Tax Compliance: Thousands of Organizations Exempt from Federal	 
Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes	 
(24-JUL-07, GAO-07-1090T).					 
                                                                 
As of September 2006, nearly 1.8 million entities were recognized
as tax exempt organizations by the Internal Revenue Service	 
(IRS). As such, they do not have to pay federal income taxes.	 
Exempt organizations are still required to remit amounts withheld
from employees' wages for federal income tax, Social Security and
Medicare, as well as other taxes. Previous GAO work identified	 
numerous government contractors, Medicare providers, and	 
charities participating in the Combined Federal Campaign (CFC)	 
with billions in unpaid federal taxes. Today's testimony, based  
on a report that we are releasing today, summarizes the results  
of work we performed at the request of Representative Ramstad,	 
Ranking Member of the Subcomitte on Oversight, Committee on Ways 
and Means, to audit exempt organizations. Specifically, this	 
testimony covers whether and to what extent (1) exempt		 
organizations have unpaid federal taxes, including payroll taxes;
(2) selected case study organizations and their executives are	 
involved in abusive or potentially criminal activity; and (3)	 
exempt organizations with unpaid federal taxes received direct	 
grants from certain federal agencies. GAO reviewed unpaid taxes  
and exempt organization data from IRS and selected 25 case	 
studies for audit and investigation. GAO also reviewed data from 
3 major grant disbursement systems.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1090T					        
    ACCNO:   A73228						        
  TITLE:     Tax Compliance: Thousands of Organizations Exempt from   
Federal Income Tax Owe Nearly $1 Billion in Payroll and Other	 
Taxes								 
     DATE:   07/24/2007 
  SUBJECT:   Criminal activities				 
	     Debt						 
	     Delinquent taxes					 
	     Federal grants					 
	     Federal taxes					 
	     Payroll deductions 				 
	     Tax administration 				 
	     Tax evasion					 
	     Tax exempt organizations				 
	     Tax exempt status					 
	     Tax nonpayment					 
	     Tax return audits					 
	     Voluntary compliance				 
	     Payroll taxes					 
	     Waste, fraud, and abuse				 

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GAO-07-1090T

   

     * [1]Summary
     * [2]Exempt Organizations Had Nearly $1 Billion in Unpaid Federal

          * [3]Characteristics of Unpaid Taxes by Exempt Organizations

     * [4]Selected Exempt Organizations Were Involved in Abusive and P
     * [5]Exempt Organizations with Unpaid Federal Taxes Received Bill

          * [6]Exempt Organizations with Tax Debt Misrepresented Their Tax

     * [7]Concluding Observations
     * [8]Contacts and Acknowledgments
     * [9]GAO's Mission
     * [10]Obtaining Copies of GAO Reports and Testimony

          * [11]Order by Mail or Phone

     * [12]To Report Fraud, Waste, and Abuse in Federal Programs
     * [13]Congressional Relations
     * [14]Public Affairs

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 10:00 a.m. EDT
Tuesday, July 24, 2007

TAX COMPLIANCE

Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1
Billion in Payroll and Other Taxes

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

GAO-07-1090T

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss issues related to exempt
organizations and their adherence to the federal tax system. This
testimony builds on your concern about the $290 billion annual federal tax
gap. This testimony also builds on a large body of work, conducted over
the past few years,1 in which we investigated entities that have abused
the federal tax system2 while benefiting from doing business with the
federal government. Our testimony, and the accompanying report that we are
releasing today,3 address whether organizations exempt from federal income
taxes were delinquent in remitting payroll and other federal taxes to the
Internal Revenue Service (IRS). All employers, regardless of tax exempt
status, are required to withhold from their employees' wages payroll taxes
for Social Security, Medicare, and other federal taxes. Willful failure to
remit payroll taxes is a felony under U.S. law.

