Like all other employers, exempt organizations with employees are  required to pay payroll taxes that they withhold from employees’ wages “in  trust” for the federal government, as well as other applicable federal taxes. Payroll taxes withheld from employees consist of income taxes; Old Age,  Survivors, and Disability Insurance (OASDI), commonly referred to as  Social Security; and Medicare. 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. All of these nearly 1,500 exempt organizations owed over  $100,000 each, with some owing more than $10 million. Amount of Unpaid Federal Taxes Is Understated for Exempt Organizations

Although the nearly $1 billion in unpaid federal taxes we identified that  were owed by exempt organizations as of September 30, 2006, is a  significant amount, it understates the full extent of unpaid taxes. 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. All 25 exempt  organizations had unpaid payroll taxes, some dating as far back as the late  1980s. Rather than fulfill their role as  “trustees” of this money and forward it to IRS as required by law, the  officials responsible for these exempt organizations diverted the money to  fund the organizations’ operations, which sometimes included millions of  dollars in management fees to related entities, or for personal benefits,  such as their own salaries. Further, 4 of the 25 case study organizations we  investigated had key officials and other employees who were convicted of  criminal activities, including tax evasion and operating an illegal gambling  establishment, at the same time the organizations continued to benefit  from a tax exempt status. We are referring all 25 cases we examined to IRS for further  collection activity and criminal investigation, if warranted. Despite continuing to abuse the federal tax system, all of the 25 case study  organizations continued to retain their tax exempt status. Existing federal  statutes do not authorize IRS to revoke exempt status based on an  organization’s tax delinquency. Tax Delinquent Exempt Organizations Received Billions in Federal Grants

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 HHS, Education, the Department of  Energy, the National Aeronautics and Space Administration, and other  federal agencies in fiscal years 2005 and 2006. Figure 3 provides excerpts of an SF 424 for this  organization where the applicant appears to have violated the False  Statements Act by not disclosing its delinquent tax debt. 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. The oral comments highlighted  several planned actions to enhance exempt organizations’ tax compliance  efforts. GAO staff who made major contributions to this report  are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine whether and, if so, 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. On April 6, 2007, we  requested comments on a draft of this report from the Commissioner of  IRS.
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. To follow up on the CFC work, the subcommittee requested that GAO determine 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. GAO referred all 25 cases to IRS for collection activity and criminal investigation, if warranted. In its oral comments on a draft of this report, IRS noted several actions it is taking to enhance exempt organizations' tax compliance.

What GAO Found

Nearly 55,000 exempt organizations had almost $1 billion in unpaid federal taxes as of September 30, 2006. About 1,500 of these entities each had over $100,000 in federal tax debts with some owing tens of millions of dollars. 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. For the 25 cases investigated GAO 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 large salaries ranging from hundreds of thousands of dollars to over $1 million. Many of the 25 case studies accumulated substantial assets, such as million-dollar homes and luxury vehicles. Key officials and employees at 4 exempt organizations 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.