Tax Debt: Some Combined Federal Campaign Charities Owe Payroll	 
and Other Federal Taxes (25-MAY-06, GAO-06-755T).		 
                                                                 
The Office of Personnel Management (OPM) administers the annual  
Combined Federal Campaign (CFC), which gave more than 22,000	 
charities access to the federal workplace, helping those in need 
by collecting more than $250 million in donations during the 2005
campaign. The success of the campaign is predicated on each	 
donor's confidence in a system that ensures donations reach	 
charitable organizations that have met the CFC's specific	 
eligibility requirements and are legitimate charities. For	 
example, to be eligible, each charity must have formally received
from the Internal Revenue Service (IRS) tax-exemption designation
under 501(c)(3) of the Internal Revenue Code. The Subcommittee on
Oversight is reviewing tax-exempt status entities and asked GAO  
to determine whether charitable organizations participating in	 
the CFC were remitting their payroll and other taxes to the IRS  
as required by law. Specifically, GAO was asked to investigate	 
and determine whether and to what extent (1) charities listed in 
the 2005 CFC have unpaid payroll and other taxes; (2) selected	 
charities, their directors or senior officers are abusing the	 
federal tax system; and (3) OPM screens charities for federal tax
problems before allowing them to be listed with the CFC.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-755T					        
    ACCNO:   A54739						        
  TITLE:     Tax Debt: Some Combined Federal Campaign Charities Owe   
Payroll and Other Federal Taxes 				 
     DATE:   05/25/2006 
  SUBJECT:   Charitable organizations				 
	     Delinquent taxes					 
	     Federal taxes					 
	     Tax exempt organizations				 
	     Tax exempt status					 
	     Tax violations					 
	     Payroll taxes					 
	     Tax debt						 
	     Combined Federal Campaign				 

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GAO-06-755T

     

     * Summary
     * More Than 1,280 CFC Charities Had Tax Debts Totaling $35.6
          * Unpaid Payroll Taxes Comprised Almost 80 Percent of Charitie
          * Amount of Unpaid Federal Taxes Is Understated for CFC Charit
          * Some CFC Charities with Delinquent Tax Debt Also Received Su
     * Certain CFC Charity Executives We Investigated Abused the Fe
     * OPM Does Not Screen Charities for Delinquent Tax Debt
          * Tax Debts Are Not Considered When Granting Charities Eligibi
          * Restrictions on Tax Data Hamper Identification of Charities
          * OPM Does Not Verify Charity Applicant's Exempt Organization
          * Control Weaknesses Allowed GAO to Enroll Fictitious Charitie
     * Concluding Observations
     * Contacts and Acknowledgments
     * Appendix I: Objectives, Scope, and Methodology
          * Data Reliability Assessment
     * Appendix II: Background
     * Appendix III: CFC Charities with Unpaid Taxes
          * Order by Mail or Phone

Testimony

Before the Subcommittee on Oversight, Committee on Ways and Means, House
of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 11:00 a.m. EDT

Thursday, May 25, 2006

TAX DEBT

Some Combined Federal Campaign Charities Owe Payroll and Other Federal
Taxes

Statement of Gregory D. Kutz, Managing Director Forensic Audits and
Special Investigations

GAO-06-755T

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 system1 while
benefiting from doing business with the federal government.2 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).

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.

1 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.

2 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).

As you know, to qualify as exempt from federal income taxes, an
organization must meet the requirements set forth in the Internal Revenue
Code3 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.4

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.5 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.

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.

3 26 U.S.C. S: 501(c)(3).

4 26 U.S.C. S: 7202.

5 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.

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.6 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.

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.7 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.

6 26 U.S.C. S: 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).

7 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).

       More Than 1,280 CFC Charities Had Tax Debts Totaling $35.6 Million

Based on our analysis, more than 1,280 CFC charities had federal tax debts
totaling $35.6 million as of September 30, 2005. This represented nearly 6
percent of the charities that participated in the OPM-administered 2005
campaign. $27.7 million of this debt represented payroll taxes, penalties,
and interest dating as far back as 1988. The remaining $7.9 million
includes annual reporting penalties, excise taxes, exempt organization
business income, unemployment taxes, and other types of taxes and
penalties. 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 Charities' 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.8

8 A tax period varies by tax type. For example, the tax period for payroll
and excise taxes is generally one quarter of a year. The taxpayer is
required to file quarterly returns with IRS for these types of taxes,
although payment of the taxes occurs throughout the quarter. In contrast,
for income, corporate, and unemployment taxes, a tax period is 1 year.

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
2005.9 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,10 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.

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.

9 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.

10 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. S: 6404.

  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,11 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.12 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.

