a cause for revocation of an organization's exempt status. However, IRS
is allowed to revoke exempt status when it determines the organization
has ceased to operate in a manner consistent with the purpose for which
it was granted the tax exempt status or for other extraordinary
circumstances, such as when an organization engages in more than
inconsequential illegal activities.
We also found that more than 1,200 of the exempt organizations with
over $72 million in tax debt received over $14 billion in direct
federal grants in fiscal years 2005 and 2006. Of the more than 1,200
exempt organizations that received grants, over 1,150 were charitable
organizations. These organizations owed approximately $70 million in
tax debt and received over $12 billion of the $14 billion in grants.
Further, the $14 billion in grant disbursements going to exempt
organizations is substantially understated because our audit did not
include all federal agencies that provided grants and did not cover
federal grants disbursed by state or local governments, known as pass-
through grants. According to our analysis of the data from the Federal
Assistance Award Data System, pass-through grants accounted for about
80 percent of total federal grants. Of our 25 tax exempt case study
entities, 6 received federal grants. Our limited audit of grant
applications submitted by these 6 case study entities found that 5 of
the 6 appeared to have violated the False Statement Act[Footnote 11] by
not disclosing their tax debts in their applications even though they
were required to do so. The strict taxpayer privacy statute poses a
significant challenge to federal granting agencies in determining the
accuracy of representations made by organizations seeking grants.
Specifically, federal granting agencies cannot verify an applicant's
tax status with IRS unless the taxpayer specifically authorizes such
disclosure.[Footnote 12]
Exempt Organizations Had Nearly $1 Billion in Unpaid Federal Taxes:
As of September 2006, nearly 55,000 exempt organizations had nearly $1
billion in unpaid payroll and other federal taxes. Almost 40,000 of the
55,000 delinquent exempt organizations were charitable, or 501(c)(3),
organizations that owed almost $830 million of the nearly $1 billion in
unpaid payroll and other federal taxes. The amount of taxes owed by
exempt organizations ranged from $101 to $16 million, and the number of
delinquent tax periods ranged from a single period[Footnote 13] to more
than 80 tax periods.[Footnote 14] However, the dollar amount of federal
taxes owed by exempt organizations is understated because some
organizations underreported their tax liability or failed to file a
return altogether.
Characteristics of Unpaid Taxes by Exempt Organizations:
As shown in figure 1, about 71 percent of the nearly $1 billion in
unpaid federal taxes is composed of payroll taxes and related penalties
and interest. About 19 percent, or over $180 million, is related to
annual reporting penalties. IRS imposes reporting penalties on entities
that did not file annual returns, failed to file in a timely manner, or
filed inaccurate returns.[Footnote 15] The remaining 10 percent of the
nearly $1 billion in delinquent taxes consists of unrelated business
income, excise, and other types of taxes.
Figure 1: Unpaid Federal Tax Debt of Exempt Organizations by Tax Type:
[See PDF for image]
Source: GAO analysis of IRS data set as of September 30, 2006.
[End of figure]
A significant amount of the unpaid federal taxes owed by exempt
organizations had been outstanding for several years. As reflected in
figure 2, while the majority of the nearly $1 billion in unpaid federal
taxes was from tax periods 2001 through 2005, about a third of the
unpaid taxes were from tax periods prior to 2001. While there is a 10-
year statutory collection period beyond which IRS is prohibited from
attempting to collect tax debt. the 10-year time may be suspended for a
variety of reasons, including for periods during which the taxpayer is
involved in a collection due process appeal, litigation, or a pending
offer in compromise or installment agreement. As a result, figure 2
includes taxes that are for tax periods from more than 10 years ago.
Figure 2: Age of Federal Tax Debt Owed by Exempt Organizations:
[See PDF for image]
Source: GAO analysis of IRS data as of September 30, 2006.
