-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-959R		

TITLE:     CFC Charities: Responses to Posthearing Questions

DATE:   07/07/2006 
				                                                                         
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GAO-06-959R

     

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July 7, 2006

The Honorable Jim Ramstad

Chairman

Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Subject: CFC Charities: Responses to Posthearing Questions

Dear Mr. Chairman:

This letter responds to your request for additional information related to
the subcommittee's May 25, 2006 hearing on whether charities participating
in the Combined Federal Campaign (CFC) are meeting their employment tax
responsibilities. Enclosed are our responses to the supplemental questions
you submitted. Our responses are based on work performed during our audit,
communication with the Internal Revenue Service, our views of generally
accepted accounting principles and generally accepted auditing standards,
and on professional judgment.

If you have any further questions or would like to discuss these
responses, I can be reached at (202) 512-7455 or [email protected].

Sincerely yours,

Gregory D. Kutz

Managing Director

Forensic Audits and Special Investigations

Enclosure-1

                                  Enclosure I

               Responses to Supplemental Questions for the Record

                                  Submitted by

                           Representative Jim Ramstad

                           Subcommittee on Oversight

                                   Hearing on

              Charities and EmploymentTaxes: Are Charities in the

                      Combned Federa Campaign Meeting ther

                        Employment Tax Responsibilities?

                                  May 25, 2006

1. It is my understanding that you came across a number of CFC charities
about which the IRS has no current information, and which they classify as
being in "unable to locate" status. Is that correct? How many of these did
you find participating in the CFC?

Answer:

We referred Combined Federal Campaign (CFC) charities with questionable
exempt status to the Internal Revenue Service (IRS) for further review.
Based on preliminary research, the IRS classified as "unable to locate"
more than 40 organizations that participated in the 2005 CFC. The IRS also
classified more than 80 other organizations as "terminated or merged" that
participated in the 2005 campaign. According to the IRS, this status
indicates the IRS either revoked the 501(c) (3) status or received
notification that the charity had merged with another charity. In
addition, the IRS identified about 70 organizations from the 2005 CFC
whose employer identification numbers (EIN) matched an EIN of a taxable
organization with the same or similar name. Therefore, about 200
organizations of the 22,000 charities that participated in the 2005 CFC
have questionable tax exempt status and may not be legitimate charities
under 501(c)(3).

2. OPM emphasizes that it requires financial audits of an organization for
admission into the CFC. Yet there were more than 1,280 charities with tax
debt. Wouldn't an independent audit detect any tax debt when reviewing an
organization's finances? Can you explain if GAO discovered this during its
examination of CFC charities?

Answer:

A charity's outstanding tax debt may or may not be disclosed in a
charity's financial statements prepared in conformity with Generally
Accepted Accounting Principles (GAAP), depending on the specific facts and
circumstances. Several factors affect (1) management's decisions about
whether to separately disclose liabilities for taxes, and (2) the ability
of a financial audit to detect a situation where the financial statements
did not conform with GAAP. For example, management may decide to not
separately report the liability in the financial statements or
specifically disclose it in the related footnotes if the amount is not
material to the financial statements taken as a whole. In addition, if
charity management assesses the probability of payment to be remote,1 an
amount would not be recorded or disclosed under GAAP.

Generally accepted auditing standards require an auditor to plan and
perform an audit to obtain reasonable, but not absolute, assurance about
whether the financial statements are free of misstatements, including any
material misstatement of tax debt. However, it is possible that an audit
would not in all cases detect improper recording or disclosure of tax
debt, particularly if the amounts involved are immaterial to the financial
statements or the risk of material misstatement is very low.

As part of our audit and investigative procedures, we requested from CFC
copies of the charities' independently audited financial statements. We
found that 4 of the 13 charities we investigated with significant tax debt
had financial statements that separately reported outstanding tax debt
either in the body or the footnotes to the financial statements.2 For the
remaining 9 charities, we are unaware of the reasons why the tax debt was
not disclosed.

1For example, the entity may consider the likelihood of payment remote
because management disagrees with the amount of a tax assessment or there
may be disputed penalties and interest charges. GAAP defines remote as a
slight chance of a future event or events occurring.

(192215)

2We investigated 15 charities and requested from CFC copies of audited
financial statements included with each of the charity's application
packages. As of the end of our fieldwork we received audited financial
statements for 13 of the 15 charities we investigated.

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