Tax Debt: Some Combined Federal Campaign Charities Owe Payroll	 
and Other Federal Taxes (28-JUL-06, GAO-06-887).		 
                                                                 
The continued success of the Combined Federal Campaign (CFC),	 
which is administered by the Office of Personnel Management	 
(OPM), is predicated on donor confidence that each donation	 
reaches a legitimate charitable organization. The Ways and Means 
Committee's review of tax-exempt entities has led to concerns	 
that charities listed in CFC are failing to remit payroll and	 
other taxes to IRS as required by law. Specifically, GAO was	 
asked to 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 CFC. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-887 					        
    ACCNO:   A57624						        
  TITLE:     Tax Debt: Some Combined Federal Campaign Charities Owe   
Payroll and Other Federal Taxes 				 
     DATE:   07/28/2006 
  SUBJECT:   Charitable organizations				 
	     Delinquent taxes					 
	     Federal taxes					 
	     Tax exempt organizations				 
	     Tax exempt status					 
	     Tax violations					 
	     Combined Federal Campaign				 

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GAO-06-887

     

     * Report to Subcommittee on Oversight, Committee on Ways and Means,
       House of Representatives
          * July 2006
     * TAX DeBT
          * Some Combined Federal Campaign Charities Owe Payroll and Other
            Federal Taxes
     * Contents
          * Overview of Testimony
          * Conclusion
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Testimony on CFC Charities with Unpaid Federal Tax Debt
     * Comments from the Office of Personnel Management
     * Comments from the Internal Revenue Service
     * GAO Contact and Staff Acknowledgments

                 United States Government Accountability Office

Report to Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives

July 2006

TAX DEBT

  Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes

                                       a

TAX DEBT

Some Combined Federal Campaign Charities Owe Payroll and Other Federal
Taxes

  What GAO Found

More than 1,280 CFC charities, nearly 6 percent of charities in the OPM-
administered 2005 campaign, had tax debts totaling almost $36 million as
of September 30, 2005. While the majority of this debt represented payroll
taxes, penalties, and interest dating back as far as 1988, the debt also
included amounts from annual reporting penalties, excise taxes, exempt
organization business income taxes, unemployment taxes, and other types of
taxes and penalties. Most of the 1,280 tax delinquent charities (79
percent) owed less than $10,000. Further, at least 170 of the charities
with tax debt received about $1.6 billion in federal grants in 2005.

All 15 of the charities that we selected for detailed audit and
investigation had abusive and potentially criminal activity related to the
federal tax system. Specifically, 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. Although exempt
from federal income tax, charities as employers are required to forward
payroll taxes withheld from their employees' wages to the IRS. Willful
failure to remit payroll taxes is a felony under U.S. law. 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

Type of  Tax       
charity       debt Charity activity                                        
Museum        Over Repeatedly underpaid payroll taxes. Federal and local   
                      liens                                                   
            $100,000  were filed against the charity. The IRS assessed a      
                      penalty                                                 
                      against personal assets of the director who admitted to 
                      underpaying payroll taxes to fund operations.           
Health        Over Repeatedly remitted payroll taxes late while accruing   
                      interest                                                
service  $400,000  and penalties. Executives were paid through a           
                      contractor that                                         
provider           received $3 million from the charity. Received more     
                      than $2                                                 
                      million in federal grants from the Department of Health 
                      and                                                     
                      Human Services.                                         
Mental   Over $1.5 Repeatedly failed to remit or to remit timely payroll   
                      taxes for                                               
health     million the last 15 years. Director diverted payroll tax to pay 
                      his and                                                 
clinic             employee salaries.                                      

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. 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.