[End of figure]
Our analysis of IRS data found that nearly 1,500 of the almost 55,000
delinquent exempt organizations owed in total over $600 million of the
nearly $1 billion unpaid federal taxes of exempt organizations we
identified. All of these nearly 1,500 exempt organizations owed over
$100,000 each, with some owing more than $10 million. Another 8,400
owed from $10,000 to $100,000 each. Although the largest group--nearly
45,000--owed less than $10,000 in delinquent taxes, the majority of the
debt in this group of exempt organizations related to payroll taxes
withheld from employees and not remitted to the federal government and
annual reporting penalties.
Although the nearly $1 billion in unpaid federal taxes we identified as
owed by exempt organizations as of September 30, 2006, is a significant
amount, it understates the full extent of unpaid taxes. This amount
does not include amounts due IRS from exempt organizations that did not
file payroll taxes (nonfilers) and that underreported their payroll tax
liability (underreporters). Also, we did not include exempt
organization tax debt from 2006 tax periods, tax debt for entities
owing $100 or less, or tax debt for certain entities listed in IRS's
database of exempt organizations.[Footnote 16]
Selected Exempt Organizations Were Involved in Abusive and Potentially
Criminal Activity Related to the Federal Tax System:
For all 25 cases involving exempt organizations with delinquent tax
debts that we audited and investigated, we found abusive activity,
potentially criminal activity, or both related to the federal tax
system. The amount of unpaid taxes associated with these cases ranged
from over $300,000 to nearly $30 million. Table 1 highlights 5 of the
25 organizations we investigated with unpaid taxes. Appendix I provides
a summary of the other 20 cases we examined. We are referring the 25
cases detailed in this testimony to IRS for further collection activity
and criminal investigation, if warranted.
Table 1: Exempt Organizations with Unpaid Federal Taxes:
Case: 1;
Nature of work[A]: Health care-related facilities;
Unpaid federal tax amount[B]: Nearly $30 million;
Comments:
* This case consists of an exempt organization and multiple for-profit
related entities with tax debt;
* The entities owe mostly payroll taxes dating back to the late 1990s;
* While failing to pay its taxes:
- The exempt organization paid millions of dollars in management fees
to a contractor that is listed in public records as an affiliate of the
exempt organization;
- The charity received millions of dollars of its funding from federal
government programs;
* While the entities owed taxes, a top official owned an offshore
entity and a residence valued at over $500,000;
* Federal, state, and local tax liens were filed against the charity
for over $10 million.
Case: 2;
Nature of work[A]: Industry association;
Unpaid federal tax amount[B]: Over $6 million;
Comments:
* Tax debts are mostly payroll taxes dating back to the late 1990s;
* An officer acknowledged the tax debt and the decision to fund
operations, including salaries to over 10 officers in excess of
$100,000, rather than pay the tax liability;
* During the time the organization incurred payroll tax debt, a top
officer owned a multimillion-dollar home and purchased luxury vehicles;
* IRS assessed a Trust Fund Recovery Penalty (TFRP) against one
official and placed a tax lien on the organization.
Case: 3;
Nature of work[A]: Health care-related facilities;
Unpaid federal tax amount[B]: Over $15 million;
Comments:
* Tax debts are mostly payroll taxes dating back to the early 2000s;
* At the same time the organization failed to pay its taxes, the top
official;
* received more than $1 million in annual compensation and benefits
and;
* made several hundred thousand dollars in cash transactions at banks
and casinos;
* Millions in federal tax liens have been placed against the
organization and IRS is in the process of assessing a TFRP.
Case: 4;
Nature of work[A]: Social club;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* The tax debt, mostly payroll taxes, dates back to the late 1990s;
* This organization and former officials pled guilty to conducting an
illegal gambling business;
* Despite the guilty pleas, the organization continues to operate as an
exempt organization;
* The organization was also involved in cash transactions not reported
to IRS;
* As of September 30, 2006, a TFRP had not been assessed because IRS
concluded that no one could be held liable;
* Federal tax liens were filed against the entity.
