[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




                  CHARITIES AND EMPLOYMENT TAXES: ARE

               CHARITIES IN THE COMBINED FEDERAL CAMPAIGN

                      MEETING THEIR EMPLOYMENT TAX

                           RESPONSIBILITIES?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 25, 2006

                               __________

                           Serial No. 109-79

                               __________

         Printed for the use of the Committee on Ways and Means










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30-448                     WASHINGTON : 2006
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                    JIM RAMSTAD, Minnesota, Chairman

ERIC CANTOR, Virginia                JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado               EARL POMEROY, North Dakota
JOHN LINDER, Georgia                 MICHAEL R. MCNULTY, New York
E. CLAY SHAW, JR., Florida           JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

















                            C O N T E N T S

                               __________

                                                                   Page

Advisory of May 18, 2006 announcing the hearing..................     2

                               WITNESSES

Miller, Steven T., Internal Revenue Service......................    18
Green, James S., Office of Personnel Management..................    28
Kutz, Gregory D., U.S. Government Accountability Office..........     6














 
                    CHARITIES AND EMPLOYMENT TAXES:
                 ARE CHARITIES IN THE COMBINED FEDERAL
                   CAMPAIGN MEETING THEIR EMPLOYMENT
                         TAX RESPONSIBILITIES?

                              ----------                              


                         THURSDAY, MAY 25, 2006

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 11:02 a.m., in 
room 1100, Longworth House Office Building, Hon. Jim Ramstad 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
May 18, 2006
OV-7

               Ramstad Announces Hearing on Charities and

                 Employment Taxes: Are Charities in the

                   Combined Federal Campaign Meeting

                 Their Employment Tax Responsibilities?

    Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight 
of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on charities and employment tax 
compliance. The hearing will take place on Thursday, May 25, 2006, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 11:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include the Internal Revenue Service (IRS), U.S. 
Government Accountability Office (GAO), and the Office of Personnel 
Management (OPM). However, any individual or organization not scheduled 
for an oral appearance may submit a written statement for consideration 
by the Committee and for inclusion in the printed record of the 
hearing.
      

BACKGROUND:

      
    Under the law, employers who compensate their employees are 
required to withhold certain taxes from an employee's paycheck, known 
as employment or payroll taxes. Employment taxes include Federal income 
tax withholding, Social Security, Medicare and Federal Unemployment 
Tax. Entities organized under section 501(c)(3) of the Internal Revenue 
Code must pay all employment taxes except Federal Unemployment Tax. 
Employers are responsible for withholding employment taxes from 
employees' pay, and then remitting the employment taxes, as well as the 
appropriate forms to the IRS for the purpose of revenue collection, and 
properly crediting a worker's Social Security record.
      
    Charities are a significant part of the economy, and payroll tax 
compliance by charities is an important part of overall employment tax 
compliance. According to the GAO, in 2002, charities reported revenues 
of more than $941 billion, representing 8 percent of gross domestic 
product. Their personnel accounted for approximately 8.6 percent of the 
civilian workforce in 2001. The IRS is responsible for enforcement of 
all employment tax cases, including those relating to charities and 
other tax-exempt organizations. The IRS uses a variety of means to find 
and collect unpaid employment taxes. This hearing will explore whether 
the IRS uses its significant regulatory authority over charities to 
ensure that they are meeting their payroll tax obligations.
      
    In order to better understand the extent of payroll tax 
noncompliance by charities, the Subcommittee has asked GAO to review 
whether any charities participating in the Combined Federal Campaign 
(CFC) have outstanding tax debts. The CFC is a program administered by 
OPM in order to facilitate charitable contributions by federal 
employees. While all charities receive a tax subsidy, CFC charities 
receive substantial additional benefits from the Federal Government. 
The most significant of these benefits is that by accepting a charity 
in the CFC, OPM is indicating that a charity meets certain basic 
standards regarding its charitable purpose, transparency and public 
accountability. Therefore, it is important to see whether these 
charities have any outstanding payroll tax debt, and whether the OPM's 
procedures for reviewing charities' qualifications are effective.
      
    The hearing will examine the following issues:
      
      What is the IRS doing to ensure that charities comply 
with their payroll tax obligations?
      Is the IRS effectively using its regulatory authority 
over charities to ensure that they pay their taxes?
      Is it appropriate for charities with substantial tax debt 
to maintain their tax-exempt status?
      Do any charities participating in the CFC have tax debt?
      Is it appropriate for charities with tax debt to 
participate in the CFC?
      Does the OPM perform effective background checks on the 
charities participating in the CFC?
      Are there tax-exempt organizations with significant tax 
debt that receive other benefits from the Federal Government, such as 
grants?
      
    In announcing the hearing, Chairman Ramstad stated, ``The Federal 
Government's fiscal health cannot be maintained without effective 
employment tax compliance. It is important to ensure that tax deadbeats 
are not unnecessarily receiving benefits from the Federal Government, 
whether through tax-exempt status, grants, or promotion in the Combined 
Federal Campaign.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on compliance by charities with their 
employment tax obligations.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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June 8, 2006. Finally, please note that due to the change in House mail 
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technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
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be accepted for printing. Instead, exhibit material should be 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman RAMSTAD. The Committee hearing will come to order. 
We welcome our witnesses as well as our guests in the audience 
here today. Nice to see you, Ranking Member Lewis, my dear 
friend.
    Mr. LEWIS. Thank you sir.
    Chairman RAMSTAD. The Committee on Ways and Means has been 
conducting a wide-ranging review of tax-exempt entities to 
ensure that these tax-exempt entities are providing the 
benefits that Congress intended in exchange for their tax-
exempt status. Today, as part of this ongoing review, we will 
learn more about whether charities are fulfilling their tax 
obligations.
    While charities do not pay income taxes, they are still 
responsible for collecting payroll taxes. Given the fact that 
charities' employees account for 9 percent of the Nation's work 
force, these payroll taxes are not inconsequential. Therefore, 
we will hear testimony from the Internal Revenue Service (IRS) 
which will explain what it does to ensure that charities pay 
their taxes.
    To analyze payroll tax compliance by charities, I asked the 
government Accountability Office (GAO) to review the charities 
participating in the Combined Federal Campaign (CFC). The focus 
on the CFC is appropriate, I believe, as those charities 
receive additional benefits from the Federal government above 
and beyond the tax subsidy received by all charities. CFC 
charities receive, first of all, the Federal Government's seal 
of approval. They also get extensive promotion and fundraising 
assistance.
    As a result of GAO's work, we learned several disturbing 
facts. First, a number of CFC charities have Substantial tax 
debts. The GAO found almost 1,300 CFC charities that owed tax 
debts, totaling over $36 million. As detailed in the GAO 
testimony, some of the charities have been engaged in serious 
abuse of the Federal tax system. I want to know among other 
things if the witnesses here today think it is appropriate for 
charities with substantial tax debts to be participating in the 
CFC, and if not, what should be done about it?
    We also learned pursuant to the GAO review, in addition to 
participating in the CFC, many of these tax delinquent 
charities received substantial grants from various Federal 
agencies totaling $1.6 billion. That is $1 billion with a ``B'' 
and $600 million dollars. We learned that the Office of 
Personnel Management (OPM), apparently does not conduct even 
the most basic background checks about entities applying to 
participate in the CFC. For example, the OPM does not even have 
a list of the charities participating in the CFC, and despite 
weeks of work, GAO was never able to get a list of the 
charities authorized to participate in the CFC. If there is 
one, we hope to hear about it today, but GAO could not find it.
    Perhaps most disturbing of all, we learned that the OPM 
does not even make sure that charities approved to participate 
in the CFC are in fact legitimate charities. The GAO applied to 
three different local CFC campaigns as a fictitious charity in 
a sting-type operation and was accepted into each of the three 
campaigns. Again, fictitious charities applying to the CFC 
campaigns were accepted into all three campaigns. The GAO could 
have been caught in the sting operation if someone at the local 
campaign or at OPM had simply picked up the phone and asked the 
IRS if the applicant were a legitimate if the applicant were a 
legitimate charity. In fact, GAO's work in this case reminds me 
of an old Seinfeld episode in which George Costanza sets up a 
up a fake charity, called ``The Human Fund,'' with a memorable 
motto, ``money for people,'' ``give to The Human Fund.'' I see 
some heads in the audience shaking affirmatively, ``give to the 
human fund,'' ``money for people.'' George set up his fake 
charity so that he could tell his coworkers that donations had 
been made in their name to the Human Fund and thereby avoid 
giving them actual Christmas presents. While fake charities 
like The Human Fund might be funny on a sitcom, when it comes 
to the CFC, they are not a laughing matter.
    The OPM procedures appear to be so minimal that anyone 
could pull a Costanza, create a fake charity and be accepted 
into the CFC and then use that designation, that imprimatur or 
aura of legitimacy, to take advantage of donors.
    Now, we all know the vast majority of charities in the CFC 
are established, legitimate, well-intended organizations, and 
they certainly perform valuable services. It is critical that 
we not allow the reputations of these charities, of these 
legitimate organizations, to suffer because of the weak 
controls that OPM maintains over the CFC.
    I am eager to hear more about the GAO's work on this issue, 
and I am certainly interested in hearing what the OPM and the 
IRS can do to improve this situation. This situation, these 
revelations by the GAO, cannot continue. I will now recognize 
my good friend, the ranking Member, Mr. Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman, and thank you 
for holding this hearing today. Let me take just a moment to 
thank all of the witnesses for being here. The press release 
for today's hearing asks the overall question: Are charities 
complying with their employment tax obligations? I think today 
we will find that the answer is, yes. I look forward to hearing 
from the witnesses about what the Federal Government can do to 
ensure even greater compliance with our employment tax laws.
    A related issue to be considered by the Subcommittee 
involves tax law compliance by charities participating in the 
CFC. The CFC was officially created in 1961 by President 
Kennedy and has raised more than $5.5 billion in charitable 
donations from Federal workers. That is a lot of money on the 
part of Federal workers. It is the world's largest and most 
successful workplace giving campaign.
    Again, Mr. Chairman, I want to thank you for holding 
today's hearing because I think it is important that the 
Subcommittee review these issues. Workers expect that the 
amounts withheld from their paychecks are correctly sent to the 
IRS by their employers.
    Government employees expect that charitable paycheck 
contributions are forwarded to first class charity 
organizations. That is what we need to find out, and I agree, 
Mr. Chairman, that this is an issue that we must deal with. 
Thank you very much.
    Chairman RAMSTAD. Thank you very much, Mr. Lewis. We will 
now call our first panel, first and only panel, Gregory Kutz, 
Managing Director of Forensic Audits and Special Investigations 
for the U.S. GAO. Welcome, Mr. Kutz. Our second witness will be 
Mr. Steven T. Miller, Commissioner, Tax Exempt and government 
Entities (TE/GE) Division of the IRS. Welcome, Mr. Miller. 
Finally, James S. Green, Associate General Counsel, 
Compensation, Benefits, Products and Services Group of the OPM. 
Welcome, Mr. Green. We will begin by hearing from Mr. Kutz, 
please.

   STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. KUTZ. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to discuss the CFC.
    Last year, Federal workers gave $250 million to CFC 
charities, helping thousands of people that were in need. Our 
investigation focused on whether and to what extent these 
charities had Federal tax problems. The bottom line of my 
testimony is that the vast majority of CFC charities pay their 
fair share of taxes. However, we found that 6 percent had $36 
million of unpaid Federal taxes.
    My testimony has two parts: first, charity tax problems 
and, second, oversight of the CFC program. First, we found that 
1,280 CFC charities had $36 million of unpaid Federal taxes. 
The monitor shows the composition of these unpaid taxes. As you 
can see, $28 million represent payroll taxes. Note the payroll 
taxes include amounts withheld from an employee's wages for 
Federal income taxes, Social Security and Medicare, along with 
the employer match. Willful failure to remit payroll taxes is a 
felony.
    Our analysis clearly understates the number of CFC 
charities with tax problems. For example, our analysis excludes 
charities that are nonfilers or that underreport payroll or 
other taxes. Further, in addition to the benefits of CFC, as 
you mentioned, Mr. Chairman, 170 of these tax delinquent 
charities received at least $1.6 billion of Federal grants. 
Examples of where the grants came from include the Departments 
of Health and Human Services, Education, Energy, the U.S. 
Agency for International Development (USAID) and the National 
Aeronautics and Space Administration (NASA).
    In order to determine the story behind these charities and 
their executives, we investigated 15 that owed between $100,000 
and $1.5 million of Federal taxes. All 15 charities that we 
investigated were involved with abusive and potentially 
criminal activity related to the Federal tax system. For 
example, rather than fulfill their role as trustees of the 
payroll tax money and forward it to the IRS, these executives 
diverted the money for other charity expenses, including their 
own salaries. Many of these individuals had salaries in excess 
of $100,000.
    We also found evidence of severe cash flow problems. For 
example, several of the charities had filed for bankruptcy 
protection. In other cases, the auditor of the charity had 
issued what is referred to as a going-concern opinion on the 
financial statements. This means that the ability of the 
charity to survive for another year is in serious doubt.
    Regarding my second point, OPM and the 300 CFC campaigns do 
not screen charities for Federal tax problems before allowing 
them to be listed in the CFC program. Under current law, OPM 
would need consent from the charities to access IRS tax 
records. The OPM and the campaigns also do not validate with 
IRS each CFC applicant's tax-exempt status. To demonstrate the 
vulnerability of this process, we applied to three CFC 
campaigns using a bogus charity. The monitor shows one of the 
three letters that we received this month in response to our 
application. As you can see, the letter documents the 
acceptance of our bogus charity into the 2006 CFC. Unlike 
delinquent tax records, IRS data on tax-exempt status is 
available to OPM.
    In conclusion, our investigation raises several important 
policy questions. First, should charities with tax problems be 
allowed to be listed with the CFC? Further, should they be 
allowed to continue to enjoy their status as tax-exempt 
organizations and receive Federal grants? Regardless of what 
policy choices are made, OPM can better ensure the integrity of 
the CFC program through enhanced oversight. Let us not forget 
that the vast majority of CFC charities are good corporate 
citizens that help thousands of those that are truly in need.
    Mr. Chairman, this ends my statement. I look forward to 
your questions.
    [The prepared statement of Mr. Kutz follows:]
 Statement of Gregory D. Kutz, Managing Director, Forensic Audits and 
     Special Investigations, U.S. Government Accountability Office
    Mr. Chairman and Members of the Subcommittee:
    Thank you for the opportunity to assist the subcommittee as it 
reviews tax-exempt organizations. This testimony builds on our 
experience investigating entities that have abused the federal tax 
system \i\ while benefiting from doing business with the federal 
government. \ii\ Today, our testimony addresses whether organizations 
exempt from federal income taxes were delinquent in remitting payroll 
and other federal taxes to the Internal Revenue Service (IRS) while 
participating in the 2005 Combined Federal Campaign (CFC).
---------------------------------------------------------------------------
    \i\ We considered activity to be abusive when a 501(c)(3) 
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 for 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.
    \ii\ See GAO, 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).
---------------------------------------------------------------------------
    The CFC, which is administered and promoted by the Office of 
Personnel Management (OPM) and about 300 local campaigns, gave more 
than 22,000 charities access to the federal workplace, where they 
collected more than $250 million in donations during the 2005 campaign. 
The success of CFC has made a notable difference in the benefits 
provided to those in need. The CFC represents that it brings three 
unique qualities to those it serves--''the three C's of CFC''--by 
offering donors a ``choice'' to select from thousands of charities to 
support, allowing the ``convenience'' of making payroll deductions, and 
ensuring donors' ``confidence'' that charities listed with the campaign 
meet CFC's specific eligibility requirements. In the spirit of ensuring 
that donors can trust their contributions are going to organizations 
that have met CFC's specific eligibility requirements, and are 
legitimate charities, you asked us to investigate charities listed with 
the CFC.
    Specifically, you asked us to investigate and determine whether and 
to what extent (1) charities listed in the 2005 CFC have unpaid payroll 
and other federal 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.
    As you know, to qualify as exempt from federal income taxes, an 
organization must meet the requirements set forth in the Internal 
Revenue Code\iii\ and formally receive tax-exemption designation under 
501(c)(3) to participate in the CFC. Regardless of tax-exempt status, 
all employers are required to withhold from their employees' wages 
payroll taxes for Social Security and Medicare and other taxes. Willful 
failure to remit payroll taxes is a felony under U.S. law.\iv\
---------------------------------------------------------------------------
    \iii\ 26 U.S.C. Sec. 501(c)(3).
    \iv\ 26 U.S.C. Sec. 7202.
---------------------------------------------------------------------------
    To determine whether and to what extent CFC 501(c)(3) charities had 
unpaid payroll and other federal taxes, we obtained and analyzed IRS 
unpaid tax debt data as of September 30, 2005. We matched organizations 
with unpaid tax debts to the CFC's list of charities that participated 
in the 2005 campaign.\v\ To further analyze abuse of the federal tax 
system by selected charities, their directors, or senior officers, we 
applied certain criteria--the amount of outstanding tax debt, the 
number and age of reporting periods for which taxes were due, and the 
type of outstanding tax--to select 15 organizations for detailed audit 
and investigation. For these 15 organizations, we reviewed tax records 
and performed additional searches of criminal, financial, and other 
public records.
---------------------------------------------------------------------------
    \v\ The campaign cycle for CFC consists of a 2-year reporting 
period, which marks the beginning of a campaign and the end of a 
campaign. Most campaigns will begin operation on or about March 15 of 
the first year of the campaign and end around March 14 2 years later, 
depending on the final disbursement for the campaign. For example, 
March 15, 2005, begins the fall 2005 campaign and March 14, 2007, marks 
the end of the fall 2005 campaign. Typically, the annual campaign runs 
for a 6-week period from September 1 through December 15. Actual dates 
may vary from one campaign to another.
---------------------------------------------------------------------------
    To determine whether OPM screens organizations for federal tax 
problems before allowing them to be listed with the CFC, we identified 
the legal criteria for doing so and gained an understanding of the 
screening process through meetings with OPM's Office of CFC Operations 
and others responsible for processing applications. To test OPM's 
process of screening for legitimate charities, we created a fictitious 
charity and applied to three large campaigns in various parts of the 
country. We also matched the CFC's list of charities that participated 
in the 2005 campaign against the list of all tax-exempt organizations 
identified by the IRS to determine whether non-tax-exempt organizations 
participated in the 2005 campaign. For further details on our scope and 
methodology, see appendix I.
    We conducted our audit work from January 2006 through May 2006 in 
accordance with U.S. generally accepted government auditing standards. 
We performed our investigative work in accordance with standards 
prescribed by the President's Council on Integrity and Efficiency.
Summary
    More than 1,280 CFC charities had tax debts totaling at least $35.6 
million as of September 30, 2005. This represented nearly 6 percent of 
the charities that participated in the OPM-administered 2005 campaign. 
Of this debt, $27.7 million represented payroll taxes, penalties, and 
interest dating back as far as 1988. The remaining $7.9 million 
includes annual reporting penalties, excise taxes, exempt organization 
business income taxes, unemployment taxes, and other types of taxes and 
penalties. The majority of the 1,280 delinquent charities, 78.6 
percent, owed less than $10,000 in delinquent taxes. The $35.6 million 
in delinquent taxes is likely understated because we took a 
conservative approach to identifying the amount of tax debt owed to the 
IRS by CFC charities. The delinquent tax totals do not include amounts 
for charities that do not file required tax returns and related taxes 
or charities that underreport unrelated business income or payroll 
taxes.
    In addition to CFC donations, we found that more than 170 of these 
tax-delinquent charities received about $1.6 billion in federal grants 
during fiscal year 2005. Five of 15 case study charities we reviewed in 
detail were among the more than 170 charities that received federal 
grants. These 5 charities received grants from the Departments of 
Health and Human Services (excluding Medicaid) and Education that 
totaled more than $6.5 million.
    Our detailed audit and investigation of the 15 CFC charities with 
tax debt and their directors or senior officers identified abusive and 
potentially criminal activity. Although charities are exempt from 
certain taxes (e.g., federal income tax), the executives of the 15 
charities we investigated were required by law but failed in their 
roles as ``trustees'' to forward payroll taxes to the IRS, which 
include amounts withheld from their employees' wages for Social 
Security, Medicare, and the employer's matching portion of these taxes 
and individual income taxes.
    During interviews, three of the 15 selected charities' executives 
denied owing payroll and other taxes when IRS records showed otherwise. 
Executives from 5 other charities explained that they knowingly 
withheld payroll taxes in order to have enough funds available to pay 
for charity activities and the salaries of charity employees. As a 
result of remitting tax payments late, the charities accumulated tens 
of thousands of dollars in penalties and interest. Our investigations 
also showed that several of the executives who potentially could be 
assessed trust fund recovery penalties for the debts of their charities 
had salaries in excess of $100,000 and owned significant personal 
assets. In addition, according to independent audit reports, some of 
the charities appeared to have significant cash flow problems. Willful 
failure to remit payroll taxes is a felony under U.S. law\vi\. We 
referred all 15 cases detailed in our report to the IRS so that it can 
determine whether additional collection action or criminal 
investigation is warranted.
---------------------------------------------------------------------------
    \vi\ 26 U.S.C. Sec. 7202. Under section 7202, it must be shown that 
a defendant voluntarily and intentionally acted in violation of a known 
legal duty. Cheek v. United States, 498 U.S. 192 (1991).
---------------------------------------------------------------------------
    Neither OPM nor the approximately 300 local campaigns dispersed 
throughout the United States screen charities for federal tax problems 
before allowing the charities to be listed with the CFC. OPM policies 
do not require such screening. Additionally, federal law generally 
prohibits the disclosure of taxpayer data and, consequently, even if 
OPM had specific policies to check for unpaid taxes, it has no access 
to a specific charity's tax data. The administration of CFC does not 
have the internal controls necessary to assure donors that charities 
listed with and backed by the CFC are meeting federal laws.
    We also found that OPM, its local campaigns, and federations do not 
validate with the IRS each CFC applicant's tax-exempt status. To be 
eligible for the CFC, a charity must submit as part of its application 
a copy of a standard IRS letter showing that it has received tax-
exemption status from the IRS under 501(c)(3) of the Internal Revenue 
Code \vii\ To demonstrate the vulnerability of OPM's lack of validation 
of tax-exempt status, we applied as a fictitious charity to three local 
campaigns using fake documents and an erroneous IRS taxpayer 
identification number. In all three cases, our fictitious charity was 
accepted into the local CFC. Furthermore, our match of CFC charities 
from the 2005 campaign against IRS's database of tax-exempt 
organizations identified charities whose 501(c)(3) status could not be 
confirmed. Therefore, we referred these charities to OPM and IRS for 
further review and confirmation of their tax-exempt status.
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    \vii\ Exempt from this requirement are organizations seeking local 
eligibility in Puerto Rico or the U.S. Virgin Islands. However, these 
organizations must include in their applications, the appropriate local 
forms demonstrating their status as charitable organizations. 5 C.F.R. 
Pt. 950.204(b)(2)(iii).
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More Than 1,280 CFC Charities Had Tax Debt's 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. In performing our analysis, we took 
a conservative approach to identifying the amount of tax debt owed by 
the CFC's charities, and therefore the number of delinquent charities 
and amount due to the IRS are likely understated. We also found that at 
least 170 charities with unpaid taxes also benefited by receiving about 
$1.6 billion in federal grants.
Unpaid Payroll Taxes Comprised Almost 80 Percent of Chariries' Federal 
        Tax Debt
    As indicated in figure 1, payroll taxes comprised $27.7 million, or 
almost 80 percent, of the $35.6 million in unpaid federal taxes owed by 
CFC charities. Unpaid payroll taxes included amounts that were withheld 
from employees' wages for federal income taxes, Social Security, and 
Medicare but not remitted to the IRS, as well as the matching employer 
contributions for Social Security and Medicare. Employers who fail to 
remit payroll taxes to the federal government may be subject to civil 
and criminal penalties. Figure 1 shows the types of federal taxes owed 
by CFC charities as of September 30, 2005.
Figure 1: Types of Federal Tax Debt Owed by CFC Charities



    The next largest component, annual reporting penalties, was $4.5 
million or almost 13 percent of the unpaid taxes. Generally, the IRS 
requires 501(c)(3) charities with more than $25,000 of income to file 
an annual return (i.e., Form 990). This annual return serves as the 
basis for review in determining whether an organization continues to 
meet requirements for exempt status. Failure to file an annual return 
at all or in a timely manner, as well as filing an incomplete return, 
results in various types of penalties. Excise taxes related to employee 
benefit plans, exempt organization business income taxes, unemployment, 
and other types of taxes and penalties comprised the remaining $3.4 
million.
    The majority of the approximately 1,280 delinquent charities, 78 
percent, owed less than $10,000 in delinquent taxes. Fifteen percent 
owed from $10,000 to $50,000, and 7 percent owed more than $50,000 in 
delinquent taxes. Also, 91 percent of 1,280 charities were delinquent 
for up to 4 tax periods, 7 percent of charities for 5 to 9 tax periods, 
and 2 percent for 10 or more tax periods.\viii\
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    \viii\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 taxes occurs throughout the quarter. In 
contrast, for income, corporate, and unemployment taxes, a tax period 
is 1 year.
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Amount of Unpaid Federal Taxes Is Understated for CFC Charities
    The amount of unpaid federal taxes we identified among CFC 
charities--$35.6 million--is understated. To avoid overestimating the 
amount owed by CFC charities, we intentionally limited our scope to tax 
debts that were affirmed by either the charity or a tax court for tax 
periods prior to 2005.\ix\ We did not include the most current tax year 
because recently assessed tax debts that appear as unpaid taxes may 
involve matters that are routinely resolved between the taxpayer and 
the IRS, with the taxes paid, abated,\x\ or both within a short period. 
We eliminated these types of debt by focusing on unpaid federal taxes 
for tax periods prior to calendar year 2005 and eliminating tax debt of 
$100 or less.
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    \ix\ We eliminated from our analysis all tax debt coded by IRS as 
not having been agreed to by the taxpayer (for example, by filing a 
balance due return) or a tax court. For financial reporting, those 
cases are referred to as compliance assessments.
    \x\ Abatements are reductions in the amount of taxes owed and can 
occur for a variety of reasons, such as to correct errors made by IRS 
or taxpayers or to provide relief from interest and penalties. 26 
U.S.C. Sec. 6404.
---------------------------------------------------------------------------
    Also limiting our estimate of CFC charities' unpaid federal taxes 
is the fact that the IRS tax database reflects only the amount of 
unpaid taxes either reported by the charity on a tax return or assessed 
by the IRS through various enforcement programs. The IRS database upon 
which we relied exclusively does not reflect amounts owed by charities 
that have not filed tax returns or that have underreported the owed 
taxes in their return and for which the IRS has not assessed tax 
amounts due. According to the IRS, underreporting of payroll taxes 
accounts for about $60 to $70 billion of the estimated $345 billion 
annual gross tax gap. Consequently, the true extent of unpaid taxes for 
these charities is unknown.
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. These 
charities are benefiting from the federal government through their tax-
exempt status and receipt of substantial amounts of federal grants, 
while not meeting their responsibility to pay required federal taxes. 
Included in the $1.6 billion are grants to 5 of the 15 charities we 
selected, totaling more than $6.5 million.
Certain CFC Charity Executives We Investigated Abused the Federal Tax 
        System
    Executives responsible for the tax debts of the 15 charities we 
investigated abused the federal tax system and may have violated the 
law by diverting payroll or other taxes due to the IRS. Willful failure 
to remit payroll taxes is a felony under U.S. law,\xi\ 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.\xii\ In 
this regard, one executive from these 15 case study CFC charities was 
assessed a TFRP for what IRS determined to be his abusive behavior.
---------------------------------------------------------------------------
    \xi\ 26 U.S.C. Sec. 7202.
    \xii\ 26 U.S.C. Sec. 6672. The amount of a TFRP does not include 
employers' matching amounts.
---------------------------------------------------------------------------
    Table 1 highlights 5 of the 15 case study CFC charities that we 
investigated with payroll tax issues.
Table 1: CFC Charities with Unpaid Federal Taxes

----------------------------------------------------------------------------------------------------------------
                                       Nature of the
              Charity                     charity           Tax debt a                    Comments
----------------------------------------------------------------------------------------------------------------
1                                    Museum            Over $100,000         Payroll tax debt covers
                                                                             more than 12 tax periods dating
                                                                             back to the mid 1990s.
                                                                             The IRS assessed a TFRP
                                                                             against the charity's director.
                                                                             Federal and local tax liens
                                                                             have been filed against the
                                                                             charity.
                                                                             The charity filed for
                                                                             bankruptcy protection in the past
                                                                             but the court denied the petition.
                                                                             The executive director
                                                                             admitted to underpaying payroll
                                                                             taxes to fund the charity's
                                                                             operations.
----------------------------------------------------------------------------------------------------------------
2                                    Hospital          Nearly $1 million     Payroll tax debt covers
                                                                             more than 5 periods dating back
                                                                             several years.
                                                                             The charity paid two of its
                                                                             executives a salary of more than
                                                                             $200,000 each.
                                                                             The charity received about
                                                                             $1.5 million in federal grants from
                                                                             the Department of Health and Human
                                                                             Services (non-Medicaid) and the
                                                                             Department of Education.
----------------------------------------------------------------------------------------------------------------
3                                    Mental health     Over $1.5 million     Payroll tax debt covers
                                      clinic                                 more than 12 tax periods dating
                                                                             back to the early 1990s.
                                                                             The charity recently signed
                                                                             an installment agreement.
                                                                             Federal, state, and local
                                                                             tax liens have been filed against
                                                                             the charity.
                                                                             The executive director
                                                                             received a salary of more than
                                                                             $100,000.
                                                                             The executive director
                                                                             admitted to underpaying payroll
                                                                             taxes to fund the charity's
                                                                             operations, which includes the
                                                                             director's salary.
----------------------------------------------------------------------------------------------------------------
4                                    Homeless shelter  Over $300,000         Charity failed to submit
                                                                             payroll tax payments for more than
                                                                             5 tax periods over several years.
                                                                             The executive director
                                                                             received a salary of more than
                                                                             $100,000 per year.
----------------------------------------------------------------------------------------------------------------
5                                    General health    Over $700,000         Payroll tax debt covers 7
                                      clinic                                 tax periods dating back over 5
                                                                             years.
                                                                             The charity submitted an
                                                                             offer in compromise, which is
                                                                             pending.
                                                                             The chief executive officer
                                                                             received a salary of more than
                                                                             $100,000 per year.
----------------------------------------------------------------------------------------------------------------
Source: GAO's analysis of IRS, OPM, public, and other records.

\a\ Tax debt amount includes principal, interest, and penalties as of September 30, 2005.