Exempt organizations are granted exemption from federal income taxes by
statutes contained in the Internal Revenue Code (I.R.C.), most notably
I.R.C. S 501(c). Income tax exemption is a significant benefit unavailable
to the vast majority of taxpayers. To qualify, an organization's purpose
and operations must meet the criteria explicitly contained in the I.R.C.
While the range of types of exempt organizations varies greatly, from
large national charities to local athletic leagues and social clubs, the
majority of exempt organizations are charities, churches, and educational
institutions that qualify for their exemption under I.R.C. S 501(c)3. Many
exempt organizations also receive the added benefit of being able to
provide a tax deduction to their contributors, meaning the donors can
deduct the amount of the donation on their individual income tax returns.
This statutory privilege, subsidized by the federal government, encourages
donations to these organizations and aids them in raising revenue.

1See GAO, Tax Compliance: Thousands of Federal Contractors Abuse the
Federal Tax System, [15]GAO-07-742T (Washington, D.C.: Apr. 19, 2007);
Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System, [16]GAO-07-587T (Washington, D.C.: Mar. 20, 2007); Tax Debt: Some
Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes,
[17]GAO-06-755T (Washington, D. C. : May 25, 2006); Financial Management:
Thousands of GSA Contractors Abuse the Federal Tax System, [18]GAO-06-492T
(Washington, D.C.: Mar. 14, 2006); Financial Management: Thousands of
Civilian Agency Contractors Abuse the Federal Tax System with Little
Consequence, [19]GAO-05-637 (Washington, D.C.: June. 16, 2005); and
Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence, [20]GAO-04-95 (Washington, D.C.: Feb. 12, 2004).

2We considered activity to be abusive when a 501(c) 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 of 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.

3GAO, Tax Compliance: Thousands of Organizations Exempt from Federal
Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes,
[21]GAO-07-563 (Washington, D. C.: June 29, 2007), released today, July
24, 2007.

Our previous work on a small portion of the nation's exempt organizations,
specifically those that participated in the federal government's Combined
Federal Campaign,4 indicated that some of these exempt organizations were
ignoring their payroll and other federal tax obligations. Based on this
previous work and at the request of Representative Ramstad, Ranking Member
of this subcommittee, we expanded our audit to include all organizations
considered actively exempt by IRS. We also investigated whether tax
delinquent exempt organizations were receiving additional federal support
in the form of grants. Today's testimony covers whether and to what extent
(1) exempt organizations have unpaid federal taxes, including payroll
taxes; (2) selected case study organizations and their executives are
involved in abusive or potentially criminal activity; and (3) exempt
organizations with unpaid federal taxes received direct grants from
certain federal agencies.

To determine the extent to which exempt organizations have unpaid federal
taxes, including payroll taxes, we matched IRS's unpaid tax data as of
September 30, 2006 to IRS's database of exempt organizations as of
September 30, 2006.5 To identify specific instances of abusive and
potentially criminal activities by selected exempt organizations and their
executives, we performed investigative work on a nonrepresentative
selection of 25 exempt organizations. We selected these 25 organizations
using primarily the amount of tax debt and number of delinquent tax
periods as selection factors. The investigative work included obtaining
and analyzing tax, financial, criminal history, and other public records.
We also reviewed the statutory authority provided in I.R.C. S 501 and
interviewed IRS officials on their process for revoking tax exempt status.

4 [22]GAO-06-755T , and GAO, Tax Debt: Some Combined Federal Campaign
Charities Owe Payroll and Other Federal Taxes, [23]GAO-06-887 (Washington,
D.C.: July 28, 2006).

5To ensure reliability of data in IRS's Unpaid Assessments file and Exempt
Organization database, we considered the results of our annual IRS
financial audits, interviewed IRS officials, performed electronic testing
of specific data elements, or a combination of these. For additional
information on our scope and methodology and tests of data reliability,
see app. I of our accompanying report, [24]GAO-07-563 .