Case: 5;
Nature of work[A]: Services to children;
Unpaid federal tax amount[B]: Over $500,000;
Comments:
* This organization's tax debt dates back to the late 1980s;
* The top official of the organization was convicted of attempting to
bribe an IRS employee;
* This same official retained a position in the organization, which
continues to operate as an exempt organization;
* Organization officials allegedly requested that some payments to it
be made in cash;
* IRS assessed TFRPs against the organization's top officials;
* Federal tax liens were filed against the entity.
Source: GAO analysis of IRS, grant agencies, public and other records.
[A] As described earlier in this testimony, a case study consists in
some cases of multiple related entities, some or all of which have tax
debts. The number of tax periods and the accumulated tax debts cited
earlier in this testimony pertain solely to the exempt organization.
The number of tax periods and the accumulated tax debts cited here
pertain to the accumulated tax periods and tax debts of the exempt
organization and its related entities.
[B] Rounded dollar amount of unpaid federal taxes as of September 30,
2006.
[End of table]
The above cases illustrate how some officials of delinquent exempt
organizations abused the federal tax system for their own benefit.
These officials started multiple exempt organizations and failed to
remit taxes, paid large management fees to related entities, paid high
salaries and accumulated significant assets, or were involved in
criminal activity all the while failing to remit payroll and other
taxes to the federal government.
Despite continuing to abuse the federal tax system, all of the 25 case
study organizations we investigated retained their tax exempt status.
Existing federal statutes do not authorize IRS to revoke exempt status
based on an organization's tax delinquency. However, IRS can revoke an
organization's exempt status when it determines that the organization
has ceased to operate in a manner consistent with the purpose for which
it was granted the tax exempt status or for other extraordinary
circumstances, such as when an organization engages in more than
inconsequential illegal activities or pays officials excessive
compensation.
Exempt Organizations with Unpaid Federal Taxes Received Billions in
Federal Grant Payments:
Based on our analysis, we determined that of the nearly 55,000 exempt
organizations with federal tax debt, more than 1,200 received over $14
billion in federal grants from the Department of Health and Human
Services (HHS),[Footnote 17] the Department of Education, the
Department of Energy, the National Aeronautics and Space
Administration, and other federal agencies in fiscal years 2005 and
2006. The more than 1,200 exempt organizations owed over $72 million in
tax debt yet received substantial amounts in federal grants. Of the
more than 1,200 exempt organizations that were delinquent in taxes yet
received grants, over 1,150 were charitable organizations that owed
approximately $70 million in unpaid federal taxes. These charitable
organizations received over $12 billion of the $14 billion in grants
disbursed to tax delinquent exempt organizations. Additionally, our
estimate of the over $14 billion in federal grants disbursed to exempt
organizations with federal tax debt is likely understated because our
audit did not include all federal agencies that provided grants and did
not cover pass-through grants.
Exempt Organizations with Tax Debt Misrepresented Their Tax Status to
Granting Agencies:
Organizations that apply for federal grants are required to complete a
Standard Form (SF) 424, "Application for Federal Assistance," to
provide granting agencies with entity information, such as name,
employer identification number, address, and a descriptive title of the
project for which the grant will be used. The SF424 also requires that
the grant applicant provide information as to whether the applicant has
any delinquent federal debts. The instructions that accompany the SF424
define federal debt to include taxes owed. The applicant is required to
certify that the information provided on the SF424 is true and correct.
We examined information provided on the SF424 for six of our case study
tax exempt organizations that received grants, all of which had
substantial tax debts outstanding. We found that five of the six that
received federal grants failed to disclose their federal tax debts on
the SF424s filed with the granting agencies. The six entities applied
for and received over $13 million in total grant payments in fiscal
years 2005 and 2006. In a recent 3-year time span, one of the exempt
organizations we audited applied for multiple grants to provide
community services. Even though the entity had an outstanding balance
of unpaid federal taxes, the entity did not disclose its tax liability
on the SF424s. The organization subsequently received several million
dollars in grant payments during 2 recent fiscal years. Figure 3
provides excerpts of an SF424 for this organization where the applicant
appears to have violated the False Statements Act[Footnote 18] by not
disclosing its delinquent tax debt.