    For the five charities in table 1, tax debt ranged from about 
$100,000 to more than $1.5 million, and the unpaid taxes spanned a 
period ranging from 5 to more than 12 payroll tax periods. In addition 
to the federal tax debt, two of the five CFC charities had unpaid state 
and/or local taxes, where state and/or local taxing authorities filed 
multiple tax liens against them.
    During the time frames for which these charities were not paying 
their taxes, funds were available to cover other charity expenses, 
including officer salaries. Executives at two charities explained that 
they knowingly withheld payroll taxes in order to have enough funds 
available to pay their own salaries and the salaries of charity 
employees, in addition to charity expenses. One executive we 
investigated denied owing payroll or other taxes when IRS records 
showed otherwise. In at least one case, the charity's executives 
remitted payroll taxes later than the IRS required to pay their 
salaries, while the charity accumulated tens of thousands of dollars in 
penalties and interest for remitting late.
    We also identified directors and senior executives who potentially 
could be assessed TFRPs by the IRS for the debts of their charities. 
Some of these directors and executives had salaries in excess of 
$100,000 and owned significant personal assets. One of these executives 
has already been assessed a TFRP.
    See appendix III for the details on the other 10 CFC charities 
reviewed in detail. 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.
OPM Does Not Screen Charities for Delinquent Tax Debt
    OPM does not screen charities for federal tax debt prior to 
granting CFC eligibility, thereby making charities with unpaid federal 
taxes eligible to receive donations from federal civilian employees and 
military personnel. OPM policies do not specifically require CFC 
charities to be screened for these problems. Additionally, federal law 
generally prohibits the disclosure of taxpayer data and, consequently, 
even if OPM had specific policies to check for unpaid taxes, it has no 
access to a specific charity's tax data. OPM determines the 
completeness of a charity applicants' paperwork, but it does not 
perform third-party verification of documents as part of that process. 
For example, OPM does not verify with the IRS the tax-exempt status of 
CFC applicants and relies solely on each applicant's submission of IRS 
documentation that it is a bona fide charity. 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. We were accepted into all three 
campaigns.
Tax Debt Are Not Considered When Granting Charities Eligibility to 
        Participate in the CFC
    OPM does not screen charities for tax debts prior to granting CFC 
eligibility and, ultimately, charities with unpaid federal taxes are 
eligible to receive donations from federal civilian employees and 
military personnel. Federal law implemented in the Code of Federal 
Regulations does not require OPM to screen charities for federal tax 
delinquency nor does it explicitly authorize CFC to reject charity 
applicants that have delinquent tax debt from participation in the CFC. 
Consequently, CFC's processes for determining eligibility are based on 
and limited to what is required of the CFC in Part 950 of Title 5, 
C.F.R.
Restrictions on Tax Debt Hamper Identification of Charities with 
        Delinquent Taxes
    Federal law does not permit the IRS to disclose taxpayer 
information, including tax debts.\xiii\ Thus, unless the taxpayer 
provides consent, certain tax debt information can only be discovered 
from public records when the IRS files a federal tax lien against the 
property of a tax debtor.\xiv\ However, public record information is 
limited because the IRS does not file tax liens on all tax debtors, 
and, while the IRS has a central repository of tax liens, OPM officials 
do not have access to that information. Further, the listing of a 
federal tax lien in the credit reports of an entity or its key 
officials may not be a reliable indicator of a charity's tax 
indebtedness because of deficiencies in the IRS's internal controls 
that have resulted in the IRS not always releasing tax liens from 
property when the tax debt has been satisfied.\xv\
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    \xiii\ 26 U.S.C. 6103.
    \xiv\ Under section 6321 of the Internal Revenue Code, IRS has the 
authority to file a lien upon all property and rights to property, 
whether real or personal, of a delinquent taxpayer.
    \xv\ GAO, IRS Lien Management Report: Opportunities to Improve 
Timeliness of IRS Lien Releases,GAO-05-26R (Washington, D.C.: Jan. 10, 
2005).
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OPM Does Not Verfy Charity Applicant's Exempt Organization Status
    Part 950 of Title 5 of the Code of Federal Regulations requires 
that applicants to the CFC include in their application packages a copy 
of their most recent IRS determination letter\xvi\ showing the 
charity's 501(c)(3) status. OPM does not perform any independent 
verification of charity applicants' tax-exempt status. The IRS does 
have publicly available data wherein OPM could verify an applicant's 
tax exempt status, but this is not an OPM-required procedure in the CFC 
eligibility determination process. Other documents OPM requires 
applicants to include in the CFC application package are a copy of the 
charity's most recent form 990, their most recent annual audit report, 
and an application with various self-certifications. According to an 
official from one of the CFC's largest local campaigns, the single most 
frequent reason for rejecting an applicant from the CFC is the 
applicant's failure to submit its IRS determination letter.
---------------------------------------------------------------------------
    \xvi\ A determination letter to an organization is the IRS's 
notification that it has reviewed the organization's application 
package and qualified it as exempt from federal income taxes.
---------------------------------------------------------------------------
Control Weaknesses Allowed GAO to Enroll Fictitious Charities
    To determine whether and to what extent CFC's eligibility 
determination processes are vulnerable, we applied to three local 
campaigns with a fictitious charity using fake documents and an 
erroneous IRS taxpayer identification number. In all three campaigns, 
our application for participation in the 2006 CFC was accepted. Figure 
2 shows one example of the three letters we received regarding our 
acceptance into the 2006 CFC. Immediately after our applications were 
accepted, we notified CFC officials and withdrew our charity from the 
campaigns in order to prevent donations to our fictitious charity.
    In addition to our direct testing of OPM's screening process, our 
match of CFC charities from the 2005 campaign against IRS's database of 
tax-exempt organizations identified charities whose 501(c)(3) status 
could not be confirmed. Therefore, we referred these charities to OPM 
and IRS for further review and confirmation of their tax-exempt status.
Figure 2: Copy of an Acceptance Letter from One of the Three Local CFC 
        Campaigns for Our Fictitious Charity
        

        
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. The bona fide charities 
participating in the annual campaign have the most to lose when such 
confidence is shaken because of the abuse of a minority of 
participating charities. Until OPM takes steps to independently 
validate whether applicants are legitimate 501(c)(3) organizations, the 
campaign is vulnerable to entities that fraudulently purport to be 
charities. Further, tax-abusing charities will continue to benefit by 
being eligible to participate and receive donations unless OPM is 
provided access to their tax debt information and determines whether 
sanctions such as expulsion from the CFC are warranted. OPM and each 
local CFC cannot provide the assurance needed to sustain such 
confidence. This could have devastating consequences for the vast 
majority of eligible and tax-compliant charities that are dependent on 
donor contributions to support their critical missions.
    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.
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 identify CFC 
charities we requested data from CFC headquarters. To obtain these 
data, CFC headquarters requested data from the 299 local campaigns 
throughout the United States. We received data from 291 of the 
299\xvii\ local campaigns.
---------------------------------------------------------------------------
    \xvii\ Data from the remaining 8 local campaigns were either not 
received or not sufficient for analysis.
---------------------------------------------------------------------------
    To identify CFC charities with unpaid federal taxes, we obtained 
and analyzed the Internal Revenue Service's (IRS) September 30, 2005, 
Unpaid Assessments file. We matched the CFC charity data to the IRS 
unpaid assessment data using the taxpayer identification number (TIN) 
field. To avoid overstating the amount owed by charities with unpaid 
federal tax debts and to capture only significant tax debt, we excluded 
tax debts meeting specific criteria. The criteria we used to exclude 
tax debts are as follows:

      tax debts the IRS classified as compliance assessments or 
memo accounts for financial reporting,\xviii\
---------------------------------------------------------------------------
    \xviii\  Under federal accounting standards, unpaid assessments 
require taxpayer or court agreement to be considered federal taxes 
receivables. Compliance assessments and memo accounts are not 
considered federal taxes receivable because they are not agreed to by 
the taxpayers or the courts.
---------------------------------------------------------------------------
      tax debts from calendar year 2005 tax periods, and
      charities with total unpaid taxes of $100 or less.

    The criteria above were used to exclude tax debts that might be 
under dispute or generally duplicative or invalid and tax debts that 
are recently incurred. Specifically, compliance assessments or memo 
accounts were excluded because these taxes have neither been agreed to 
by the taxpayers nor affirmed by the court, or these taxes could be 
invalid or duplicative of other taxes already reported. We excluded tax 
debts from calendar year 2005 tax periods to eliminate tax debt that 
may involve matters that are routinely resolved between the taxpayers 
and the IRS, with the taxes paid or abated within a short period. We 
also excluded tax debts of $100 or less because they are insignificant 
for the purpose of determining the extent of taxes owed by CFC 
charities.
    The 2005 pledged donation (pledges) information was unavailable at 
the time we selected our charity cases for investigations. We requested 
pledge information from the CFC and were in the process of receiving 
these data, piecemeal, from the CFC's 299 campaigns as of the end of 
our fieldwork. The pledge information we received through the end of 
fieldwork lacked the detail necessary to efficiently determine the 
amount of pledges for tax-delinquent charities. Consequently, we were 
unable to determine the amount of pledges received for tax-delinquent 
charities we identified.
    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. We selected the 15 charities 
using a nonrepresentative selection approach based on our judgment, 
data mining, and a number of other criteria, including the amount of 
unpaid taxes, number of unpaid tax periods, amount of payments reported 
by the IRS, and indications that key officials might be involved in 
multiple charities with tax debts.
    We obtained copies of automated tax transcripts and other tax 
records (for example, revenue officers' notes) from the IRS as of 
September 30, 2005, and reviewed these records to exclude charities 
that had recently paid off their unpaid tax balances and considered 
other factors before reducing the selection of charities to 15 case 
studies. For the selected 15 cases, we reviewed the charity CFC 
application files and performed additional searches of criminal, 
financial, and public records. Our investigators also contacted several 
of the charities and conducted interviews.
    To determine whether and to what extent OPM screens charities for 
federal tax problems before allowing them to be listed with the CFC, we 
reviewed OPM's policies and procedures, performed process walkthroughs, 
and interviewed key CFC officials at CFC Headquarters and three local 
campaigns. We reviewed laws and regulations governing OPM's 
administration of the CFC. We identified processes and procedures 
performed by the CFC during the annual application period. To confirm 
our understanding of the requirements placed on charity applicants and 
to test whether OPM's processes would identify fraudulent charities, we 
attempted to gain acceptance into the 2006 CFC by posing as a charity. 
We prepared and submitted application packages for each of three local 
campaigns using fake documentation for a fictitious charity. To test 
the effectiveness of OPM's processes and procedures to identify charity 
applicants that are not valid tax-exempt organizations, a primary 
requirement for participation in the CFC, we matched the list of CFC 
charities that participated in the 2005 campaign with the IRS's 
database of tax-exempt organizations.
    We conducted our audit work from January 2006 through May 2006 in 
accordance with U.S. generally accepted government auditing standards, 
and we performed our investigative work in accordance with standards 
prescribed by the President's Council on Integrity and Efficiency.
Data Reliability Assessment
    For the IRS unpaid assessments data, we relied on the work we 
performed during our annual audits of the IRS's financial statements. 
While our financial statement audits have identified some data 
reliability problems associated with the coding of some of the fields 
in the IRS's tax records, including errors and delays in recording 
taxpayer information and payments, we determined that the data were 
sufficiently reliable to address this testimony's objectives. Our 
financial audit procedures, including the reconciliation of the value 
of unpaid taxes recorded in IRS's master file to IRS's general ledger, 
identified no material differences.
    To help ensure reliability of CFC-provided data, we performed 
electronic testing of specific data elements in the databases that we 
used to perform our work and performed other procedures to ensure the 
accuracy of the charity data provided by the CFC.
    Based on our discussions with agency officials, our review of 
agency documents, and our own testing, we concluded that the data 
elements used for this testimony were sufficiently reliable for our 
purposes.
Appendix II: Background
    The Combined Federal Campaign (CFC) is the only authorized 
solicitation of employees in the federal workplace on behalf of 
charitable organizations. The CFC's mission is to promote and support 
philanthropy through a program that provides all federal employees the 
opportunity to improve the quality of life for others through donations 
to eligible nonprofit organizations. In 1971, the CFC began operation 
as a combined campaign with donations solicited once a year. Also 
during this period, charitable contributions in the form of payroll 
deduction were made possible. Contributions grew dramatically from 
$12.9 million in 1964 to $82.8 million in 1979. Growth in the number of 
participating charities was slow through the 1970s, increasing from 23 
charities in 1969 to only 33 charities in 1979. Significant changes in 
CFC regulations occurred in the late 1970s and early 1980s\xix\ which 
in April 1984 opened the CFC to organizations that received tax-exempt 
status under 501(c)(3) of the Internal Revenue Code. The CFC has grown 
to a campaign consisting of approximately 1,700 (2005 campaign) 
national and international charitable organizations and more than 
21,000 local charities. Contributions have also increased from about 
$95 million in 1981 to more than $255 million in 2004.
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    \xix\ Including a court order that prohibited OPM from excluding 
legal defense and advocacy groups from the CFC because of their 
``indirect'' support of health and welfare or their lobbying/advocacy 
activities.
---------------------------------------------------------------------------
    Each campaign is conducted during a 6-week period, varying by local 
campaign from September 1 through December 15, at every federal agency 
in the campaign community. During this period, current federal civilian 
and active duty military employees, throughout the country and 
internationally, donate tens of millions of dollars to these nonprofit 
organizations that provide health and human service benefits throughout 
the world.
    The Director of the Office of Personnel Management (OPM) exercises 
general supervision over all operations of the CFC and takes steps to 
ensure the campaign objectives are achieved. The CFC is decentralized; 
therefore, each of the approximately 300 campaigns manages its local 
campaign and then reports statistics in aggregate to OPM. The Local 
Federal Coordinating Committee (LFCC) is the leadership element of the 
local CFC and is comprised of members from the federal community--
federal civilian, military, and postal. The LFCC solicits annually a 
principle combined fund organization (PCFO), conducts local agency 
eligibility, approves campaign material, conducts compliance audits, is 
the liaison to federal agency heads, and is generally engaged in a host 
of the scheduled campaign activities. The PCFO manages all aspects of 
the campaign. The PCFO develops campaign materials; serves as fiscal 
agent; collects, processes, and distributes pledges; and trains loaned 
executives and campaign personnel. The PCFO and the LFCC are 
responsible for reporting to the OPM summary data about their campaign 
results.
Appendix III: CFC Charities with Unpaid Taxes
    Table 1 in the main portion of this testimony provides data on 5 
detailed case studies. Table 2 shows the remaining case studies that we 
audited and investigated. 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. All 10 
charities in table 2 had unpaid payroll taxes.
Table 2: CFC Charities with Unpaid Federal Taxes


             Charity              Nature of charity      Tax debt a                     Comments
----------------------------------------------------------------------------------------------------------------
6                                 Rehabilitation     Over $100,000       The charity failed to pay its
                                   services                              payroll taxes in full or on time,
                                                                         resulting in delinquent payroll taxes
                                                                         and subsequent interest and penalties.
                                                                         A federal tax lien has been
                                                                         filed against the charity.
                                                                         Although these taxes remain
                                                                         outstanding, one of the executives of
                                                                         this charity recently placed property
                                                                         into a family trust.
----------------------------------------------------------------------------------------------------------------
7                                 Psychiatric        Over $1 million     This entity owes more than
                                   center                                $600,000 in penalties and interest.
                                                                         A state tax lien of $200,000
                                                                         has been filed against the charity.
                                                                         The charity repeatedly
                                                                         underpaid payroll taxes in 1 year
                                                                         recently.
                                                                         Executive director received a
                                                                         salary of more than $100,000.
                                                                         A recent independent auditor's
                                                                         report states there is substantial
                                                                         doubt regarding the entity's ability to
                                                                         continue operating (i.e., a going
                                                                         concern).
                                                                         An officer of the charity told
                                                                         us that rather than remitting the
                                                                         payroll taxes to the IRS, the officer
                                                                         used them to pay operating expenses,
                                                                         which included the officer's own
                                                                         salary.
----------------------------------------------------------------------------------------------------------------
8                                 Healthcare         Over $400,000       Federal tax lien has been filed
                                   provider of                           against the charity.
                                   hospital and                          The charity filed for Chapter
                                   nursing home                          11 bankruptcy protection.
                                   services                              The top executives of the
                                                                         charity and several part-time
                                                                         management personnel were employed
                                                                         through a contracting firm and were
                                                                         paid wages that totaled more than $3
                                                                         million.
                                                                         The charity received over $2
                                                                         million in grants from the Department
                                                                         of Health and Human Services.
----------------------------------------------------------------------------------------------------------------
9                                 Drug and alcohol   Over $70,000        The charity has substantial
                                   rehabilitation                        equity in a multi-acre parcel of real
                                   center                                estate located in a major metropolitan
                                                                         area.
                                                                         The charity owns a boat that is
                                                                         primarily used by the executive
                                                                         director.
----------------------------------------------------------------------------------------------------------------
10                                Charity provides   Nearly $300,000     A recent independent auditor's
                                   social welfare                        report states there is substantial
                                   programs                              doubt regarding the entity's ability to
                                                                         continue operating (i.e., a going
                                                                         concern).
                                                                         The charity received federal
                                                                         grants of more than $2.5 million from
                                                                         the Department of Health and Human
                                                                         Services.
----------------------------------------------------------------------------------------------------------------
11                                Social services    Nearly $100,000     The charity has more than 13
                                   for the blind                         periods of payroll tax debt dating back
                                                                         several years.
                                                                         The charity entered into an
                                                                         installment agreement that the IRS
                                                                         terminated after the charity did not
                                                                         make the required payments.
----------------------------------------------------------------------------------------------------------------
12                                Prevent and treat  Over $120,000       Charity owes over $120,000 in
                                   child abuse                           payroll taxes, penalties and interest
                                                                         from the late 1990s.
                                                                         Charity requested an offer in
                                                                         compromise on the tax debt.
                                                                         State and local tax liens have
                                                                         been filed against the charity's real
                                                                         estate.
                                                                         After the charity was
                                                                         delinquent in paying its payroll taxes,
                                                                         it obtained more than $600,000 to
                                                                         construct a new building.
                                                                         An officer of the charity told
                                                                         us that rather than remitting the
                                                                         payroll taxes to the IRS, the officer
                                                                         used them to pay the charity's workers,
                                                                         which included the officer's own
                                                                         salary.
                                                                         The charity received federal
                                                                         grants of $40,000.
----------------------------------------------------------------------------------------------------------------
13                                Counseling         Over $500,000       The charity's tax debt covers
                                   service for                           more than six tax periods.
                                   adults,                               Charity paid consultant more
                                   adolescents, and                      than $100,000 for professional
                                   children                              services.
----------------------------------------------------------------------------------------------------------------
14                                Adult and senior   Nearly $200,000     Federal tax lien has been filed
                                   services                              against the charity.
                                                                         The charity received federal
                                                                         grants of $140,000.
----------------------------------------------------------------------------------------------------------------
15                                Family social      Over $500,000       The charity's tax debt covers
                                   services                              more than 20 tax periods of payroll
                                                                         taxes.
                                                                         Federal tax lien has been filed
                                                                         against the charity.
                                                                         An officer of the charity told
                                                                         us that rather than remitting the
                                                                         payroll taxes to the IRS, the officer
                                                                         used them to pay operating expenses,
                                                                         which included the officer's own
                                                                         salary.
Source: GAO's analysis of IRS, OPM, public, and other records.