To determine the extent to which exempt organizations with tax debt
received federal grants,6 we matched the data set of tax delinquent exempt
organizations we identified from our first objective to selected agencies'
grant disbursement data for fiscal years 2005 and 2006.7 We reviewed six
grant applications of selected exempt organizations with tax debts that
received federal grant payments in fiscal years 2005 and 2006 to determine
whether they reported federal tax debt as required. We also interviewed
grant officials at selected federal agencies on whether they considered
tax debts in grant award decision making. For further details on our scope
and methodology, see appendix I of the accompanying report.8

We conducted our audit work from August 2006 through March 2007 in
accordance with U.S. generally accepted government auditing standards. We
performed our investigative work, conducted during the same period, in
accordance with standards prescribed by the President's Council on
Integrity and Efficiency.

Summary

While the vast majority of exempt organizations pay their fair share of
federal taxes, tens of thousands abused the federal tax system. Our
analysis of IRS data shows that nearly 55,000 exempt organizations owed
nearly $1 billion in unpaid payroll and other federal taxes as of
September 30, 2006. Nearly 40,000 of the 55,000 delinquent exempt
organizations were charitable, or 501(c)(3), organizations. These
organizations owed almost $830 million of the nearly $1 billion in
delinquent taxes. Seventy-one percent of the nearly $1 billion in unpaid
taxes owed by tax exempt organizations consists of payroll taxes and
related penalties and interest dating as far back as 1981.9 Over $600
million of the nearly $1 billion is accounted for by about 1,500 exempt
organizations that individually owed over $100,000. Some of these entities
owed more than $10 million in unpaid federal taxes. Also, the nearly $1
billion in delinquent taxes is understated because we did not include IRS
data on tax debts for current periods and disputed debts because they may
be routinely resolved or not represent a fully valid tax debt. Our
estimate is also understated because the IRS data used in our analysis did
not include, among other items, debts owed by organizations that did not
file federal tax returns or underreported their tax liability, or for
which IRS had not yet assessed the amount of the tax debt.

6For purposes of this audit, grants include formula grants, project
grants, and direct payments for specified use as classified by the General
Services Administration in the Catalogue of Federal Domestic Assistance.
We excluded Medicaid from formula grants and Medicare from direct payments
for specified use.

7Grant data we analyzed came from the Department of Education's Grant
Administration and Payment System, the Department of the Treasury's
Financial Management Service's Automated Standard Application Payment
System, and the Department of Health and Human Services' Payment
Management System. These three systems processed the majority of federal
grants excluding Medicare and Medicaid during fiscal years 2005 and 2006.

8 [25]GAO-07-563 .

For all 25 cases that we investigated, we found abusive and potentially
criminal activity related to the federal tax system, including failure to
remit to IRS payroll taxes withheld from employees. Rather than fulfill
their role as "trustees" of this money, these case study entities and
their executives diverted the money for other purposes. Willful failure to
remit these payroll taxes, which included amounts withheld from employee
wages for income taxes, Social Security, and Medicare, is a felony. The
failure to properly segregate payroll taxes can be a criminal misdemeanor
offense.10

We found multiple instances in our case studies in which the payroll taxes
were diverted to fund operations or to pay hundreds of thousands of
dollars in compensation to the organization's top officials. In one case,
over $1 million in compensation was paid to the organization's top
official at the same time that the exempt organization owed millions of
dollars in delinquent taxes. Many of the top officials of selected case
study entities owned significant personal assets, including
multimillion-dollar homes and luxury vehicles. Other top officials of the
exempt organizations in our case studies neglected to remit millions of
dollars in delinquent taxes while at the same time paying millions of
dollars in management fees to related entities. We also found several
instances in which the same individuals who were top officials of the tax
exempt entities in our case studies also operated other tax exempt or
taxable (for-profit) entities with significant delinquent tax debts. For
instance, one of our case study exempt organizations, with over $10
million in tax debt, was affiliated with several other for-profit
entities, providing a variety of services from health care to management
services, that were also delinquent in paying their federal taxes. The
related for-profit entities owed more than $15 million in additional tax
debts, primarily payroll taxes. Despite repeatedly abusing the federal tax
system, all the exempt organizations in our case studies continued to
retain their exempt status. We found that existing federal statutes do not
authorize IRS to use tax debt as a cause for revocation of an
organization's exempt status. However, IRS is allowed to revoke exempt
status when it determines the organization has ceased to operate in a
manner consistent with the purpose for which it was granted the tax exempt
status or for other extraordinary circumstances, such as when an
organization engages in more than inconsequential illegal activities.