Figure 3: Excerpt of SF424 Showing Failure to Declare Delinquent Tax
Debt:
[See PDF for image]
Source: HHS.
[End of figure]
We found that while granting agencies can ask prospective grantees for
consent to verify federal tax debt information with IRS, granting
agencies did so only in a few cases where the grant applicant disclosed
having federal debts. Agencies did not confirm with IRS the accuracy of
applicant information related to federal tax debts because of strict
taxpayer privacy laws. Officials at three granting agencies informed us
that procedurally, if tax debt were declared on the SF424, the agencies
would request further information, including consent to verify tax debt
with IRS, to determine the financial responsibility of the applicant
and whether any action needs to be taken, including withholding grant
payments until a payment plan has been entered into with IRS. Without
accurate debt information, granting agencies are limited in their
ability to fully evaluate whether the grantee is a responsible party
and should receive the grant, whether additional action needs to be
taken, or a combination of these.[Footnote 19]
Concluding Observations:
The vast majority of exempt organizations pay their fair share of
federal taxes. However, our work has shown that tens of thousands of
exempt organizations and their officers have taken advantage of the
opportunity to avoid paying their federal taxes, in part because IRS
does not have the authority to revoke exempt status for failure to pay
taxes. In many cases, officers of these delinquent organizations are
responsible for diversion of payroll tax money--a felony offense--to
pay their substantial salaries and accumulate substantial personal
wealth. It is likely that many of these exempt organizations have
provided significant and positive services to those in need.
Nevertheless, it is also important that they comply with federal tax
law in order for the federal government to collect the funds to which
it is entitled to finance critical government priorities, and to help
improve the overall level of compliance with the nation's tax laws.
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: Exempt Organizations with Unpaid Federal Taxes:
Table 1, in the main portion of the testimony, provides data on 5
detailed case studies. Table 2 provides details of the remaining 20
exempt organizations we selected as case studies. As with the 5 cases
discussed in the body of this testimony, we also found abuse, potential
criminal activity, or both related to the federal tax system during our
audit and investigations of these 20 case studies. The case studies
primarily involved exempt organizations with unpaid payroll taxes, one
for as many as 14 years.
Table 2: Exempt Organizations with Unpaid Federal Taxes:
Case[A]: 6;
Nature of work: Community services;
Unpaid federal tax amount[B]: Nearly $3 million;
Comments:
* Tax debts were mostly payroll taxes dating back to the late 1990s;
* The state fined this organization for employing convicted felons in
positions of public trust;
* An entity employee engaged in criminal activity while employed by the
entity;
* Although this organization has ceased operations, a similar business
has replaced it operating out of the same facility;
* Federal tax liens were filed against the entity.
Case[A]: 7;
Nature of work: Health care-related facilities;
Unpaid federal tax amount[B]: Over $6 million;
Comments:
* This case consists of several related entities with tax debt and with
related executives that share financial and other operational ties;
* Combined, these related entities owe mostly payroll taxes dating back
to the late 1990s;
* Combined, the entities received over $20 million annually from
government-funded programs;
* Several of the exempt organizations appear to pay management fees
that total in the millions to a related entity;
* Federal tax liens were filed against the entities.
Case[A]: 8;
Nature of work: Community services;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* Entity officials claim they were unaware they had not paid payroll
taxes for several years;
* Entity officials recently chose to close the entity rather than pay
the tax;
* Entity received nearly $3 million in federal grants during a recent 2-
year period;
* A top official received compensation of nearly $100,000;
* Despite owing taxes, this entity did not declare federal tax debt in
its grant application;
* Federal tax liens were filed against the entity.
Case[A]: 9;
Nature of work: Group home;
Unpaid federal tax amount[B]: Nearly $8 million;
Comments:
* Entity owes mostly payroll tax from the early 1990s;
* A key official knew of the growing tax debt, but the entity chose to
fund operations rather than pay the taxes. While incurring the tax
debt, key officials owned multimillion-dollar properties;
* Entity filed for bankruptcy;
* A Trust Fund Recovery Penalty (TFRP) has been assessed against a key
official;
* Federal, state, and local tax liens were filed against the entity for
several million dollars.