\a\ Tax debt amount includes principal, interest, and penalties as of September 30, 2005.


                                 

    Chairman RAMSTAD. Thank you, Mr. Kutz. Mr. Miller, please.

  STATEMENT OF STEVE T. MILLER, COMMISSIONER, TAX-EXEMPT AND 
     GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE

    Mr. MILLER. Thank you, Mr. Chairman, Ranking Member Lewis 
and Members of the Subcommittee.
    To encourage employment tax compliance by tax-exempt 
entities, the IRS begins with customer education outreach and 
follows up with document matching, examinations, collections 
and other traditional forms of enforcement. We start with an 
expansive educational effort. Our exempt organizations function 
conducts workshops and maintains numerous publications and an 
active Internet Web site on the topic. Our enforcement efforts 
are best understood by dividing the discussion into two 
categories: First is the Combined Annual Wage Reporting System 
(CAWR), and its related programs. Second is the examination 
program run out of my organization, TE/GE. Now, ideally, form 
941 and similar returns we receive should match forms W-2 and 
W-3 that Social Security Administration (SSA) receives. To 
verify this, the CAWR program matches reported earnings and 
reported withholding of taxes. To reconcile differences, the 
IRS, working with SSA, maintains three programs. The first two, 
SSA CAWR and IRS CAWR, deal with instances where the agency 
actually has received all returns, but there is a mismatch in 
the information. The third program deals with instances where 
it appears that the IRS does not have a form 941 to match with 
the SSA data. Under the first two programs for 2004, mismatch 
issues related to almost 30,000 TE/GE taxpayers were pursued. 
We estimate that about 20,000 of these were section 501(c)(3) 
organizations. The third CAWR program identifies and refers to 
the potential 941 non-filers. The TE/GE receives around 4,000 
CAWR referrals per year, substantially comprised in terms of 
dollars of governmental entities and pension plans. Since 2001, 
the potential value of tax owed by referred TE/GE entities has 
declined dramatically from $1.29 billion in 2001 to $180 
million in 2004. Of the $180 million, $17 million relates to 
501(c)(3) organizations.
    Our Exempt Organization Examination Process (EO) function 
has pursued form 941 non-filers not through the CAWR system in 
actuality but through a different program that matches 941s to 
the charities form 990. So, where compensation exceeds a 
certain amount as reported on the 990 but no 941 was found, we 
have conducted more than 800 examinations in recent years to 
resolve that issue. However, few improper non-filers were 
found. We have actually recently discontinued this program 
while continuing to look for better ways to select cases. As 
part of this effort, this winter, we will begin to pilot a new 
computer-based modeling system to select better cases including 
those in the employment tax area. Outside of CAWR and similar 
programs, the examination of exempt organizations for 
employment tax is integrated otherwise into our EO General 
Examination Program, and it is within this structure that the 
great majority of our examinations are conducted. We do about 
1,200 of these per year.
    Beyond our document matching and examination programs is 
the collection program. In determining whom to pursue in the 
collection process, charities are treated like any other 
taxpayer. As a result, in the collection area, the numbers I 
have that I can use today relate to all TE/GE taxpayers and all 
taxes, not just charities and not just employment tax. For 
example, I can say that, in 2005, a total of 282,000 first 
notices were issued to TE/GE taxpayers generally. A little over 
half were resolved by the taxpayer's self-correction during 
this notice process. Only about 27,000 TE/GE taxpayers 
continued past the notice phase in 2005 for potential contact 
by either a revenue agent knocking on the door or through one 
of our call sites. As stated, whether or not these get worked 
is determined by criteria that are not TE/GE specific.
    Let me wind up by stating that the IRS has a credible and 
considered program for enforcing the employment tax laws that 
apply to charities. While the law does not generally 
contemplate the revocation of a charity's tax-exempt status for 
failure to comply fully with employment tax law, it does give 
us other tools to insist that charities meet their employment 
tax obligations, and we have an active program in place to do 
just that. Thank you.
    [The prepared statement of Mr. Miller follows:]
Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government 
              Entities Division, Internal Revenue Service
    I. Introduction
    Chairman Ramstad, Ranking Member Lewis and members of the 
Subcommittee, I appreciate the opportunity to testify this morning on 
the Internal Revenue Service's enforcement efforts with respect to 
charities' payment of employment taxes.
    I am the Commissioner, Tax Exempt and Government Entities (TE/GE). 
TE/GE is one of four operating divisions at the IRS. We have principal 
responsibility for tax-exempt entities. In addition to the charities 
that are the subject of today's hearing, we are also responsible for 
other tax-favored entities: qualified retirement plans, all types of 
tax-exempt organizations, tax-exempt bonds, Indian tribal governments, 
and federal, state and local governments in their role as employers, 
which makes them responsible for employment taxes.
    In addition to discussing what my division, TE/GE, does to enforce 
the law with respect to charities' employment tax obligations, I will 
also discuss this morning the role played by another of our operating 
divisions in detecting and collecting employment taxes from charities. 
This is the Small Business/Self Employed division (SB/SE). As will be 
apparent, SB/SE plays a major role within the IRS in enforcing the tax 
law as it relates to employment taxes.
    The IRS appreciates your focus on complete compliance, with all 
aspects of the tax law, by all classes of taxpayers, including those 
designated as ``tax-exempt.'' Even charities and tax-exempt entities 
have employment tax obligations, a point I will elaborate on in a 
moment. Commissioner Everson has established the enhanced enforcement 
of the tax law as one of the three goals of his tenure as Commissioner 
of Internal Revenue. Further, he has specifically identified, as a 
principal objective of this goal, the task of deterring abuse within 
tax-exempt and governmental entities and the misuse of such entities by 
third parties for tax avoidance or other unintended purposes.
    In furtherance of these goals, the Commissioner has, in recent 
years, requested additional resources for enforcement generally. Within 
TE/GE, we have concentrated the new resources we have received in two 
of our functions, Exempt Operations (EO) and Federal, State and Local 
Governments (FSLG). In FY 2001, we had 812 FTE in EO and 50 FTE in 
FSLG. In 2005, those numbers had increased to 845 and 100, 
respectively.   EO and FSLG are the functions in TE/GE where we most 
often address employment tax issues. We have also used these resources 
to address a number of serious problems within the tax-exempt sector. 
These include, for example, the abuse of tax-exemption by credit 
counseling organizations, the practice of executives of some charities 
awarding themselves excessive compensation packages, and the improper 
intervention by charities in political campaigns.
    This morning, I would like to begin with an overview of the law 
governing employment tax, with an emphasis on how it applies to exempt 
organizations. Next, I will discuss the IRS's enforcement and 
collection efforts in this area. In doing so, I will discuss the 
Combined Annual Wage Reporting program (CAWR), which involves 
cooperation between the Social Security Administration (SSA) and SB/SE. 
I will also discuss TE/GE specific programs that address employment tax 
among tax-exempt and governmental entities. Finally, I will briefly 
speak of our future plans for enforcement in this area.
    II. Applicable Law
    Overview of Employment Tax Requirements
    Let me begin with the applicable law. What follows in this section 
of my testimony is a broad discussion of the main employment tax 
obligations imposed on employers. There are many specific details and 
exceptions that affect the amount of an employer's liability and how 
the employer goes about reporting and paying the tax.
    In general, employers are required to pay employment taxes on 
wages, and to report wages and certain other payments to the IRS. 
Federal employment taxes include three components: (i) federal income 
tax withholding, (ii) social security, and Medicare taxes (the Federal 
Insurance Contributions Act ``FICA'' taxes), and (iii) the Federal 
Unemployment Tax Act (FUTA) tax. Employers are required to make 
deposits of employment taxes on a daily, semi-weekly, monthly or 
quarterly schedule, depending upon the amount of tax they accumulate 
for deposit.
    For purposes of today's discussion, it is important to note that 
charities described in section 501(c)(3) that are exempt from income 
tax under section 501(a), as well as Federal, state and local 
government agencies and instrumentalities, are not liable for taxes 
under the FUTA. This is a significant distinction from other employers.
    Determining Liability for Tax
    The first step in evaluating liability for federal employment taxes 
is to determine whether a worker is an employee or an independent 
contractor. The Code applies the multi-factor common law test for this 
purpose. Under the common law test, an employer-employee relationship 
exists when the person for whom the services are performed has the 
right to control and direct the individual who performs them. More 
detailed information is available in Independent Contractor or 
Employee? Training Materials (1996), issued by the IRS and available on 
the IRS web site at http://www.irs.gov/pub/irs-utl/emporind.pdf. 
Employers are generally liable for employment taxes, and the associated 
withholding, reporting and deposits, on the wages they pay their 
employees.
    Employers are also required to withhold and pay the employee 
portion of social security taxes (currently 6.2 percent of wages up to 
the maximum wage base, which is $94,200 for 2006) and Medicare taxes 
(currently 1.45 percent of all wages) from payments of wages, and to 
pay the equivalent employer portion of social security and Medicare 
taxes with respect to wages paid to the employees. If the employer 
fails to withhold the proper amount of income tax or the employee 
portion of social security or Medicare taxes from wages paid to the 
employee, the employer remains liable for such tax.
    The law provides exceptions from the general rules for certain 
employers. We will discuss the special rules for charities below, but 
will first note that there are also special rules that apply to 
governments. For example, state and local government workers are not 
subject to social security tax if they are otherwise covered by a 
retirement system providing a benefit similar to social security. A 
state or local government employee will be exempt from the Medicare tax 
if the employee has been continuously employed by the same employer 
since 1986, and is also covered by a retirement system. Additionally, 
Federal employees hired before January 1, 1984, are generally not 
subject to social security tax. These exceptions do not apply for 
purposes of income tax withholding.
    How employment tax is paid
    Employers are required to withhold income tax from wages in 
accordance with tables provided by the IRS and published in Publication 
15, Circular E, and Employer's Tax Guide, which is updated at least 
annually and is found at the following URL:  www.irs.gov/pub/irs-pdf/
p15.pdf. If the employer fails to withhold income tax, and the employee 
does not pay the income tax, the employer remains liable for the 
missing withholding.
    In general, employers must pay federal employment tax by depositing 
federal income tax withholding and both the employer and employee 
social security and Medicare taxes. In calculating the amount to be 
deposited the employer must take into account any adjustments to tax 
liability for prior periods and the amount of any advance earned income 
credit payments. The liability for employment tax arises when the wages 
are paid. If an employer accumulates $100,000 or more of employment tax 
liability, the employer must deposit the employment taxes by the end of 
the next business day. Less frequent deposits are required for smaller 
liabilities. Some employers are required to deposit using the 
Electronic Federal Tax Deposit System (EFTPS).
    Filing of Tax Returns and Information Reporting
    In addition to determining the liability for employment taxes and 
making timely deposits, employers are responsible for filing 
appropriate tax and information returns. Employers are required to file 
Form 941, Employer's Quarterly Federal Tax Return, reporting liability 
for Federal income tax withholding, social security, and Medicare tax 
on a quarterly basis. Beginning January 1, 2006, employers with an 
estimated annual employment tax liability of $1,000 or less may file 
the new Form 944 (Employers Annual Federal Tax Return) once a year 
rather than filing Form 941 four times a year. The IRS mailed 
notification letters between February 1 and February 15, 2006 to 
eligible small employers for calendar year 2006.
    Employers must also provide each employee with a copy of his Form 
W-2 for the preceding year by January 31. Employers are required 
annually to file Form W-3, Transmittal of Wage and Tax Statements, with 
the Social Security Administration along with copies of the Forms W-2 
for all employees.
    All taxpayers are required to maintain the records necessary to 
support the information submitted on their tax returns. If an employer 
discovers that it has made a mistake in computing its social security 
and Medicare tax liability in a prior tax return, IRS procedures call 
for the employer to amend its returns and pay any social security and 
Medicare taxes that it owes. Under Code section 6205, adjustments 
related to the FICA tax are made ``interest free'' on a subsequent Form 
941 with an attached Form 941C explaining the adjustment. Generally, 
this rule applies for errors related to income tax withholding only if 
the error is discovered within the same calendar year.
    IRS procedures also call for the employer to provide the employee 
with a corrected Form W-2.
    Personal liability for employment taxes
    Section 6672(a) of the Code imposes a liability equal to the amount 
of unpaid ``trust fund taxes'' upon any person responsible for 
collecting, accounting for or paying over such taxes who willfully 
fails to do so. ``Trust fund taxes'' include income tax withholding and 
the employee portion of social security and Medicare taxes.
    Special Rules Applicable to Exempt Organizations
    If an exempt organization has employees, it is responsible for 
federal, state, and local taxes. Exempt organizations follow the same 
employment tax filing and reporting requirements as non-exempt 
organizations, with two exceptions. The first applies to exempt 
organizations that are exempt from income tax under section 501(c)(3) 
of the Internal Revenue Code. Such an organization is also exempt from 
FUTA. This exemption cannot be waived.
    The second exception applies to churches, and concerns all three 
employment taxes: withholding, FICA and FUTA.
    Churches are not required to withhold income tax on compensation 
paid to ministers for performing services in the exercise of their 
ministry, although a minister may request voluntary income tax 
withholding. Whether tax is withheld or not, the church reports the 
minister's compensation on Form W-2, if the minister is an employee, or 
on Form 1099, if the minister is an independent contractor. If the 
minister is the only employee, the church may have no form 941 
requirement.
    Churches are required to withhold income tax for their other 
employees, and the general rules apply for determining whether a worker 
providing services is an employee or an independent contractor. The 
Church reports an employee's compensation on Form W-2, or issues a Form 
1099 for an independent contractor.
    Churches are also not required to withhold or pay FICA taxes on 
compensation paid to ministers for performing services in the exercise 
of their ministry. However, a minister is subject to SECA, unless he or 
she applies timely for an exemption on the basis of his or her 
religious beliefs.
    Other church employees are subject to FICA unless the church pays 
the employee less than $108.28 in a calendar year or the church applies 
for an exemption from FICA due to religious reasons. If a church makes 
such an election not to pay FICA, the employees are subject to SECA.
    Churches, like other 501(c)(3) organizations, are not subject to 
the FUTA tax for any of their employees.
    Is Failure to Pay Employment Tax a Cause for Revocation of Tax-
Exempt Status?
    Under section 508 of the Code, a charitable organization wishing to 
obtain tax-exempt status, must apply to the IRS for exemption. These 
applications come to TE/GE's EO unit, where they are reviewed. If the 
applicant demonstrates its eligibility for exemption, we issue it a 
determination letter recognizing its tax-exempt status.
    Under section 508(c), churches, their integrated auxiliaries, and 
conventions or associations of churches are not required to complete 
this determination process.
    Exempt status, once recognized, can be lost. The IRS is authorized 
to, and does, revoke the tax-exempt status of organizations that cease 
to act in pursuance of an exempt purpose, or that violate specific 
provisions of the Code pertinent to tax-exempt status. For example, 
section 501(c)(3) prohibits, among other things, inurement or 
participation or intervention in political campaigns. As I mentioned a 
moment ago, TE/GE is conducting enforcement programs aimed at 
organizations that violate these prohibitions.
    Compliance with employment tax rules is not, in general, a 
requirement for continuing recognition as a tax-exempt organization. In 
exceptional circumstances, revocation of section 501(c)(3) exempt 
status for violation of employment tax provisions, while an 
extraordinary measure, may be warranted where the violation of 
employment tax law is so substantial that the organization can be found 
to have a substantial non-exempt purpose. Available records do not 
indicate that we have revoked the tax-exempt status of any organization 
solely because of employment tax non-compliance.
    The facts of the case would be critical in any case where such a 
revocation was contemplated. For example, if the unpaid employment 
taxes are being pocketed by individuals for their personal enrichment, 
it is likely that a private benefit or inurement issue is present that 
may warrant revocation. However, if the organization does not pay the 
employment taxes because the organization is short of money and chooses 
to use that which it has to meet net payroll and to further its exempt 
purpose, then the failure to pay may not rise to the level of a 
violation of the operational test.
    III. IRS Compliance Efforts Directed at Charities
    As I noted in the introduction, two operating divisions of the IRS 
are primarily responsible for enforcing the payment of federal 
employment taxes by charities: SB/SE and TE/GE.
    To encourage and enforce compliance by tax-exempt entities with the 
requirements of employment tax law, we begin with customer education 
and outreach and follow-up with document matching, examinations, 
collections, and traditional forms of enforcement. I'd like to begin 
this portion of my testimony by discussing TE/GE's customer education 
and outreach programs for tax-exempt entities, and then move to a 
discussion of IRS enforcement efforts.
    A. Outreach and Education.
    Exempt Organizations
    TE/GE's Exempt Organizations (EO) function conducts a vigorous 
customer education and outreach program to educate charities and other 
exempt organizations about their tax responsibilities, including their 
employment tax obligations. This effort is especially important for 
small and mid-sized organizations, whose officials may not be 
experienced in business operations. EO includes information about 
employment tax obligations in its plain language publications, notably 
Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt 
Organizations, Publication 1828, Tax Guide for Churches and Religious 
Organizations, and Publication 557, Tax-Exempt Status for Your 
Organization. EO also addresses employment taxes in workshops and via 
the internet.
    For example, in EO's Small and Mid-sized Exempt Organizations 
Workshop program, offered in six cities across the country each year, 
we include a session on Employment Taxes as one of five parts of the 
day-long workshop. The session has three objectives:

      Identify the main factors used to categorize a worker as 
either an employee or an independent contractor;
      Identify the workers that are statutorily classified as 
employees and those that are statutorily classified as independent 
contractors; and
      Introduce the major employment tax forms and their uses 
for the typical small EO.

    During the presentation, attendees participate in an Employment 
Issues Quiz, which reviews the concepts covered in the session. Each 
attendee also receives a copy of the Small and Mid-sized EO Workshop 
Textbook, which includes a chapter on Employment Taxes. Next year, we 
will also make those workshops available on a CD, while continuing to 
offer the program in certain cities.
    With respect to the internet, employment taxes are a prominent 
component of the interactive ``Life Cycle of a Public Charity'' and 
``Life Cycle of a Private Foundation'' features that appear on EO's 
external web page. The Life Cycle features are easy-to-use guides that 
provide a general discussion of the basic requirements for reporting, 
withholding, and depositing employment taxes, the distinction between 
independent contractors and employees, and the e-filing options for 
exempt organizations. Importantly, they also provide links to more 
detailed information and additional resources, as well as to all 
necessary forms.
    EO advertised the availability of the employment tax web site to 
all members of the EO e-mail subscription list,EO Update, which 
currently has almost 12,000 subscribers, and placed an article about it 
in the Social Security Administration newsletter, the SSA Reporter, 
which reaches both employers and employees.
    Government Entities
    TE/GE's Government Entities (GE) function also conducts a strong 
customer education and outreach effort about employment taxes. In two 
of GE's three functional units--Federal, State and Local Government 
(FSLG), and Indian Tribal Governments (ITG)--a primary concern has been 
to improve compliance with employment tax law within the governmental 
and tribal communities. During the period FY 2001--2005, GE employment 
tax educational efforts included 4,069 events that reached 150,969 
participants. In addition to these face-to-face events, FSLG and ITG 
have established a substantial educational presence on the internet. 
This includes:

      Employment tax Frequently Asked Questions directed 
towards the unique needs of the governmental and tribal communities;
      Electronic publications, such as the ITG Employment Tax 
Desk Guide and the FSLG Federal-State Reference Guide;
      Electronic newsletters on current law changes impacting 
the communities; and
      ``Ask-us'' mailbox for general questions primarily 
relating to employment tax compliance.
B. Enforcement
    The IRS's enforcement program with respect to employment tax 
obligations of tax-exempt entities may be divided into two categories. 
The first is the Combined Annual Wage Reporting (CAWR) and other 
programs which SB/SE operates. The second is the examination program 
run by the EO function of TE/GE, including initiatives and special 
programs.
    CAWR
    The IRS and the Social Security Administration (SSA) jointly 
administer the CAWR program. The CAWR matches reported earnings and 
reported withholding of taxes. As noted, employers are responsible for 
withholding income, Social Security, and Medicare taxes from their 
employees' wages. They must pay over the amounts withheld and file Form 
94X series returns (Forms 940, 941, and 945) with the IRS.
    The employer is also required to file Form W-2 Wage and Tax 
Statements for each employee, and Form W-3 (Transmittal of Income Tax 
Statements) with SSA. Correct Forms W-2 should include the same 
information summarized quarterly on the Forms 94X, while the Form W-3 
summarizes the Forms W-2.
    Ideally, all information reported on Forms 94X should match the 
information on Forms W-2 for a given year. The IRS, working with SSA, 
maintains three programs in this area. The first two, SSA CAWR and IRS 
CAWR, deal with instances where the Agencies have received all returns 
but there is a mismatch in the information reported. The third program 
deals with instances where the IRS does not have a Form 94X to match 
with the SSA data. In this testimony, we will refer to this third 
program as the CAWR Referral Program.
    The SSA CAWR program resolves discrepancies between information 
(tax and credits) reported on Forms W-2 and W-3 information returns and 
data reported on the series 94X returns. Cases normally involve 
situations where the 94X reports higher wages than the Forms W-2 and W-
3. The purpose of this program is to reconcile SSA accounts. SSA refers 
cases to the IRS where the employer fails to respond to two SSA 
inquiries. Under an agreement between the IRS and SSA, the IRS pursues 
all SSA CAWR cases. We may assess penalties where the discrepancy 
cannot be resolved.
    Under this program, SB/SE pursues all of these SSA referrals 
without regard to what type of taxpayer is involved, whether it is a 
charity, government or a for-profit business.
    Of the 157,355 SSA CAWR cases and closures in 2005, some 11,396 
(7.2%), were TE/GE taxpayers. Of these, it appears that at least 7,700 
were section 501(c)(3) organizations.
    The second program is the IRS CAWR. This portion of CAWR resolves 
discrepancies between information (tax and credits) reported on the 
series 94X returns and the data reported on Forms W-2 and W-3 
information returns. Where amounts reported on forms W-2 and W-3 are 
greater than those reported on Form 94X, IRS may assess additional tax 
and penalties where the discrepancy cannot be resolved.
    Like the SSA CAWR, this work is done by tax examiners at several 
CAWR units at Service Centers, and is undertaken on behalf of the 
entire IRS. Unlike the SSA CAWR, IRS CAWR work is not mandatory, and 
therefore not all cases are pursued. Charities are selected and pursued 
using the same criteria as other IRS taxpayers. The criteria for 
selection are based generally on the amount of the assessments 
involved.
    For 2005, of the universe of 659,717 IRS CAWR cases, 60,013 (9.1%) 
were TE/GE taxpayers. Of the 166,619 closures, 18,598 (11.2%) were TE/
GE cases. Thus, approximately 25% of all IRS CAWR cases, and 31% of TE/
GE IRS CAWR cases were pursued. Of the TE/GE closures, more than 12,400 
were entities described in section 501(c)(3).
CAWR Referral Program--Potential Form 941 Non-filers.
    The CAWR Referral Program concerns mismatches that occur when SSA 
has received Form W-3 & W-2 records from an employer, but the IRS has 
no record of a 941 being filed. These mismatches are posted to a 
database accessible by relevant operating divisions of the IRS, 
including TE/GE. The table below sets out the number of referrals. 
Unlike the SSA CAWR and IRS CAWR programs, SB/SE refers these cases to 
the other Operating Divisions for consideration.
CAWR Referral Activity

------------------------------------------------------------------------
              Year                  SB/SE     TE/GE     LMSB      Total
------------------------------------------------------------------------
FY03 (tax year 2001)                64,226     4,367     3,558    72,151
------------------------------------------------------------------------
FY04 (tax year 2002)                59,346     4,432     3,646    67,424
------------------------------------------------------------------------
FY05 (tax year 2003)                51,735     3,935     2,183    57,853
------------------------------------------------------------------------
Projection FY06 (tax year 2004)     53,647     3,950     3,113    60,710
------------------------------------------------------------------------

    TE/GE cases placed on the database include all TE/GE taxpayers: 
governments, tribes, exempt organizations, and pension plans.   A 
review of the referrals indicates that by far the largest dollar 
amounts of these mismatches relate to governmental taxpayers and 
pension plans. The review also shows that well over half of the 
referrals are churches that appear to have no Form 941 reporting 
requirement.
    The potential value of tax owed by all TE/GE entities on the CAWR 
database has declined dramatically. For 2001, the value of the tax owed 
cases was $1.29 billion. This declined to $1.16 billion for 2002, $356 
million for 2003, and $180 million for 2004, the most current year. Of 
this $180 million, the potential value of tax owed by 501(c)(3) 
organizations is $17 million.
    This large decline reflects in part, we believe, the significant 
attention that TE/GE, and in particular its Federal, State, and Local 
Governments unit (FSLG), has devoted to employment tax cases. FSLG uses 
the CAWR referral database, as well as other CAWR data, in its case 
selection work.
    EO has not used the CAWR database. Instead, it pursued Form 941 
non-filers through the use of Form 990 information returns. In 2002 and 
continuing until recently, EO used an automated system to select for 
examination organizations that reported salaries, wages, or executive 
compensation on the Form 990, but showed no filed Form 941 for the 
corresponding periods. EO conducted more than 800 examinations as part 
of this project. EO initiated the program because it believed that this 
set of circumstances was likely to identify high potential 
noncompliance. However, examination results did not support this 
hypothesis. We therefore discontinued the program and began work to 
find improved methods of case selection. As part of this effort, we 
will begin using CAWR referrals and other CAWR data as part of a 
broader case selection process through an automated system similar to 
that used by FSLG. EO also is working on an improved computer-based 
modeling system to help select productive employment tax examination 
cases. This new system, which uses all available data, including CAWR 
data and examination results, will be piloted this winter.
TE/GE--EO Examination Program
    TE/GE's EO function contains an examination unit, EO Examinations. 
In five years, EO Examinations has grown from 432 FTE in 2001 to 472 
FTE in 2005. The examination of exempt organization employment tax 
returns is integrated into EO's general examination program, and it is 
within this structure that most EO employment examinations are 
conducted.
    In 2006, EO Examinations plans to close 6,100 returnsof exempt 
organizations. In conducting these examinations, when the preliminary 
review indicates that further inquiry is appropriate, the agent obtains 
and conducts an examination of the exempt organization's employment tax 
returns. This has resulted in EO Examinations closing more than 1,200 
employment tax returns of exempt organizations in each recent year.
    The number of employment tax examination closures does not fully 
reflect the level of effort in the employment tax area because we 
evaluate whether to open an employment tax audit in most of our exempt 
organization examinations. However, unless a problem surfaces, time 
spent on this review is not reflected in our examination data systems 
because the agent does not open a formal employment tax examination. We 
have also created correspondence units whose work is accounted for 
separately.
    In EO, we select employment tax cases in several ways. We selected 
most of our employment tax cases as part of an examination of other 
returns. Beyond that, we have a number of initiatives and special 
projects that address employment taxes. I will discuss each of these in 
turn.
Required Review of Exempt Organizations' Employment Tax Filings
    Within EO, we examine exempt organizations' compliance with 
employment tax obligations as part of standard exempt organization 
audits. We do this by following our EO Examinations ``Required Filing 
Checks''--that is, a guide to the elements we expect an agent to review 
in the course of an audit.
    Exempt Organization examinations ordinarily include a ``Required 
Filing Check'' to determine if the organization is in compliance with 
all federal tax return filing requirements--including employment tax 
returns--and whether all returns report substantially correct tax. When 
warranted, we expand the examination to focus on specific returns.
    Required Filing Checks address employment tax (including 
questionable Form W-4 procedures), excise tax, information returns, 
pension plan returns, and Forms 8300. The specific forms include:

      Form 940, Employers Annual Federal Unemployment (FUTA) 
Tax Return
      Form 942, Employer's Quarterly Federal Tax Return
      Form W-2, Wage and Tax Statement
      Form W-4, Employee's Withholding Allowance Certificate
      Form 1096, Annual Summary and Transmittal of U.S. 
Information Returns, including Form 1099 series
      Form 1120-POL, U.S. Income Tax Return for Certain 
Political Organizations
      Form 4720, Return of Certain Excise Taxes on Charities 
and other persons under Chapters 41 and 42 of the IRC
      Form 5500 series, Annual Return/report of Employee 
Benefit Plan