                 United States Government Accountability Office

Contents

Letter 1
Overview of Testimony 2
Conclusion 4
Recommendations for Executive Action 4
Agency Comments and Our Evaluation 4
Appendixes
                   :Testimony on CFC Charities with Unpaid Federal Tax Debt 6
                         :Comments from the Office of Personnel Management 31
                               :Comments from the Internal Revenue Service 41
                                   : GAO Contact and Staff Acknowledgments 43

This is a work of the U.S. government and is not subject to copyright
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

July 28, 2006

The Honorable Jim Ramstad Chairman Subcommittee on Oversight Committee on
Ways and Means The House of Representatives

Dear Mr. Chairman:

On May 25, 2006, we testified before the Subcommittee on Oversight of the
House of Representatives' Committee on Ways and Means on the results of
our audit and investigations of 2005 Combined Federal Campaign (CFC)
charities with unpaid federal taxes.1 CFC, which is administered and
promoted by the Office of Personnel Management (OPM) and about 300 local
campaigns, is the only authorized solicitation of employees in the federal
workplace on behalf of charitable organizations. In order to participate
in CFC, an organization must be recognized as tax-exempt by the Internal
Revenue Service (IRS). Notwithstanding this status, all employers are
required to withhold from their employees' wages payroll taxes for Social
Security, Medicare, and other taxes. Willful failure to remit payroll
taxes is a felony under U.S. law.2 Our work focused on determining whether
and to what extent (1) charities listed in the 2005 CFC had 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
CFC.

This report summarizes our testimony, which is reprinted in appendix I,
and makes specific recommendations for corrective actions. 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.

1 GAO, Tax Debt: Some CombinedFederal Campaign Charities Owe Payroll and
Other Federal Taxes, GAO-06-755T (Washington, D.C.: May 25, 2006).

2 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 US 192 (1991).

  Overview of Testimony

In our testimony, we stated that more than 1,280 CFC charities, nearly 6
percent of the charities that participated in the OPM-administered 2005
campaign, had federal tax debts totaling $35.6 million as of September 30,
2005. While the majority of this debt represented payroll taxes,
penalties, and interest dating back as far as 1988, the unpaid debt also
included amounts from annual reporting penalties, excise taxes, exempt
organization business income taxes, unemployment taxes, and other types of
taxes and penalties. Most of the 1,280 delinquent charities, 79 percent,
owed less than $10,000 in delinquent taxes. Further, in identifying
charities with unpaid tax debt we took a conservative approach, so the
$35.6 million in delinquent taxes is likely understated. For example, the
delinquent tax totals do not include amounts for charities that do not
file required tax returns or taxes for charities that underreport
unrelated business income or payroll taxes.

In addition to receiving exclusive access to the federal workplace, we
also found that more than 170 of these tax-delinquent CFC charities
received about $1.6 billion in federal grants during fiscal year 2005.
Five of the 15 charities we investigated were among the more than 170
charities that received federal grants. These 5 charities received grants
from the Departments of Health and Human Services (not including Medicaid)
and Education that totaled more than $6.5 million.

Our detailed audit and investigation of 15 CFC charities with tax debt and
their directors or senior officers identified abusive and potentially
criminal activity.3 Specifically, we found that the executives of the 15
charities we investigated failed in their role as "trustees" to forward
payroll taxes to IRS. Although the charities themselves are exempt from
federal income taxes, the charities as employers are still required by law
to withhold amounts from their employees' wages for Social Security,
Medicare, and individual income taxes. Willful failure to remit payroll
taxes is a felony.

3 We characterized as "potentially criminal" any activity related to
federal tax liability that may be a crime under a specific provision of
the Internal Revenue Code. Depending on the potential penalty provided by
statute, the activity could be a felony (punishable by imprisonment of
more than 1 year) or a misdemeanor (punishable by imprisonment of 1 year
or less). Some potential crimes under the Internal Revenue Code constitute
fraud because of the presence of intent to defraud, intentional
misrepresentation or deception, or other required legal elements.