Case[A]: 10;
Nature of work: Educational services;
Unpaid federal tax amount[B]: Over $3 million;
Comments:
* Entity owes mostly payroll taxes dating back to the early 2000s;
* Despite owing taxes, this entity did not declare federal tax debt in
its grant application. The entity received several million dollars in
federal grants in a recent year;
* IRS seized some of the organization's assets in the mid- 2000s;
* A large TFRP has been assessed against several officials;
* Federal tax liens were filed against the entity.
Case[A]: 11;
Nature of work: Health care facility;
Unpaid federal tax amount[B]: Over $500,000;
Comments:
* Entity received local funding on the condition that it would be
current in paying its payroll taxes;
* After IRS placed levies on the organization for failing to remit
mostly payroll taxes for over 3 years, the entity lost its local
funding;
* While the entity incurred the tax debt the top official of the
entity;
* was compensated by the entity close to $200,000 for management
services as a sole proprietor,;
* owed the entity nearly $200,000 for overbudget expenditures and
unpaid rents,;
* had the entity's license to operate suspended because of violations
of regulations,;
* owed individual income tax, and;
* filed for personal bankruptcy;
* IRS assessed a TFRP against this top official;
* Federal and state tax liens have been filed against the entity and
this official.
Case[A]: 12;
Nature of work: Community services;
Unpaid federal tax amount[B]: Over $300,000;
Comments:
* This entity received over $2 million in federal grants;
* Entity pays a $75,000 annual salary to a relative of the executive
director;
* Despite owing taxes, this entity did not declare federal tax debt in
its grant application.
Case[A]: 13;
Nature of work: Social services;
Unpaid federal tax amount[B]: Over $800,000;
Comments:
* Entity received nearly $400,000 in federal grants during a recent 2-
year period while owing payroll tax dating back to the early 2000s;
* Previous top official, responsible for incurring the debt, was
convicted of a felony;
* IRS placed a TFRP on the previous top official;
* Federal tax liens were filed against the entity.
Case[A]: 14;
Nature of work: Group homes;
Unpaid federal tax amount[B]: Over $3 million;
Comments:
* This case consists of multiple exempt organizations with tax debt.
These entities owe mostly payroll tax dating back to the late 1990s;
* Entities make and receive interest- free loans to and from other
related entities and key officials;
* Related key officials are annually compensated over $300,000 from
multiple entities;
* One key official owes individual income tax;
* Federal tax liens have been filed against some of the related
entities and related key officials;
* IRS placed a large TFRP on one of the related key officials;
* One of the entities entered into multiple installment agreements with
IRS and was out of compliance on at least one agreement.
Case[A]: 15;
Nature of work: Health care-related facility;
Unpaid federal tax amount[B]: Nearly $2 million;
Comments:
* Entity has twice filed for bankruptcy, and the top official filed for
personal bankruptcy. During this time the entity failed to remit mostly
payroll tax dating back to the late 1990s;
* IRS assessed TFRPs against key officials who are each compensated
over $100,000 annually;
* Federal tax liens have been filed against the entity totaling over $1
million.
Case[A]: 16;
Nature of work: Services to children;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* Entity owes mostly payroll tax dating back to the mid-1990s. The top
official of this entity is also an official for another for-profit
entity with tax debt;
* This top official;
* has a history of personal and business bankruptcies;;
* incurs tax debt, files for bankruptcy, reincorporates as another
entity, and incurs additional tax debt;
and;
* runs a separate company that provides services to the exempt
organization. The associated costs are significantly greater than those
of similar children's services organizations in the same region;
* IRS assessed TFRPs against key officials;
* Federal tax liens have been filed against the top official.
Case[A]: 17;
Nature of work: Social services;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* Entity owes mostly payroll taxes dating back to early 2000s;
* IRS placed tax liens on this organization;
* IRS assessed a TFRP against an organization official.