    Form 8300, Reports of Cash Payments Over $10,000 Received in a 
Trade or Business.
    When EO decides to open an employment tax exam, as a result of the 
Required Filing Check process, we first insure that the tax has not 
already been paid, and that it has not been filed under an incorrect 
EIN number. When these preliminaries are completed, we open the case
Initiatives and Special Programs
    Beyond its standard examination program, Exempt Organizations also 
conducts initiatives and special programs that focus on compliance with 
employment tax requirements by specific classes of exempt 
organizations. We have already discussed the EO Form 941 matching 
program. Another example of an employment tax initiative is the Medical 
Residents FICA program. The issue here is whether the medical residents 
are students employed by a school, college or university, and therefore 
exempt from FICA, or not. The IRS has taken the position that medical 
residents are subject to FICA, and that position has been strenuously 
challenged. We have won a case in a federal district court in the 11th 
Circuit, but lost two cases in the 8th Circuit on this question. The 
district court case in the 11th Circuit is now on appeal. We have a 
large number of claims pending in this area as well.
    Another example of such an initiative involves the failure of some 
colleges and universities to comply with the withholding tax 
regulations on payments (such as wages, grants, scholarships and other 
income) to non-resident alien students, faculty and researchers. Under 
prior programs, we allowed taxpayers to voluntarily come in to us to 
resolve problems in this area. Subsequently, we decided to follow-up to 
see if compliance had improved after our educational and voluntary 
compliance programs. We conducted 12 examinations and 319 compliance 
checks. The change rate on the examinations was 92%. In the compliance 
checks program, delinquent returns were secured in 38% of the cases. 
After this program was completed, a research team took a second look to 
determine whether there was improvement in the filing of the required 
forms by the taxpayers involved. The team found a marked improvement. 
All but 8 of the colleges and universities were in compliance. More 
work in this area will occur in 2007.
    A third initiative involves the use of one of EO's new enforcement 
units, the EO Compliance Unit (EOCU). This project focuses on exempt 
organizations that have filed a Form 941 showing a specific level of 
wages, but not a Form 990. In such cases, we would expect an 
organization that filed a 941 to also file a Form 990. The EOCU is 
conducting compliance checks on a statistically-valid sample of 654 
cases for tax years 2002 and 2003 to look into this situation.
III. Collection Practices
    Another important part of the IRS's over-all employment tax 
enforcement strategy is the collection program for tax-exempt 
taxpayers. SB/SE conducts this program on behalf of TE/GE, as it does 
for the entire IRS. This section of the testimony describes the volume 
of TE/GE collection cases, the notice process and its effectiveness, 
and the manner in which cases are selected for individual collection 
actions.
    The figures presented in this section include all TE/GE taxpayers. 
They include government agencies, Indian tribes, pension plans, and 
non-profits as well as charitable organizations. Our collection 
activity reports do not separate out these individual categories in 
greater detail.
    It should be noted that in determining who to pursue in the 
collection process, SB/SE does not consider whether the taxpayer is a 
TE/GE taxpayer. Thus, TE/GE taxpayers, including charities, are treated 
in a manner similar to all other taxpayers.
    To begin the Collection process, all entities showing a balance due 
are automatically contacted by notice sent from our Service Centers. In 
FY 2005 a total of 282,049 first notices were issued on balance-due 
accounts of TE/GE taxpayers. This amounts to about 2% of the more than 
13,870,000 first notices issued to all types of taxpayers that year. 
About 53% of the TE/GE accounts are resolved by the taxpayer's self-
correction before the fourth or final notice is issued.
    A total of 131,669 TE/GE accounts required a fourth notice. (Of 
these 68,390, or about 52%, involved employment tax (trust fund) 
delinquencies.) About 49% of all fourth notices are resolved in that 
status.
    Some 64,801 TE/GE accounts associated with 27,452 taxpayers 
continued into delinquent status for potential contact by telephone or 
by a revenue officer in the field. After application of certain 
screening criteria, 26,884 TE/GE accounts associated with 6,498 
taxpayers met the criteria for assignment to the field for personal 
contact by a revenue officer.
    At the end of FY 2005, 26,007 accounts, representing $250 million 
in assessed balances due, were in the queue awaiting assignment. Of 
these 1,407 accounts--or 5%--represented nearly half of the total 
dollars due. The average balance due of the remaining 24,600 accounts 
was $5,335.
    As indicated, no distinction is made with respect to the type of 
taxpayer when prioritizing cases for assignment to employees in the 
call sites, or in the field for personal contact. As these employees 
are available for new work, cases are assigned according to a risk-
based process. Although the process is complex, and there are some 
minor exceptions, generally the priorities are set with a focus on 
three factors:
    a.  The type of tax being collected, which weighs more heavily 
toward employment taxes;
    b.  The age of the delinquency; where the newest delinquency 
receives the higher priority; and
    c.  The amount due; where the priority increases as more money is 
involved.

    The absence of figures relating exclusively to exempt 
organizations' accounts makes difficult a precise evaluation of the 
IRS's collection program for exempt organizations employment tax. It is 
clear, however, that such cases are pursued, according to the same 
criteria that apply to other types of collection cases. Thus, the 
employment tax obligations of tax exempt organizations are pursued.
IV. Future Plans
    Within the IRS, and within TE/GE, we have been hard at work on 
improving compliance with employment tax obligations across the board, 
and we have achieved some noteworthy successes, particularly with 
respect to potential tax due from Federal, state and local governments.
    We continue to look for ways to improve charities' compliance with 
employment tax law, and to improve our collection of employment taxes 
owed but unpaid. We want, of course, to collect the tax, but we also 
hope that by developing better methods of detecting non-compliance in 
the employment tax area, we also will be able to detect non-compliance 
in other areas of the tax law related to charities.
    With that in mind, we continue to develop new processes in the 
employment tax area.
Data Mining and Modeling Project
    TE/GE currently has underway an initiative to develop a ``risk 
model'' that will detect, classify and quantify high risk compliance 
patterns. When completed in late September, EO Examinations will pilot 
the use of this risk model in selecting taxpayers for examination. In 
developing the risk model, all available sources of data are being 
evaluated that could be helpful in identifying organizations likely to 
be non-compliant.
    One aspect of the model focuses on identifying exempt organizations 
that are not fully meeting their employment tax obligations.
    The primary source of the data to be used is our RICS 
classification system. RICS is a database and search engine that 
includes information for all exempt organizations that file, or are 
required to file, Forms 990 or 990 PF returns. RICS also includes 
information on related returns (including Forms 940 and 941) filed by 
these exempt organizations, and audit history information on taxpayers 
previously examined. One of the other data sources we are exploring for 
possible use in this project is the Combined Annual Wage Reporting 
(CAWR) system, discussed above. We hope this will allow us to be 
increasingly proactive in our selection of non-compliant charities, 
including those that are not meeting their employment tax obligations.
Expansion of Information Available for Case Classification
    As mentioned, RICS is a TE/GE computer system that analyzes data 
about TE/GE taxpayers to help TE/GE classification staffs select the 
most appropriate TE/GE taxpayers for examination, or to identify 
appropriate remedies for specific taxpayer situations. RICS can 
effectively analyze multiple databases.
    With this in mind, TE/GE is working to enlarge RICS' accuracy and 
usefulness by expanding RICS' access to relevant databases. Last year, 
RICS gained access to updated Business Masterfile (BMF) data, as well 
as to all CAWR data. TEGE is now exploring best practices for querying 
and using this data to select productive cases for examination.
    Access to these databases will also allow us to identify situations 
that require our attention but do not rise to the level of a full 
examination.
    TEGE classifiers are being trained and gaining experience with 
these new data sources, and this process will continue into the future. 
When fully familiar with the characteristics of the new BMF and CAWR 
databases, TE/GE classifiers will be able, among other things, to:

      Identify situations where no return has been filed but 
substantial tax deposits have been made (a situation amenable to 
resolution by ``soft'' contact rather than examination).
      Identify situations where a taxpayer thought to be 
delinquent has recently filed a return, and an examination would not be 
necessary.
      Identify situations where a taxpayer is working with 
Collections, and initiation of an examination would be inappropriate.
V. Conclusion
    In sum, the IRS, using resources primarily from SB/SE and TE/GE, 
has a considered program for enforcing the employment tax law as it 
applies to charities.
    While the law does not generally permit us to revoke a charity's 
tax-exempt status for its failure to comply fully with employment tax 
law, it does give us other tools to insist that charities meet their 
employment tax obligations, and we have active programs in place to do 
that. This said, we believe that as we improve selection techniques, we 
will be able to increase our coverage in this important area.

                                 

    Chairman RAMSTAD. Thank you, Mr. Miller. Mr. Green, please.

STATEMENT OF JAMES S. GREEN, ASSOCIATE GENERAL COUNSEL, OFFICE 
  OF THE GENERAL COUNSEL, U.S. OFFICE OF PERSONNEL MANAGEMENT

    Mr. GREEN. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to appear before you this morning 
to discuss the CFC, the annual workplace charity solicitation 
for Federal, civilian, military and postal employees. The CFC 
is actually 299 separate campaigns, each located in a 
geographic area with a substantial Federal population. The 
largest local campaign being the CFC of the National Capital 
Area. In 2005, Federal employees across the Nation and overseas 
donated over $268.5 million to the CFC. Charities can apply to 
participate locally in the campaign where they provide their 
services or, for charities with a demonstrably more national or 
global program, apply to participate in all 299 CFCs as a 
national or international participant. Each charity wishing to 
participate in the CFC, whether as a local or national or 
international participant, must apply annually meeting 
eligibility and accountability requirements set out in OPM's 
CFC regulations. The applications of charities seeking local 
list eligibility are reviewed by that campaign's Local Federal 
Coordinating Committees (LFCC) made up of Federal employees who 
live and work in that geographic area and who volunteer their 
services to the LFCC. The LFCC acts as the campaign's board of 
directors, applying CFC eligibility and accountability 
standards. Charities seeking to participate as national or 
international charities apply directly to OPM's Office of CFC 
Operations. These national or international applicants also 
must meet established eligibility and accountability standards 
and must additionally demonstrate that they provide or conduct 
real services, benefits, assistance or program activities in 15 
or more different states or a foreign country over the 3-year 
period immediately preceding the year in which they apply. A 
basic CFC eligibility criterion for all local, national or 
international charities is recognition by the IRS of tax-exempt 
status under section 501(c)(3) of the Internal Revenue Code and 
that contributions to that charity are tax deductible. The OPM 
has traditionally accepted a certification by the charities as 
to that tax-exempt status.
    Given the review undertaken by the GAO that led to this 
proceeding, OPM is carefully reviewing how it can better assure 
itself and the Federal employees whose generosity has made the 
CFC a success that the 501(c)(3) status if participating 
charities is valid and current. Working with IRS, we are 
completing a review to confirm that all national and 
international charities participating in the fall of 2006 CFC 
have valid and current 501(c)(3) status. A similar review is 
currently underway in the National Capital Area's CFC, and we 
continue to analyze the best means to utilize that review 
process for charities participating in the other 298 local 
campaigns. The OPM will work directly with all of those 299 
local campaigns on this process. We are confident that the 
review will be completed by the beginning of the 2006 CFC in 
September. We look forward to working with IRS, GAO and the 
Subcommittee to assure the continued integrity of the CFC.
    That concludes my oral testimony. I will be pleased to 
respond to any questions Members of the Subcommittee might have 
for OPM. Thank you.
    [The prepared statement of Mr. Green follows:]
 Statement of James S. Green, Associate General Counsel, Compensation, 
 Benefits, Products and Services Group, Office of Personnel Management
Background
    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to testify before you today on the Combined Federal 
Campaign (CFC) and the extent to which CFC participating charities 
comply with their Federal tax obligations to the Internal Revenue 
Service. The CFC is a fund-raising drive conducted every fall that 
allows Federal employees and military personnel to donate money to the 
charities of their choice through a workplace solicitation. Since its 
establishment in 1957 by Executive Order 10728 the campaign has raised 
over $5 billion on behalf of charitable organizations across the 
country and around the world.
Management and Structure of the CFC
    OPM is responsible for the overall management and oversight of the 
CFC. However, OPM does not directly manage the Federal employee 
contribution process. The CFC structure relies on the dedication and 
commitment of the Federal employees who make up the Local Federal 
Coordinating Committees (LFCC) to determine which organizations will 
administer local campaigns. Only charities seeking national or 
international status are vetted at the Office of Combined Federal 
Campaign Operations (OCFCO) at OPM headquarters. Through an annual 
competition, the LFCC's enter into agreements with a local non-profit 
organization, which we refer to as Principal Combined Fund 
Organizations (PCFO), to serve as the local fiscal agent, administering 
the local campaign by providing marketing, fund receipt and 
disbursement, accounting, and other administrative support. LFCC's also 
are responsible for reviewing and approving applications for 
participation by local charities in each of the 299 local CFC's. OPM's 
OCFCO serves a similar role in reviewing and approving the applications 
of national and international charitable organizations, which 
participate in all of the local CFCs. Thus, Federal employees in the 
geographic areas of the 299 local CFC's have a wide choice of donating 
to charities that provide local services, to charities that provide 
national and international service, or a combination of both.
    OPM regulates and provides oversight and guidance to each of the 
local campaigns to ensure that each campaign is conducted in accordance 
with OPM regulations, congressional mandates, and established policy. 
This oversight is primarily conducted through the review of a number of 
accountability and status reports from each local campaign throughout 
the year. OPM also establishes the criteria for local and national/
international participation. In the 2005 CFC, a total of 1,839 
charities applied for national or international participation through 
OPM headquarters. Of these 1,714, or approximately 93%, were admitted. 
The estimated number of charities participating in all of the 299 local 
campaigns is over 20,000.
    Although solicitation of Federal employees in the workplace is only 
permitted from September 1 through December 15 each year, each yearly 
CFC covers an approximate two-year period. The process begins with each 
LFCC's selection of a PCFO by March of the year, followed by the review 
of applications and completion of eligibility decisions around May of 
that year. Both local and national/international applicants have the 
right to have initial negative eligibility determinations appealed to 
OPM, with an ultimate eligibility determinations made by the Deputy 
Director of OPM. By regulation, OPM must complete its review of 
national applications and appeals by June 30 of each year. That 
timeframe allows sufficient time for the printing and distribution of 
the 299 local campaign brochures used as the primary vehicle to educate 
and solicit Federal employees as to which charities will be 
participating in their local CFC. The brochures list the local 
charities unique to each local campaign as well as the national/
international organizations that participate in each CFC. The campaigns 
themselves take place during a 6 week period between September and 
December of each year. .
    The majority of Federal employee contributions are made through 
payroll deduction and are processed by the local PCFO over the course 
of the 12 month period following the campaign which ran in the 
September through December timeframe. Actual distributions of the funds 
to the charities are made by each PCFO during that time as well. The 
campaign period ends with an audit of each PCFO's activities conducted 
by an independent public accountant but a local campaign is not 
considered closed until OPM is satisfied with the independent auditor's 
report and any findings are resolved.
    Due to the decentralized structure of the CFC, a majority of the 
specific information related to the local campaigns and its 
participating charitable organizations is maintained locally. OPM has 
initiated projects to improve access to campaign information and to 
promote electronic giving. Specifically, OPM is currently developing a 
National Charity Registry that will collect important information on 
each charitable organization (international, national and local) that 
participates in the CFC. The design of this initiative began last year 
and is expected to be completed in time for the 2007 campaign. The 
first phase of the project is the assignment of new and unique codes 
for each of the estimated 20,000 participating charities. With the 
implementation of this centralized Registry of information, OPM will be 
in a better position to assess the status of all CFC participating 
charitable organizations.
Screening Charities for Participation in the CFC
    All CFC participating charities must apply each year for that 
year's campaign, with an application made either to OPM or the 
appropriate LFCC, depending on whether the applicant is applying as a 
national /international or local organization. These applications set 
forth the information and background submissions required by OPM's 
regulatory eligibility criteria and public accountability standards and 
each applicant must certify that information in order to participate in 
the CFC. These criteria were designed to ensure Federal donors that 
only legitimate, accountable, and responsible charitable organizations 
are admitted to the CFC. The criteria for both local and national/
international applicants includes, but is not limited to, a 
demonstration by the applicant that it:

      Has status as an IRS determined tax-exempt charity under 
section 501(c)(3) of the Internal Revenue Code (what is the difference 
between this bullet and the next bullet?);
      Completed and provided to the IRS a Form 990, the annual 
tax return document for non-profits;
      Provides real health and human services, benefits, 
assistance or program activities; and
      Has an active and responsible Board of Directors, in 
which a majority of its Board members serve without compensation and 
without a conflict of interest.

    Determinations of eligibility are based in part on a series of self 
certifications by the charitable organization, which affirms that the 
information provided is correct and that the charity agrees to comply 
with the eligibility criteria. For example, OPM requires that all 
applicants submit either to OPM or the local LFCC, depending on 
application status, a copy of its IRS 501 (c)(3) determination letter, 
a copy of its IRS Form 990, a copy of the organization's audited 
financial statement, a detailed description of its claim of providing 
real services, a copy of the annual report or more frequently published 
document such as a quarterly newsletter, information on its governing 
Board of Directors' compensation, meeting dates, and terms of office. 
In addition, in 2005 OPM amended the CFC regulations to add a new 
certification on compliance with terrorism prevention laws. OPM also is 
considering proposing revisions to its CFC regulations which we believe 
will streamline the CFC eligibility process and public accountability 
standards.
    The current eligibility criteria do not require the applicant 
organization to disclose the status of its payment of payroll or any 
other taxes. A requirement for this type of information has not been 
included in the CFC Executive Orders or the existing congressional 
eligibility mandates. The current law prevents OPM from making the 
existing eligibility criteria more restrictive than it was under the 
eligibility criteria in effect in 1984. As such, OPM currently does not 
screen charities for compliance with tax payments to the IRS and has 
never denied an organization because of non-compliance in this area.
OPMs Oversight and Monitoring Program
    In addition to the eligibility determination process for national/
international applicants, OPM conducts a number of monitoring 
activities over local campaigns to minimize the risk of non-compliance 
with CFC regulations and prevent abuse in the CFC. In particular, OPM's 
OCFCO receives copies of audit reports for each local campaign as 
required by CFC regulations. OPM also receives audit reports from OPM's 
Office of the Inspector General, which audits approximately 15 local 
CFCs each year. The OCFCO reviews all audit findings and works with the 
local CFC's to resolve each finding. The OCFCO also selects a sample of 
local CFC brochures each year to review for compliance with CFC 
regulations and OPM guidance. In addition, the OCFCO requires each 
local campaign to report campaign results, including amounts raised, 
costs of the campaign, and Federal employee participation rates, after 
the solicitation period. This information helps us identify campaign 
performance and potential at-risk campaigns that might need assistance, 
require merging with another more efficient campaign, or require 
dissolution. Finally, OPM regularly communicates with the local 
campaigns to ensure that each campaign is operational and has an active 
LFCC.
Conclusion and Next Steps
    In light of the GAO findings reported today, the Director of OPM 
has already requested that staff examine options for improving the 
screening process with particular emphasis on preventing charities that 
are not in compliance with Federal tax laws from participating in the 
CFC.
    Mr. Chairman and Subcommittee members, this concludes my remarks. I 
am happy to answer any questions you or the members of the Subcommittee 
may have.