9Generally, there is a 10-year statutory collection period beyond which
IRS is prohibited from attempting to collect tax debt. However, the
10-year time may be suspended for a variety of reasons, including for
periods during which the taxpayer is involved in a collection due process
appeal, litigation, or a pending offer in compromise or installment
agreement.

10I.R.C. S 7202, 7215, and 7512 (b). Organization officials deemed by IRS
to be personally liable for the withheld amounts not forwarded are
assessed a civil monetary penalty known as a trust fund recovery penalty.
I.R.C. S 6672.

We also found that more than 1,200 of the exempt organizations with over
$72 million in tax debt received over $14 billion in direct federal grants
in fiscal years 2005 and 2006. Of the more than 1,200 exempt organizations
that received grants, over 1,150 were charitable organizations. These
organizations owed approximately $70 million in tax debt and received over
$12 billion of the $14 billion in grants. Further, the $14 billion in
grant disbursements going to exempt organizations is substantially
understated because our audit did not include all federal agencies that
provided grants and did not cover federal grants disbursed by state or
local governments, known as pass-through grants. According to our analysis
of the data from the Federal Assistance Award Data System, pass-through
grants accounted for about 80 percent of total federal grants. Of our 25
tax exempt case study entities, 6 received federal grants. Our limited
audit of grant applications submitted by these 6 case study entities found
that 5 of the 6 appeared to have violated the False Statement Act11 by not
disclosing their tax debts in their applications even though they were
required to do so. The strict taxpayer privacy statute poses a significant
challenge to federal granting agencies in determining the accuracy of
representations made by organizations seeking grants. Specifically,
federal granting agencies cannot verify an applicant's tax status with IRS
unless the taxpayer specifically authorizes such disclosure.12

1118 U.S.C. S 1001 provides criminal penalties for those who knowingly and
willfully (1) falsify, conceal, or cover up by any trick, scheme, or
device a material fact; (2) make any materially false, fictitious, or
fraudulent statement or representation; or (3) make or use any false
writing or document knowing that the documents contain any materially
false, fictitious, or fraudulent statement or entry.

Exempt Organizations Had Nearly $1 Billion in Unpaid Federal Taxes

As of September 2006, nearly 55,000 exempt organizations had nearly $1
billion in unpaid payroll and other federal taxes. Almost 40,000 of the
55,000 delinquent exempt organizations were charitable, or 501(c)(3),
organizations that owed almost $830 million of the nearly $1 billion in
unpaid payroll and other federal taxes. The amount of taxes owed by exempt
organizations ranged from $101 to $16 million, and the number of
delinquent tax periods ranged from a single period13 to more than 80 tax
periods.14 However, the dollar amount of federal taxes owed by exempt
organizations is understated because some organizations underreported
their tax liability or failed to file a return altogether.

Characteristics of Unpaid Taxes by Exempt Organizations

As shown in figure 1, about 71 percent of the nearly $1 billion in unpaid
federal taxes is composed of payroll taxes and related penalties and
interest. About 19 percent, or over $180 million, is related to annual
reporting penalties. IRS imposes reporting penalties on entities that did
not file annual returns, failed to file in a timely manner, or filed
inaccurate returns.15 The remaining 10 percent of the nearly $1 billion in
delinquent taxes consists of unrelated business income, excise, and other
types of taxes.