Case[A]: 18;
Nature of work: Rehabilitation services;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* Entity accumulated tax debt over several years dating back to the
late 1990s;
* During this time period, organization officials withdrew several
hundred thousand dollars in cash from entity bank accounts;
* Related key officials were annually compensated close to $200,000 in
total;
* IRS assessed TFRPs against key officials. Some payments have been
made, but the majority of the tax remains unpaid;
* Federal tax liens have been filed against the entity.
Case[A]: 19;
Nature of work: Educational services;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* This entity owes mostly payroll tax dating back to the mid-1990s;
* A top official owns an expensive home and has recently filed for
personal bankruptcy;
* IRS assessed a TFRP against organization officials;
* Federal tax liens were filed against the entity.
Case[A]: 20;
Nature of work: Services to the elderly;
Unpaid federal tax amount[B]: Over $3 million;
Comments:
* Entity owes mostly payroll tax for tax periods dating back to the
late 1980s;
* IRS assessed a TFRP against organization officials;
* Federal tax liens were filed against the entity.
Case[A]: 21;
Nature of work: Community services;
Unpaid federal tax amount[B]: Nearly $3 million;
Comments:
* Entity reported on recent financial statements cash and cash
equivalents of over several million dollars. At the same time, the
entity owed mostly payroll tax dating back to the mid-1990s;
* While the entity was incurring the tax debt,;
* the top official received compensation of over $250,000 and;
* several other employees received compensation from $75,000 to
$200,000;
* A key official owns an expensive home in an exclusive neighborhood
and has been investigated or indicted for various violations of civil
laws;
* Federal tax liens have been filed against the entity.
Case[A]: 22;
Nature of work: Education services;
Unpaid federal tax amount[B]: Over $2 million;
Comments:
* Entity owes mostly payroll tax dating back to the mid-1990s. In
addition, entity owes nontax debt totaling several million dollars;
* Federal and state tax liens have been filed against the entity;
* IRS assessed a TFRP against key officials, one of whom also has
unpaid federal tax debt dating back to the early 1990s.
Case[A]: 23;
Nature of work: Children's services;
Unpaid federal tax amount[B]: Over $2 million;
Comments:
* While failing to remit mostly payroll taxes dating back to the early
2000s,;
* the entity received over $2 million in federal grants in recent
years,;
* a key official received compensation of over $100,000, and;
* the entity entered into multiple payment plans with the IRS, and was
out of compliance on at least one;
* Despite owing taxes, this entity did not declare federal tax debt in
its grant application;
* IRS assessed large TFRPs against key officials;
* Federal tax liens were filed against the entity.
Case[A]: 24;
Nature of work: Health care services;
Unpaid federal tax amount[B]: Over $5 million;
Comments:
* Entity owes mostly payroll tax dating back to the early 2000s;
* Key official received compensation of over $200,000;
* IRS has not assessed a TFRP against any individual;
* Federal tax liens were filed against the entity.
Case[A]: 25;
Nature of work: Educational services;
Unpaid federal tax amount[B]: Over $300,000;
Comments:
* Entity received over $2 million in federal grants during a recent 2-
year period while owing mostly payroll tax dating back to the late
1990s;
* Despite owing taxes, this entity did not declare federal tax debt in
its grant application;
* Entity did not file payroll tax returns for several years, although
it made payments for some periods. IRS is considering a request from
the entity for an offer in compromise in which the entity would pay
only a portion of the unpaid tax debt.
Source: GAO analysis of IRS data, public, and other records.
[A] As described earlier in this testimony, a case study consists in
some cases of multiple related entities, some or all of which have tax
debts. The number of tax periods and the accumulated tax debts cited
earlier in this testimony pertain solely to the exempt organization.
The number of tax periods and the accumulated tax debts cited here
pertain to the accumulated tax periods and tax debts of the exempt
organization and its related entities.
[B] Rounded dollar amount of unpaid federal taxes as of September 30,
2006.