                                 

    Chairman RAMSTAD. Thank you, Mr. Green. I want to thank all 
three witnesses for your testimony. I appreciate the tone as 
well as the words of your testimony, the intent to get it 
right. Certainly we do not want to in any way damage the CFC. 
That is why we are here today.
    The purpose of the CFC, or one of the purposes, is to give 
confidence to be donors that the charities are legitimate and 
they meet certain basic--certain minimal standards as a 
charity. Certainly, we would all have to recognize that the 
testimony of Mr. Kutz and the review by GAO raises some very 
troubling questions.
    I guess the first question I have for you, Mr. Kutz, the 
most obvious question, what, if anything, does your review show 
that OPM did to approve charities, that is to prove 
participation in the CFC was actually a legitimate charity?
    Mr. KUTZ. You are talking about with respect to our bogus 
charity?
    Chairman RAMSTAD. Those three sting operations or bogus----
    Mr. KUTZ. What we did is, again, we do these--we used only 
publicly available information, we used only off-the-shelf 
software, paper, whatever the case may be, to file something 
like this, and we pretty much followed the application process 
that any charity would follow in applying for the CFC. We put 
together the forms, including 990 information about our charity 
and the other documents that were required by OPM, and we filed 
three separate applications using the same charity for the 
campaign. As I mentioned, in May of 2006, several weeks ago, we 
received our letters authorizing us or approving our 
applications into the program. I believe what you are talking 
about is, I think it is a paper review to a large extent. They 
get the paper. They look at paper, and I think they approve the 
paper without any independent validation. The one thing that 
could be done is, as you mentioned, I believe, validation with 
the IRS that we indeed are a legitimate charity.
    Chairman RAMSTAD. Is there a statutory barrier to that? Is 
that what I am hearing you say, Mr. Miller?
    Mr. MILLER. There would be a statutory 6103 barrier to 
finding out if there is a tax delinquency with respect to a 
given taxpayer. We actually--in terms of whether an 
organization is exempt or not, we make that available in great 
detail both on our Web site and otherwise.
    Chairman RAMSTAD. Mr. Green, the obvious question for you 
is, wasn't that data consulted, the data that Mr. Miller just 
said is readily available? It seems to me there should be an 
effort to validate whether an applicant is a legitimate 
charity.
    Mr. GREEN. Mr. Chairman, we agree. Traditionally, the 
application process has in it information about 501(c)(3) 
status including a determination letter and a 990 as well as 
other information about the charity. There are some 20,000 
charities that apply annually, and it is in fact a review with 
a dependence on the integrity of that application process. We 
are now using IRS databases, as I indicated in my earlier 
statement. We are confident that all of the charities will be 
checked before the 2006 campaign begins.
    Chairman RAMSTAD. Then, it is a fair statement to say, 
prior to the GAO review, that database was not checked, and now 
as a result of the GAO review, it is being checked to 
corroborate that information.
    Mr. GREEN. It is correct that it was not checked across the 
board. It has been checked where problems have been brought to 
our attention or a question has been raised. In this case, the 
information we got from the GAO was very legitimate looking and 
sounding applications, but we will be checking those now. In 
addition, Mr. Chairman, we are----
    Chairman RAMSTAD. All of them?
    Mr. GREEN. All of them. All of them locally, all the 
locals--the 299 locals as well the international and national. 
Mr. Chairman, we also are working on developing a registry 
which we believe will be in effect by next year's campaign, 
will have a one-place-to-go listing which will make that 
process easier, more reliable and more continual in campaigns 
in the future.
    Chairman RAMSTAD. Well, I am encouraged to hear that OPM 
recognizes the problem, the obvious problem, and has taken 
corrective steps. That is the way government should work. That 
is the way we should work because the last thing we want to do 
is to damage the CFC and those charities that benefit those 
people in need, kids, senior citizens, the poorest of the poor, 
people suffering the ravages of disease and addiction and 
poverty. I am just grateful to hear that you are taking these 
corrective steps. I am grateful by the work that GAO did to 
facilitate this corroboration now, this improved checking, and 
I hope it continues.
    Mr. Miller, beyond the statute you cited, were there any 
other barriers to corroborating the applications, the facts 
represented on applications by these charities?
    Mr. MILLER. I am unaware of any barriers. There may be 
some. Obviously, if we did work out something with OPM to do a 
tax check on 20,000 organizations, that would be a substantial 
resource issue for us, and we would have to talk about that. We 
are going to talk to OPM to see what we can do to----
    Chairman RAMSTAD. Just the fact of the 501(c)(3) 
certification, that speaks volumes from the IRS----
    Mr. MILLER. That should be on the Web site. In fact, we can 
and will make our master file, which contains more data than is 
on the Web site, available to OPM.
    Chairman RAMSTAD. Again, I thank all three witnesses. I now 
yield to my good friend, the ranking Member, Mr. Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Miller, 
do you have any idea of the number of organizations or groups 
that have lost their tax-exempt status in recent years for 
failing to comply with the tax laws?
    Mr. MILLER. We have a process of revocation, as you are 
aware, Mr. Lewis. If the question is for failure to comply with 
employment tax laws?
    Mr. LEWIS. Yes.
    Mr. MILLER. In general, I do not think we have any 
instances that we were able to come up with. In preparing for 
this hearing, we did not find that. I would say more generally 
that failure to comply in and of itself with the employment tax 
rules is not likely to lead to a revocable sort of activity on 
behalf of the service against the organization. Not likely to 
revoke for that.
    Mr. LEWIS. Would there be other factors that--other reasons 
that you would lift the tax-exempt status of a charitable 
organization if it is, I think Mr. Kutz said, some of them are 
phony, that there may be----
    Mr. MILLER. Absolutely, Mr. Lewis. There are a number of 
criteria for exemption, and often in some of these cases where 
you have someone putting the money in their pocket, that would 
be an independent sort of reason to say that that organization 
was no longer operating for charitable purposes, and that would 
cause a revocation. You might have employment tax problems that 
are incident to other underlying problems within the 
organization, and I am quite sure we have revoked--we do not 
revoke much. In 2005, we revoked perhaps as many as 30 
charities, which actually is up a bit from past years. We do 
not do it often, but we have done it.
    Mr. LEWIS. Do you tend to agree with Mr. Kutz? Do you see 
this as a serious problem?
    Mr. MILLER. I see it as a problem. There is no question 
about that. We do what we can in the employment tax area. We do 
quite a bit, in fact. Many of the--many of the deficiencies are 
small, and in those cases, it is not likely that we are going 
to take much action because we do not have the resources to do 
that. I do think it is important and I would concur absolutely 
with my copanelists that we make sure that those in the CFC are 
shining examples of the charitable community because they are 
very much up front parts of the way the charitable sector is 
reflected. I would be concerned with too much of a failure to 
comply with CFC organizations because, again, they are examples 
to the Federal workforce and everywhere that could really taint 
the sector more generally. I do not have enough information to 
say that the employment tax issue is a real problem in the 
exempt sector. I don't know that it is. I can understand that 
problems with organizations in the CFC reflect badly on the 
sector generally, and that is a separate sort of problem.
    Mr. LEWIS. When it comes to paying employment taxes, how 
would you compare it with businesses, the larger community? Do 
you look at that at all, Mr. Kutz?
    Mr. KUTZ. Yes. In fact, we have looked at contractors, 
companies doing contracting with the government and their 
failure to pay payroll taxes.
    Mr. LEWIS. Are people doing this, say, the big large 
Defense contractor----
    Mr. KUTZ. It is not usually the big large ones. It is the 
mid-sized and small that have the payroll tax problems and 
those contractors owe $5 to $10 billion of Federal taxes, and 
they are getting billions of dollars of government business.
    Mr. LEWIS. If you can speculate for a moment or two, why do 
you think people fail to do it? Is it a lack of bookkeeping, or 
do they just not want to pay their fair share?
    Mr. KUTZ. Well, I think the corporations are different than 
the charities. The charities, I think they had serious cash 
flow problems. The most, I guess, egregious behavior is where 
the executives that made the decision not to pay the payroll 
taxes are drawing salaries greater than $100,000; they 
effectively are choosing to pay themselves before paying the 
IRS, and I think that really is a fundamentally difficult issue 
to wrestle with.
    I think your other point that you were trying to make, too, 
and I would say willful failure to remit payroll taxes is a 
felony. The question of revocation of charitable status or 
501(c)(3) status for someone who may have committed a felony to 
me is a relevant question here that needs to be asked, and I 
don't really have the answer necessarily, but it is a policy 
question for this Subcommittee and your Committee to consider.
    Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman.
    Chairman RAMSTAD. Thank you, Mr. Lewis. The gentleman from 
Arizona, Mr. Hayworth.
    Mr. HAYWORTH. Thank you, Mr. Chairman. To our witnesses, 
thank you all for being here today highlighting a situation 
where we don't want to see the CFC somehow degenerate into a 
combined Federal con job. Sadly, as demonstrated by what we are 
hearing in your testimony, Mr. Kutz, in terms of fictional 
charities in the application, there is a lack of due diligence.
    A couple of things have happened, and Mr. Green, perhaps 
you are in a position to answer this question best for me. I 
have to kind of come at it from another angle because there 
have been cases of charities held in pretty high regard that 
have been turned down for one reason or another by CFC. An 
Arizona-based charity, the Make-A-Wish Foundation, if I am not 
mistaken, was taken from that list and was more than a cause of 
casual concern for many of my constituents in Arizona.
    Could you briefly outline the reasons why Make-A-Wish 
failed to make the grade?
    Mr. GREEN. Certainly, Mr. Hayworth. Again, each year, 
charities have to apply to the CFC. The Make-A-Wish had been in 
the CFC for a number of years. One of the criteria that we use 
is the rate at which charities spend administrative--money on 
administrative funds rather than actually the programs they 
administer. As a mathematical formula, under our current 
regulations, if that annual fundraising rate exceeds 25 
percent, then the charities have to explain to us why and 
demonstrate a plan to lower it. That is consistent--in the 
charitable community, that is fairly consistent with the 
standard. The Make-A-Wish Foundation for several years had been 
over the 25 percent limit. In last year's campaign, the 
administrative determination by OPM was that their plan to 
explain why and what they were doing to improve that after a 
couple of years of being at that level was insufficient. They 
were denied on that ground. They appealed through the internal 
administrative appeal process. The denial was affirmed. They 
then brought suit against the OPM in district court here in 
Washington, and that case was settled with the result that the 
Make-A-Wish Foundation was allowed to participate with a 
commitment to improve their fundraising rates.
    Mr. HAYWORTH. Okay. A reputable charity based on a 
mathematical formula was barred. Everybody ended up in court, 
and they were reinstated. I do not believe there is any 
question I think the Make-A-Wish people would certainly welcome 
the scrutiny of what they do in terms of terminally ill 
children having an opportunity to realize their dreams in a 
very difficult situation. It points up both the true impulse of 
charity on the part of Federal employees and yet what seems to 
be on one hand stringent criteria but perhaps mathematical 
formulas fitting in a certain way and a lack of due diligence 
on, ``Hey, Let's Invent a Charity, Inc.'' and come to the Feds 
and find a way to become part of the CFC. I realize that in any 
situation there is going to be selective enforcement. I am glad 
to hear that Make-A-Wish was restored. I am sorry that it ended 
up being such a court case there.
    Mr. Kutz, you found that there were more than 1,280 
charities with unpaid tax debt participating in the CFC, and 
they owed about $36 million in debt. You say that amount is 
understated. Can you explain why you think that is a low ball 
figure, or was that a deliberative understatement?
    Mr. KUTZ. Yes. There would be quite a few reasons why. The 
first would be, it is only a portion of what actually the IRS 
knows. In other words, it represents only agreed to tax 
assessments, either agreed to by the taxpayer or affirmed by a 
tax court. We also excluded 2005 because a lot of things get 
resolved in the short term. It is truly delinquent. It is 2004 
and earlier.
    However, the bigger reason it is probably understated is it 
does not include the impact of non-filers or those who 
underreport, and as you probably on this Subcommittee would 
know, based on the tax gap, probably the unknown portion of the 
tax gap is greater than the known portion of the tax gap. I 
think the unknown portion here would likely or could be bigger 
than the known portion.
    Mr. HAYWORTH. Mr. Miller, GAO makes it clear that its 
estimates of charities with unpaid employment taxes in the CFC 
are understated and there are likely more charities that are 
underreporting or not filing employment taxes. Do you agree 
with that assessment?
    Mr. MILLER. If they took known assessments, then I would 
agree with that, that there would be more dollars out there in 
all likelihood.
    Mr. HAYWORTH. One final question, Mr. Green, just to 
satisfy curiosity. Often there is an equation, deliberate or 
not, in the popular mind some people deem CFC kind of like 
United Way with the Federal Government, the notion of unified 
charities, combined giving. Sadly, some local United Way 
chapters have chosen to restrict the Boy Scouts of America from 
funding. Have there been examples on the 299--has there been a 
situation where the Boy Scouts of America has been barred in 
any way from the CFC?
    Mr. GREEN. Mr. Hayworth, the eligibility process is uniform 
across all 299--the standards are uniform across all 299 local 
campaigns. I do not know if that has happened in any local 
campaign, but the local campaigns, if a charity is denied at 
the local level, they do appeal. Ultimately that appeal does 
come to OPM headquarters and would be reviewed by ultimately 
the deputy director of OPM. If there was a local that denied 
the Boy Scouts and the Boy Scouts felt that they were 
improperly denied, they would have that appeal process. I do 
not know off the top of my head whether that has happened, that 
that would come----
    Mr. HAYWORTH. If you could check and get back to me with 
some correspondence, Mr. Green, I would appreciate it.
    Mr. GREEN. I would be happy to do that, Mr. Hayworth.
    Mr. HAYWORTH. Thank you, Mr. Chairman. Thank you for your 
indulgence on the clock there.
    Chairman RAMSTAD. Thank you, Mr. Hayworth.
    The gentleman from North Dakota, Mr. Pomeroy.
    Mr. POMEROY. Mr. Chairman, before I begin on the topic of 
today's hearing, I want to express some concern about the 
Subcommittee itself, and I do so with the highest respect for 
you, and I believe and I want to make this very clear. I 
believe that under our present Committee structure, 
Subcommittee Chairmen are allowed to do what the Chairman of 
the full Committee allows them to do. That said, this is the 
17th month of the 109th Congress. This is the eighth hearing of 
this Subcommittee. Today's hearing: Are charities in the CFC 
meeting their employment tax responsibilities? This is a very 
focused inquiry precisely within the jurisdiction of this 
Subcommittee. I am happy to follow issues like this, and I hope 
that we will have the positive benefit of OPM's being a little 
more aggressive in terms of making certain that we have got 
only appropriate entities participating in the CFC.
    Yet there are so many other things that I wonder about 
relative to the IRS, the administration of the Tax Code, that 
are within the purview of this Committee. We have an estimated 
tax gap of $312 to $352 billion a year. We are running a 
deficit at about that amount. If we could get all the taxes 
collected that are owed, maybe we wouldn't have a deficit. 
Certainly we wouldn't have a deficit of this dimension. How can 
we improve our tax collection efforts? Where are the shortfalls 
for the tax gap? Man, that would be an interesting hearing. I 
would like to go to that one.
    Tax shelters, we have made progress on some. We know there 
are billions of dollars of abuse continuing. Often a little 
daylight is, as the old saying goes, the best disinfectant and 
more focus on tax shelters may prevent some of the accumulating 