Executives from 3 of the 15 selected charities denied owing payroll and
other taxes when IRS records showed otherwise. Another 5 charities'
executives explained that they knowingly withheld payroll taxes in order
to have enough funds available to pay for their salaries and the salaries
of charity employees, in addition to charity expenses. Our work 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, the independent audit reports for some of the charities
indicated significant cash flow problems. We referred all 15 cases
detailed in our report to IRS so that it can determine whether additional
collection action or criminal investigation is warranted.

Neither OPM nor the approximately 300 local campaigns screen charities for
federal tax problems before allowing charities to be listed with CFC.
Neither federal regulations nor OPM policies require federal tax debt to
be considered when determining CFC eligibility. 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. Nevertheless, CFC does not have
the internal control necessary to assure donors that charities listed with
and backed by CFC are meeting federal laws.

We also found that OPM and its local campaigns do not validate with IRS
each CFC applicant's tax-exempt status. To be eligible for CFC, a charity
must submit as part of its application a copy of a standard IRS letter
showing that it has received tax-exempt status from IRS under 501(c)(3) of
the Internal Revenue Code.4 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. Further, from our referral of more than 1,300
CFC charities whose 501(c)(3) status we could not confirm using publicly
available IRS data, IRS identified a number of charities that are not
valid 501(c)(3) entities.

4Exempt 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 CFR S:
950.204(b)(2)(iii).

    Page 3 GAO-06-887 Tax Debt

  Conclusion

Federal employees have made a notable difference in the lives of those in
need through CFC. The continued success of CFC is predicated on each
donor's confidence in a system that ensures their donations reach
legitimate charitable organizations. Bona fide charities of CFC have the
most to lose when such confidence is shaken because of the abuse of a
small number of charities. Until a governmentwide policy is developed that
addresses availability of federally sponsored benefits to entities that
fail to pay their federal tax obligations, tax delinquent CFC charities
may continue to benefit by participating in CFC and potentially receiving
donations. Further, unless OPM centralizes charity information and
validates whether applicants are legitimate 501(c)(3) organizations, the
campaign will also be vulnerable to entities that fraudulently purport to
be charities. These weaknesses 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.

  Recommendations for Executive Action

To help ensure continuing donor confidence and improve control over
participation in CFC, we recommend that the Director of the Office of
Personnel Management direct the Director of CFC Operations to take the
following actions:

     o create and maintain a comprehensive database of all local, national,
       and international charities that participate in CFC; and
     o verify with IRS the tax-exempt status of all charities applying to be
       included in CFC.

  Agency Comments and Our Evaluation

Both OPM and IRS provided written comments on a draft of this report,
which are reprinted in appendix II and appendix III, respectively. OPM
concurred with both of our recommendations and explained the actions it
has already taken or plans to take to implement them. For example, OPM has
initiated and expects to complete by the fall of 2007 the creation of a
"National Charity Registry" that would provide OPM with the ability to
independently verify data on participating charities. In addition, OPM has
begun implementing a series of steps for verifying with IRS the tax-exempt
status of all charities applying to CFC. OPM expects to finish this
screening for the 2006 Campaign by September 30, 2006. Although we did not
make any specific recommendations directly to IRS, it provided and has
agreed to continue providing OPM assistance in verifying the tax-exempt
status of CFC charities. Also, IRS stated it is reviewing the 15 cases we
referred to IRS for collection and criminal investigation and will take
further action if warranted.

As agreed with your offices, we will send copies to interest congressional
committees, the Director of the Office of Personnel Management, and the
Commissioner of the Internal Revenue Service. We will make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-7455 or [email protected] if you or your staff
have any questions concerning this report. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report.Major contributors are acknowledged in appendix IV.

Gregory D. Kutz Managing Director Forensic Audits and Special
Investigations 

Appendix I

Testimony on CFC Charities with Unpaid Federal Tax Debt

                 United States Government Accountability Office

Testimony

GAO

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

For Release on Delivery TAX DEBT                                           
Expected at 11:00 a.m.  
EDT Thursday, May 25,   
2006                    
                                                        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 thebenefits 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

1 We considered activity to be abusive when a 501(c)(3) organization's
actions (e.g., diversion of payroll tax funds) orinactions (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 withbehavior 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).