Table 1 highlights 5 of the 15 case study CFC charities that we
investigated with payroll tax issues.

11 26 U.S.C. S: 7202.

12 26 U.S.C. S: 6672. The amount of a TFRP does not include employers'
matching amounts.

Table 1: CFC Charities with Unpaid Federal Taxes

Source: GAO's analysis of IRS, OPM, public, and other records.

aTax 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 Debts 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 Data Hamper Identification of Charities with Delinquent
Taxes

Federal law does not permit the IRS to disclose taxpayer information,
including tax debts.13 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.14
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.15

OPM Does Not Verify 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 letter16 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.

13 26 U.S.C. S: 6103.

14 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.

15 GAO, IRS Lien Management Report: Opportunities to Improve Timeliness of
IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 2005).

16 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 in the CFC

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.

                          Contacts and Acknowledgments

For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-7455 or [email protected] . Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this testimony.

Appendix I: Objectives, Scope, and Methodology 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 2991 local campaigns.

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:

           o  tax debts the IRS classified as compliance assessments or memo
           accounts for financial reporting,2 
           o  tax debts from calendar year 2005 tax periods, and
           o  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.

           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.

           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 1980s1 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.

           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.

           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.

1 Data from the remaining 8 local campaigns were either not received or
not sufficient for analysis.

2 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.

Data Reliability Assessment

Appendix II: Background

1 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.

Appendix III: CFC Charities
with Unpaid Taxes

Table 2: CFC Charities with Unpaid Federal Taxes

Source: GAO's analysis of IRS, OPM, public, and other records.

aTax debt amount includes principal, interest, and penalties as of
September 30, 2005.

(192200)

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Highlights of GAO-06-755T , a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives

May 25, 2006

TAX DEBT

Some Combined Federal Campaign Charities Owe Payroll and Other Federal
Taxes

The Office of Personnel Management (OPM) administers the annual Combined
Federal Campaign (CFC), which gave more than 22,000 charities access to
the federal workplace, helping those in need by collecting more than $250
million in donations during the 2005 campaign. The success of the campaign
is predicated on each donor's confidence in a system that ensures

donations reach charitable organizations that have met the CFC's specific
eligibility requirements and are legitimate charities. For example, to be
eligible, each charity must have formally received from the Internal
Revenue Service (IRS) tax-exemption designation under 501(c)(3) of the
Internal Revenue Code.

The Subcommittee on Oversight is reviewing tax-exempt status entities and
asked GAO to determine whether charitable organizations participating in
the CFC were remitting their payroll and other taxes to the IRS as
required by law. Specifically, GAO was asked to investigate and determine
whether and to what extent  (1) charities listed in the 2005 CFC have
unpaid payroll and other taxes; (2) selected charities, their directors or
senior officers are abusing the federal tax system; and (3) OPM screens
charities for federal tax problems before allowing them to be listed with
the CFC.

More than 1,280 CFC charities, or about 6 percent of charities in the OPM-
administered 2005 campaign, had tax debts totaling approximately $36
million as of September 30, 2005. The majority of delinquent charities
owed less than $10,000. Approximately $28 million of this debt represented
payroll taxes, penalties, and interest dating back as far as 1988. The
remaining $8 million represented annual reporting penalties, excise taxes,
exempt organization business income, unemployment taxes, and other types
of taxes and penalties during this same period. Further, at least 170 of
the charities with tax debt received about $1.6 billion in federal grants
in 2005.

GAO investigated 15 CFC charities, selected primarily for the amount and
age of their outstanding tax debt. All 15 charities engaged in abusive and
potentially criminal activity related to the federal tax system. Although
exempt from certain taxes (e.g., federal income tax), these charities had
not forwarded payroll taxes withheld from their employees along with other
taxes to the IRS. Willful failure to remit payroll taxes is a felony under
U.S. law. However, rather than fulfill their role as trustees of this
money and forward it to the IRS, the directors and senior officers
diverted the money for charity-related expenses, including their own
salaries, some of which were in excess of $100,000.  We referred all 15 of
these charities to the IRS for consideration of additional collection or
criminal investigation.

Examples of Abusive and Potentially Criminal Activity by CFC Charities

Source: GAO's analysis of IRS, public and other records.

OPM does not screen CFC charities for federal tax problems or
independently validate with the IRS whether the charity is truly a
tax-exempt organization. Federal law prevents OPM from accessing taxpayer
information required to screen for tax delinquency, although information
on exempt status is available to the public. Consequently, OPM was unaware
of the charities that owed federal tax debt and cannot provide assurance
that the more than 22,000 participating charities are tax-exempt
organizations. To demonstrate the vulnerability of this process, GAO
created a fictitious charity and successfully applied to three large local
campaigns.
*** End of document. ***