abuses that we have seen in the past. We have, to my view, an 
overall lack of audit of high income, corporate taxpayers. 
Maybe this is true; maybe it is not. There are some of us who 
think, those of us--they, those on the higher end, high 
corporate taxpayers, high-income corporate taxpayers are not 
paying what they owe. Let us talk about that. If that is an 
erroneous perception, I would sure like to hear from the IRS 
about the full gamut of activity they are doing there.
    Finally, administration of our pension laws. We are in a 
pension conference. The most important pension revisions 
considered. The Pension Benefit Guaranty Corporation is 7 
months late in publishing its last fiscal year report. What is 
that about? I would be very interested in seeing what this 
Committee could do to fully develop the information that our 
conferees might find helpful relative to pension.
    I really am disappointed that the Chairman of the Committee 
on Ways and Means clips our wings so severely that today we are 
looking at, are charities in the CFC meeting their employment 
tax responsibilities? I think we have got more to do than that. 
I would hope in the months remaining in this 109th, the 
Chairman may allow us to get after the work that the 
Subcommittee is charged to do. Again, when I say Chairman, I 
don't mean you, Mr. Subcommittee Chairman. I mean the full 
Committee Chairman.
    Let us talk a bit about this tax-exempt organization 
policing function within the IRS. Mr. Miller, that is your 
division?
    Mr. MILLER. Yes, sir.
    Mr. POMEROY. It is my understanding that the number of tax-
exempt organizations have increased 55 percent since 1995. Is 
that correct?
    Mr. MILLER. I do not know the percentage, but they do go up 
probably by 70,000 a year, and they are up into the 1.8--1.8 
million range.
    Mr. POMEROY. One point eight million entities.
    Mr. MILLER. Yes.
    Mr. POMEROY. How about the staffing and resources committed 
to the Tax-Exempt Organization Department, the department you 
run to look after all of this?
    Mr. MILLER. We actually have gone up somewhat in the last 
couple of years through the work of Congress and Commissioner 
Everson.
    Mr. POMEROY. I am pleased about that. In any way 
commensurate with the additional numbers of----
    Mr. MILLER. I do not think we have doubled in size, no, 
sir. We have gone up perhaps 20 percent.
    Mr. POMEROY. A 20-percent increase in the last 2 years?
    Mr. MILLER. In the last 3 years, let us say.
    Mr. POMEROY. Do you have enough to do your job?
    Mr. MILLER. I think that we continue to push for more 
resources. We could always use more resources, but we have 
grown nicely in the last couple of years, and we need a little 
bit of time, frankly, to incorporate that----
    Mr. POMEROY. I completely understand that. My question is, 
do you have the resources required to do the job you are 
assigned to do?
    Mr. MILLER. Yes, we believe we do. We would like to--we 
would like the President's budget to be passed, and that would 
give us more resources, obviously.
    Mr. POMEROY. I thank the gentleman. I yield back.
    Chairman RAMSTAD. Since the chair was mentioned in your 
critique, Mr. Pomeroy, I just would respond. You say, and I 
believe I am quoting, we should do the work that the 
Subcommittee is charged to do. Well, certainly the Oversight 
Subcommittee of Ways and Means is responsible for conducting 
oversight of tax-exempt entities. We have been holding hearings 
on tax-exempt entities for more than a year. I guess I am 
surprised to hear you at-least implicitly say that when three 
fake charities apply to the CFC and are given legitimacy, it is 
not a problem. I think it is a problem. It goes to the very 
heart of the CFC, and we don't want to see damage done to the 
CFC. Our role is to provide oversight.
    I also think it is surprising that the 1,280 charities with 
unpaid tax debt participating in the CFC seems to be 
minimalized. They owe $36 million in debt, and that is real 
money, at least where I come from. I think there are problems 
that are worthy and I am not--I also, by the way, agree with 
you. Let us hold a hearing on the tax gap. I think that is a 
worthy subject matter of a future oversight hearing. I 
certainly would welcome any discussions, public or private, as 
to your ideas for future hearings. I appreciate your concern. 
You are a good friend and a good Member of this Subcommittee, a 
valued Member of the Subcommittee, but I think to charge that 
today's hearing is not appropriate or shouldn't be held, that 
it is a problem of a minimal nature, I think is off target. 
With that, I look forward to talking with you, Mr. Pomeroy, 
about your future ideas for hearings, and we will continue to 
work together accordingly.
    Do any of the other panelists, any other Committee Members 
rather, have further questions?
    Mr. POMEROY. Not to prolong the dialog, Mr. Chairman, but 
if I just might put into perspective what I intended to say. 
Maybe I didn't get it said right. I am happy to participate in 
this hearing, interested in the inquiry, hope that we have made 
some progress by shining some light here this morning on having 
OPM exercise greater diligence for their role in this. The IRS, 
too, if it comes to that. This is all well and good. It is a 
fine function. I am happy to spend Subcommittee time on this 
topic.
    There are so many other things, and I am frustrated that we 
have not had the license of the full Committee Chairman to, in 
my opinion, more aggressively explore this Subcommittee's 
jurisdiction on some of these issues, and I am so pleased that 
you did indicate the tax gap might be an area we could inquire 
into, and I look forward to participating in that hearing. 
Thank you.
    Chairman RAMSTAD. Well, again, I would just suggest to my 
friend from North Dakota that he give me--or the ranking Member 
or any of the Members on either side--a suggested list of 
subjects to be examined by this Committee. Certainly, the 
Subcommittee Chair is open to that, and I will take it to the 
full Committee Chair, and so far, I haven't been denied any 
requests by the full Committee Chair.
    I just want to ask you, Mr. Kutz, a final line of 
questions. In your written testimony, you indicated that more 
than 170 CFC charities with tax debt also received $1.6 billion 
in Federal grants. How is this possible?
    Mr. KUTZ. There is nothing that precludes, in our 
understanding, by law them from getting those grants. When they 
actually apply using, I guess it is called the OMB form 24, 
they have to certify whether they have any Federal tax debt, 
which would include tax debts, student loans, whatever the case 
may be. We did not investigate that form, but we understand 
that they certify. Obviously, there is nothing preventing them 
from getting those grants similar to there is nothing to 
prevent contractors from getting government contracts that have 
serious tax problems. It is the----
    Chairman RAMSTAD. Doesn't the application for Federal 
grants specifically ask the applicant if they are delinquent on 
any Federal liability?
    Mr. KUTZ. It does. It has a yes/no. If it is a ``yes,'' you 
have to explain what the debt is that you owe.
    Chairman RAMSTAD. Is it your presumption that these were 
fraudulently filed applications?
    Mr. KUTZ. They either lied or the people who reviewed the 
forms disregarded the answer or didn't follow up on it would be 
my assumption, but we did not look at those forms specifically.
    Chairman RAMSTAD. Was there any one particular agency that 
awarded the majority of the grants to the tax deadbeat 
charities?
    Mr. KUTZ. Yes. I have the notes of who the entities are. 
You have got--Health and Human Services was $811 million of the 
amount. Education was $530 million. The USAID was $169 million. 
Commerce was $15 million. Energy, $13 million. Labor, $9 
million. NASA, $7 million. Then a bunch of other ones were the 
rest. Keep in mind, our analysis excluded things like Medicaid. 
It was only limited to certain grant systems, and we looked at 
the payment systems that were--these were payments made, so 
$1.6 billion of payments made related to grant programs at 
those specific agencies.
    Chairman RAMSTAD. Thank you, Mr. Kutz. Mr. Miller, the 
statements you just heard obviously beg the question, the IRS 
has regulatory authority over charities and other tax-exempt 
organizations. Obviously, it can revoke the tax-exempt status 
of an organization for a number of reasons. If a charity was to 
repeatedly fail to pay its employment taxes, would this result 
in the revocation of its exempt status?
    Mr. MILLER. Well, it is going to depend on the fact--I hate 
to use the facts and circumstances answer, but it really will 
depend if they are small amounts, if there is no attribution to 
the board of directors. In most instances, that is not going to 
be--create a revocable sort of activity on the part of the 
organization. Really the issue is not whether you were 
violating employment tax law, but are you violating law? Are 
you acting in other than a charitable fashion? In and of 
itself, not paying your employment tax as any citizen should is 
not going to be a cause for revocation of status.
    Chairman RAMSTAD. Should it be?
    Mr. MILLER. That really is a policy issue that, you know, I 
am not really prepared to answer, to be honest with you.
    Chairman RAMSTAD. Any other comments?
    Mr. KUTZ. I would just say this with respect to, again, the 
felony aspect of this with payroll taxes, willful failure to 
remit payroll taxes is a felony under current law and----
    Chairman RAMSTAD. Failure to remit.
    Mr. KUTZ. Failure to remit, yes. We did interview several 
of these charity executives with our Federal agents, and 
several of them willingly admitted that they did divert the 
money willfully, and part of the money went to pay their 
salaries. Effectively, they admitted to us that they had 
committed a felony. To me, that would be a serious matter. 
Again, I do not know whether that would be a revocable matter 
with what Mr. Miller said, but certainly I think it is 
something that needs to be on the table.
    Chairman RAMSTAD. I think there have been a lot of serious 
matters revealed today and certainly by your study that need to 
be on the table. Mr. Miller, let me ask you this: Has your 
division ever made a criminal referral of one of these cases, 
ever?
    Mr. MILLER. We--in preparing for the hearing, we did find, 
I believe, that we made one referral to our criminal 
investigation folks. I believe that was last year.
    Chairman RAMSTAD. Are there any follow-up questions? The 
gentleman from North Dakota.
    Mr. POMEROY. Mr. Chairman, a question for Mr. Kutz. Has GAO 
done studies as to the tax liabilities of for-profit entities 
that are participating with the Government in a contract 
relationship?
    Mr. KUTZ. Yes. We have done that for Mr. Ramstad's 
colleague over on the Senate, Senator Norm Coleman. I have 
testified several times over there on Defense contractors, 
civilian agency contractors and also contractors that are on 
the GSA schedule. In all cases, we found billions of dollars of 
unpaid taxes and I would say even more egregious behavior by 
the owners of some of these, as I mentioned to Congressman 
Lewis, more small to mid-sized companies, but these people were 
clearly in some cases lining their pockets with payroll tax 
money, making loans to themselves, and there was much more 
egregious behavior there than on the parts of the charity 
executives we saw here, although either way if you look at the 
law, it is still a felony.
    Mr. POMEROY. Yes. I think it is very troubling that we 
would have this in the nonprofit, but so we understand the full 
picture, we also have trouble with our own government 
contractors. Now, is there routinely an application where they 
are disqualified from further contracts with the Federal 
Government when they are not paying the taxes at all?
    Mr. KUTZ. Absolutely not. None of these had been barred 
from doing business, and none of them were pursued criminally 
by the IRS until we referred them. We referred all 120 of the 
most egregious cases that we investigated to the IRS. Again, 
whether there will be any indictments and prosecutions of those 
has yet to be determined. We have been doing that work for the 
last several years.
    These contractors, just to get to the numbers you are 
talking about, they owe probably anywhere from $7 to $10 
billion. There is some fairly significant money associated with 
government contractors that have tax problems and a lot of it 
is payroll taxes.
    Mr. POMEROY. Even though you have turned this information 
over to the IRS, you are not aware of a single entity of those 
who owe the $7 to $10 billion having lost their ability to 
enter further contracts with the government.
    Mr. KUTZ. Not as a result of our findings, no. They may 
have been doing other things that were revoked. There may have 
been product substitution cases or other things like that, but 
not as a result of the tax issues that we looked at. I would 
say that holds true--you know, we have 15 cases we 
investigate----
    Mr. POMEROY. Do you know, for example, with Defense 
contractors, does the Pentagon have this information? Are 
they--do they make decisions on future contracts? Irrespective 
of what the IRS is doing, if these people are cheating on their 
tax obligations and it is called to the Pentagon's attention, 
do they still contract with them some more?
    Mr. KUTZ. Well, that gets into the 6103, sharing of 
information, and we can certainly have back and forth 
information with the IRS, but we were unable to refer any of 
our cases to the Defense Department or Homeland Security or 
anyone else who has contractors that have these problems. That 
would be an issue for this Subcommittee to consider, for 
certain purposes, sharing of that information because that does 
create an impediment to enforcement of the Tax Code, and it 
clearly creates an impediment for law enforcement to go after 
these people from a criminal perspective.
    Mr. POMEROY. I thank you. I thank the Chair.
    Mr. KUTZ. I would just add, too, on the--we did do 15 cases 
for this work today and none of those 15 were being pursued 
criminally by IRS, although they were all being pursued from a 
collection standpoint, and I believe one of the 15 executives 
had been assessed a trust fund penalty personally for the 
charity payroll tax debt.
    Chairman RAMSTAD. Does the gentleman yield back?
    Mr. POMEROY. I yield back.
    Chairman RAMSTAD. Mr. Miller, I just want to ask you a 
summary question really, and we are about ready to wrap up this 
Subcommittee hearing. Let us say a charity withholds a million 
dollars from its employees' paychecks, and that charity fails 
to remit the money to the Government, uses the money, as you 
have explained, Mr. Kutz, in some instances to pay the salaries 
of the charity's executives; do you think that charity should 
maintain its tax-exempt status?
    Mr. MILLER. Well, I am going to have a tough time answering 
a hypothetical. I would say, it really is going to depend on, 
as I say, what are the facts around it? I think we have the--we 
at the service have the tools short of revocation including, 
quite frankly, an election process, closing down the 
organization, short of revocation in many of these instances. 
It would be--is this million dollars being funneled to the 
pockets--outside of compensation, is it being used for 
charitable purposes? Do the people know what they are doing? 
All these things. Is there attribution to the organization by 
the people who are failing to withhold? There are all these 
sorts of things that we would look at. I couldn't give you a 
solid answer. I would say that we would at a minimum pursue the 
tools we have.
    Chairman RAMSTAD. I guess my question is, really, under 
current law, you could revoke the tax-exempt status for such 
conduct; is that not correct?
    Mr. MILLER. Absent more than what you have presented, 
perhaps not. Again, it needs to rise to a purpose of the 
organization to avoid the tax law. It has to have a substantial 
nonexempt purpose of the organization. It is not just violation 
of the employment tax rules.
    Chairman RAMSTAD. Perhaps we need to look at the law and at 
changing the law. Mr. Kutz?
    Mr. KUTZ. I think that is a valid policy consideration for 
this Subcommittee and the full Committee, yes.
    Chairman RAMSTAD. Mr. Green, do you have any comment?
    Mr. GREEN. If the IRS was to withdraw 501(c)(3) status, 
that would be a disqualifying factor either before application 
or during the campaign, and that charity would no longer be 
permitted to participate, but we would look to the IRS to 
initially make that determination.
    Chairman RAMSTAD. Yes. You are alluding to the distinction 
Mr. Miller made, which I guess I didn't quite clearly 
understand, the difference between removing or disqualifying an 
organization, a charity, taking away its tax-exempt status from 
shutting it down. Well, aren't the two equivalent?
    Mr. MILLER. Well, they are really not. I think the----
    Chairman RAMSTAD. In other words, a charity can go out and 
solicit funds when its 501(c)(3) status has been revoked?
    Mr. MILLER. No. It could solicit funds, though, when 
padlocks were on the door because we have tax liens against the 
organization.
    Chairman RAMSTAD. I see the point you are making.
    Well, if there are no further questions from any Members of 
the Subcommittee, again, I want to thank all three of you 
gentlemen for participating today. I think I am encouraged by 
the spirit of collaboration that I heard from the panelists, 
and again, Mr. Kutz, I want to commend you and those at GAO who 
worked on the review for bringing out some of these troubling 
but important revelations. The hearing is adjourned.
    [Whereupon, at 12:03 p.m., the Subcommittee was adjourned.]

                                 
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