Page 1 GAO-06-755T

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
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

4

taxes is a felony under U.S. law.

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

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.

Page 2 GAO-06-755T

Summary

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.

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 understatedbecause we took a conservative approach to identifying
the amount of tax debt owed to the IRS by CFC charities. The delinquent
tax totals do notinclude 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
taxdelinquent 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.

Page 3 GAO-06-755T

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

6

problems. Willful failure to remit payroll taxes is a felony under U.S.
law.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

6 26 U.S.C.S: 7202. Under section 7202, it mustbe 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).

Page 4 GAO-06-755T

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

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
taxexempt status.

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 farback 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 benefitedby 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.

Page 5 GAO-06-755T

    Figure 1: Types of Federal Tax Debt Owed by CFC Charities

13% Annual reporting penalties

9% Other

78% Payroll

Source: GAO analysis of IRS dataas of September 30, 2005 and 2005 CFC
data.

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

8

or more tax periods.

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.

Page 6 GAO-06-755T

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

9

affirmed by either the charity or a tax court for tax periods prior to
2005.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
havingbeen agreed to by the taxpayer (for example, byfiling 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 madeby IRS or taxpayers or
to provide relief from interest and penalties. 26 U.S.C.S: 6404.

Page 7 GAO-06-755T

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
notinclude employers' matching amounts.

Page 8 GAO-06-755T

                Table 1: CFC Charities with Unpaid Federal Taxes

Nature of the Charity charity Tax debta Comments

Museum Over $100,000  o  Payroll tax debt covers more than 12 tax periods
dating back to the mid 1990s.

     o The IRS assessed a TFRP against the charity's director.
     o Federal and local tax liens have been filed against the charity.
     o The charity filed for bankruptcy protection in the past but the court
       denied the petition.
     o The executive director admitted to underpaying payroll taxes to fund
       the charity's operations.

Hospital Nearly $1 million  o Payroll tax debt covers more than 5 periods dating
                              back several years.

     o The charity paid two of its executives a salary of more than $200,000
       each.
     o 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.

Mental health Over $1.5 million  o Payroll tax debt covers more than 12
tax periods dating back to the early 1990s. clinic  o The charity recently
signed an installment agreement.

     o Federal, state, and local tax liens have been filed against the
       charity.
     o The executive director received a salary of more than $100,000.
     o The executive director admitted to underpaying payroll taxes to fund
       the charity's operations, which includes the director'ssalary.

Homeless shelter Over $300,000  o  Charity failed to submit payroll tax
payments for more than 5 tax periods over several years.

o  The executive director received a salary of more than $100,000 per
year.

General health Over $700,000  o Payroll tax debt covers 7 tax periods
dating back over 5 years. clinic  o The charity submitted an offer in
compromise, which is pending.

o  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.

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

Page 9 GAO-06-755T

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 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.

OPM Does Not Screen Charities for Delinquent Tax Debt

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

Page 10 GAO-06-755T

Restrictions on Tax Data Hamper Identification of Charities with
Delinquent Taxes

determining eligibility are based on and limited to what is required of
the CFC in Part 950 of Title 5, C.F.R.

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 deficienciesin the IRS's
internal controls that have resulted in the IRS not always releasing tax
liens from property when the tax debt has been

15

satisfied.

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 selfcertifications. 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
thatit has reviewed the organization's application package and qualified
it as exempt from federal income taxes.

Page 11 GAO-06-755T

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
participationin 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 taxexempt
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.

Page 12 GAO-06-755T

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.

For further information about this testimony, please contact Gregory D.

Contacts and

Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of
Acknowledgments Congressional Relations and Public Affairs may be found on
the last page of this testimony.

Page 14 GAO-06-755T

  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
participatedin 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

2

for financial reporting,

     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 excludedbecause 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

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 toby the taxpayers or the courts.