[End of table]
FOOTNOTES
[1] See GAO, Tax Compliance: Thousands of Federal Contractors Abuse the
Federal Tax System, GAO-07-742T (Washington, D.C.: Apr. 19, 2007);
Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System, GAO-07-587T (Washington, D.C.: Mar. 20, 2007); Tax Debt: Some
Combined Federal Campaign Charities Owe Payroll and Other Federal
Taxes, GAO-06-755T (Washington, D. C. : May 25, 2006); 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).
[2] We considered activity to be abusive when a 501(c) 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 of
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.
[3] GAO, Tax Compliance: Thousands of Organizations Exempt from Federal
Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes, GAO-07-563
(Washington, D. C.: June 29, 2007), released today, July 24, 2007.
[4] GAO-06-755T, and GAO, Tax Debt: Some Combined Federal Campaign
Charities Owe Payroll and Other Federal Taxes, GAO-06-887 (Washington,
D.C.: July 28, 2006).
[5] To ensure reliability of data in IRS's Unpaid Assessments file and
Exempt Organization database, we considered the results of our annual
IRS financial audits, interviewed IRS officials, performed electronic
testing of specific data elements, or a combination of these. For
additional information on our scope and methodology and tests of data
reliability, see app. I of our accompanying report, GAO-07-563.
[6] For purposes of this audit, grants include formula grants, project
grants, and direct payments for specified use as classified by the
General Services Administration in the Catalogue of Federal Domestic
Assistance. We excluded Medicaid from formula grants and Medicare from
direct payments for specified use.
[7] Grant data we analyzed came from the Department of Education's
Grant Administration and Payment System, the Department of the
Treasury's Financial Management Service's Automated Standard
Application Payment System, and the Department of Health and Human
Services' Payment Management System. These three systems processed the
majority of federal grants excluding Medicare and Medicaid during
fiscal years 2005 and 2006.
[8] GAO-07-563.
[9] Generally, there is a 10-year statutory collection period beyond
which IRS is prohibited from attempting to collect tax debt. However,
the 10-year time may be suspended for a variety of reasons, including
for periods during which the taxpayer is involved in a collection due
process appeal, litigation, or a pending offer in compromise or
installment agreement.
[10] I.R.C. § 7202, 7215, and 7512 (b). Organization officials deemed
by IRS to be personally liable for the withheld amounts not forwarded
are assessed a civil monetary penalty known as a trust fund recovery
penalty. I.R.C. § 6672.
[11] 18 U.S.C. § 1001 provides criminal penalties for those who
knowingly and willfully (1) falsify, conceal, or cover up by any trick,
scheme, or device a material fact; (2) make any materially false,
fictitious, or fraudulent statement or representation; or (3) make or
use any false writing or document knowing that the documents contain
any materially false, fictitious, or fraudulent statement or entry.
[12] Federal taxpayers can request or consent to the disclosure of
their tax information. I.R.C. § 6103(c).
[13] 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.
[14] As described later in this testimony, a case study consists in
some cases of multiple related entities, some or all of which have tax
debts. The number of tax periods and the accumulated tax debts cited
here pertain solely to the exempt organization. The number of tax
periods and the accumulated tax debts cited later in this testimony
pertain to the accumulated tax periods and tax debts of the exempt
organization and its related entities.
[15] Generally, the tax code requires exempt organizations with $25,000
or more of revenues to file annual returns (i.e., Form 990/990EZ).
[16] IRS's database of exempt organizations contained over 2.5 million
entities. IRS does not consider all 2.5 million as currently tax
exempt. We only included in our analysis the classifications of exempt
organizations that IRS identified as currently tax exempt. This
resulted in about 1.8 million entities. For additional information on
our scope and methodology and tests of data reliability, see app. I of
our accompanying report, GAO-07-563.
[17] The HHS amount excludes Medicare and Medicaid payments. For
additional information on our scope and methodology and tests of data
reliability, see app. I of our accompanying report, GAO-07-563.
[18] 18 U.S.C. § 1001.
[19] Further actions granting agencies can take include placing
restrictions on the funding, requiring that the prospective grantee
enter into a payment agreement with IRS, or denying the grant.
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