12Federal taxpayers can request or consent to the disclosure of their tax
information. I.R.C. S 6103(c).

13A "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.

14As described later in this testimony, a case study consists in some
cases of multiple related entities, some or all of which have tax debts.
The number of tax periods and the accumulated tax debts cited here pertain
solely to the exempt organization. The number of tax periods and the
accumulated tax debts cited later in this testimony pertain to the
accumulated tax periods and tax debts of the exempt organization and its
related entities.

15Generally, the tax code requires exempt organizations with $25,000 or
more of revenues to file annual returns (i.e., Form 990/990EZ).

Figure 1: Unpaid Federal Tax Debt of Exempt Organizations by Tax Type

A significant amount of the unpaid federal taxes owed by exempt
organizations had been outstanding for several years. As reflected in
figure 2, while the majority of the nearly $1 billion in unpaid federal
taxes was from tax periods 2001 through 2005, about a third of the unpaid
taxes were from tax periods prior to 2001. While there is a 10-year
statutory collection period beyond which IRS is prohibited from attempting
to collect tax debt. the 10-year time may be suspended for a variety of
reasons, including for periods during which the taxpayer is involved in a
collection due process appeal, litigation, or a pending offer in
compromise or installment agreement. As a result, figure 2 includes taxes
that are for tax periods from more than 10 years ago.

Figure 2: Age of Federal Tax Debt Owed by Exempt Organizations

Our analysis of IRS data found that nearly 1,500 of the almost 55,000
delinquent exempt organizations owed in total over $600 million of the
nearly $1 billion unpaid federal taxes of exempt organizations we
identified. All of these nearly 1,500 exempt organizations owed over
$100,000 each, with some owing more than $10 million. Another 8,400 owed
from $10,000 to $100,000 each. Although the largest group--nearly
45,000--owed less than $10,000 in delinquent taxes, the majority of the
debt in this group of exempt organizations related to payroll taxes
withheld from employees and not remitted to the federal government and
annual reporting penalties.

Although the nearly $1 billion in unpaid federal taxes we identified as
owed by exempt organizations as of September 30, 2006, is a significant
amount, it understates the full extent of unpaid taxes. This amount does
not include amounts due IRS from exempt organizations that did not file
payroll taxes (nonfilers) and that underreported their payroll tax
liability (underreporters). Also, we did not include exempt organization
tax debt from 2006 tax periods, tax debt for entities owing $100 or less,
or tax debt for certain entities listed in IRS's database of exempt
organizations.16

Selected Exempt Organizations Were Involved in Abusive and Potentially Criminal
Activity Related to the Federal Tax System

For all 25 cases involving exempt organizations with delinquent tax debts
that we audited and investigated, we found abusive activity, potentially
criminal activity, or both related to the federal tax system. The amount
of unpaid taxes associated with these cases ranged from over $300,000 to
nearly $30 million. Table 1 highlights 5 of the 25 organizations we
investigated with unpaid taxes. Appendix I provides a summary of the other
20 cases we examined. We are referring the 25 cases detailed in this
testimony to IRS for further collection activity and criminal
investigation, if warranted.

16IRS's database of exempt organizations contained over 2.5 million
entities. IRS does not consider all 2.5 million as currently tax exempt.
We only included in our analysis the classifications of exempt
organizations that IRS identified as currently tax exempt. This resulted
in about 1.8 million entities. For additional information on our scope and
methodology and tests of data reliability, see app. I of our accompanying
report, [26]GAO-07-563 .

Table 1: Exempt Organizations with Unpaid Federal Taxes

Source: GAO analysis of IRS, grant agencies, public and other records.

aAs described earlier in this testimony, a case study consists in some
cases of multiple related entities, some or all of which have tax debts.
The number of tax periods and the accumulated tax debts cited earlier in
this testimony pertain solely to the exempt organization. The number of
tax periods and the accumulated tax debts cited here pertain to the
accumulated tax periods and tax debts of the exempt organization and its
related entities.

bRounded dollar amount of unpaid federal taxes as of September 30, 2006.