Page 15 GAO-06-755T Appendix I: Objectives, Scope, and Methodology

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
taxdelinquent 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 approachbased 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

Page 16 GAO-06-755T

Data Reliability Assessment

Appendix I: Objectives, Scope, and Methodology

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.

Page 17 GAO-06-755T

                            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 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 millionin 1981 to more than $255 million in
2004.

Each campaign is conducted during a 6-week period, varyingby 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,

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.

Page 18 GAO-06-755T

                            Appendix II: Background

approves campaign material, conducts compliance audits, is the liaison to
federal agency heads, and is generally engagedin 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.

Page 19 GAO-06-755T

  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 debta Comments

6 Rehabilitation        Over The charity failed to pay its payroll taxes   
           services $100,000  o in full or on time, resulting in delinquent   
                                payroll taxes and subsequent interest and     
                                penalties.                                    
                              o A federal tax lien has been filed against the 
                                charity.                                      
                              o Although these taxes remain outstanding, one  
                                of the executives of this charity recently    
                                placed property into a family trust.          
7  Psychiatric       Over $1 This entity owes more than $600,000 in        
         center      million  o penalties and interest.                       
                              o A state tax lien of $200,000 has been filed   
                                against the charity.                          
                              o The charity repeatedly underpaid payroll      
                                taxes in 1 year recently.                     
                              o Executive director received a salary of more  
                                than $100,000.                                
                              o A recent independent auditor's report states  
                                there is substantial doubt regarding the      
                                entity's ability to continue operating (i.e., 
                                a going concern).                             
                              o 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.                                       

Healthcare provider of Over $400,000  o Federal tax lien has been filed
against the charity.

hospital and nursing  o The charity filed for Chapter 11 bankruptcy
protection. home services

     o 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.
     o The charity received over $2 million in grants from the Department of
       Health and Human Services.

Drug and alcohol Over $70,000  o The charity has substantial equity in a
multi-acre parcel of real estate located rehabilitation center in a major
metropolitan area.

o  The charity owns a boat that is primarily used by the executive
director.

Charity provides social Nearly  o A recent independent auditor's report
states there is substantial doubt welfare programs $300,000 regarding the
entity's ability to continue operating (i.e., a going concern).

o  The charity received federal grants of more than $2.5 million from the
Department of Health and Human Services.

Social services for the Nearly  o The charity has more than 13 periods of
payroll tax debt dating back several blind $100,000 years.

o  The charity entered into an installment agreement that the IRS
terminated after the charity did not make the required payments.

                              Page 20 GAO-06-755T

Appendix III: CFC Charities with Unpaid Taxes

Charity Nature of    Tax debta Comments                                    
           charity      
12      Prevent and  Over $120,000  o Charity owes over $120,000 in        
           treat child  payroll taxes, penalties and interest from the        
           abuse        late 1990s.                                           
                        o Charity requested an offer in compromise on the tax 
                                                debt.                         
                          o State and local tax liens have been filed against 
                                                   the charity's real estate. 
                             o After the charity was delinquent in paying its 
                                              payroll taxes, it obtained more 
                             than $600,000 to construct a new building.       
                         o 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.                                 
                          o The charity received federal grants of $40,000.   

Counseling service for Over $500,000  o The charity's tax debt covers more
than six tax periods.

adults, adolescents, and  o Charity paid consultant more than $100,000 for
professional services. children

Adult and senior Nearly  o Federal tax lien has been filed against the
charity. services $200,000  o The charity received federal grants of
$140,000.

Family social services Over $500,000  o The charity's tax debt covers more than
                        20 tax periods of payroll taxes.

     o Federal tax lien has been filed against the charity.
     o 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.

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

Page 21 GAO-06-755T

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Appendix II

Comments from the Office of Personnel Management

                                  Appendix III

                   Comments from the Internal Revenue Service

Appendix III Comments from the Internal Revenue Service

Appendix IV

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