	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. Generally, the IRS requires  501(c)(3) charities with more than $25,000 of income to file an annual  return (i.e., Form 990). The majority of the approximately 1,280 delinquent charities, 78 percent,  owed less than $10,000 in delinquent taxes. 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. Willful failure to remit payroll taxes  is a felony under U.S. law, 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. During the time frames for which these charities were not paying their  taxes, funds were available to cover other charity expenses, including  officer salaries. 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. 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. OPM does not perform any independent verification of charity  applicants’ tax-exempt status. Therefore, we referred these charities to OPM and IRS for  further review and confirmation of their tax-exempt status. 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. 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 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. 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.
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. 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.