The above cases illustrate how some officials of delinquent exempt
organizations abused the federal tax system for their own benefit. These
officials started multiple exempt organizations and failed to remit taxes,
paid large management fees to related entities, paid high salaries and
accumulated significant assets, or were involved in criminal activity all
the while failing to remit payroll and other taxes to the federal
government.

Despite continuing to abuse the federal tax system, all of the 25 case
study organizations we investigated retained their tax exempt status.
Existing federal statutes do not authorize IRS to revoke exempt status
based on an organization's tax delinquency. However, IRS can revoke an
organization's exempt status when it determines that the organization has
ceased to operate in a manner consistent with the purpose for which it was
granted the tax exempt status or for other extraordinary circumstances,
such as when an organization engages in more than inconsequential illegal
activities or pays officials excessive compensation.

Exempt Organizations with Unpaid Federal Taxes Received Billions in Federal
Grant Payments

Based on our analysis, we determined that of the nearly 55,000 exempt
organizations with federal tax debt, more than 1,200 received over $14
billion in federal grants from the Department of Health and Human Services
(HHS),17 the Department of Education, the Department of Energy, the
National Aeronautics and Space Administration, and other federal agencies
in fiscal years 2005 and 2006. The more than 1,200 exempt organizations
owed over $72 million in tax debt yet received substantial amounts in
federal grants. Of the more than 1,200 exempt organizations that were
delinquent in taxes yet received grants, over 1,150 were charitable
organizations that owed approximately $70 million in unpaid federal taxes.
These charitable organizations received over $12 billion of the $14
billion in grants disbursed to tax delinquent exempt organizations.
Additionally, our estimate of the over $14 billion in federal grants
disbursed to exempt organizations with federal tax debt is likely
understated because our audit did not include all federal agencies that
provided grants and did not cover pass-through grants.

Exempt Organizations with Tax Debt Misrepresented Their Tax Status to Granting
Agencies

Organizations that apply for federal grants are required to complete a
Standard Form (SF) 424, "Application for Federal Assistance," to provide
granting agencies with entity information, such as name, employer
identification number, address, and a descriptive title of the project for
which the grant will be used. The SF424 also requires that the grant
applicant provide information as to whether the applicant has any
delinquent federal debts. The instructions that accompany the SF424 define
federal debt to include taxes owed. The applicant is required to certify
that the information provided on the SF424 is true and correct.

We examined information provided on the SF424 for six of our case study
tax exempt organizations that received grants, all of which had
substantial tax debts outstanding. We found that five of the six that
received federal grants failed to disclose their federal tax debts on the
SF424s filed with the granting agencies. The six entities applied for and
received over $13 million in total grant payments in fiscal years 2005 and
2006. In a recent 3-year time span, one of the exempt organizations we
audited applied for multiple grants to provide community services. Even
though the entity had an outstanding balance of unpaid federal taxes, the
entity did not disclose its tax liability on the SF424s. The organization
subsequently received several million dollars in grant payments during 2
recent fiscal years. Figure 3 provides excerpts of an SF424 for this
organization where the applicant appears to have violated the False
Statements Act18 by not disclosing its delinquent tax debt.

17The HHS amount excludes Medicare and Medicaid payments. For additional
information on our scope and methodology and tests of data reliability,
see app. I of our accompanying report, [27]GAO-07-563 .

1818 U.S.C. S 1001.

Figure 3: Excerpt of SF424 Showing Failure to Declare Delinquent Tax Debt

We found that while granting agencies can ask prospective grantees for
consent to verify federal tax debt information with IRS, granting agencies
did so only in a few cases where the grant applicant disclosed having
federal debts. Agencies did not confirm with IRS the accuracy of applicant
information related to federal tax debts because of strict taxpayer
privacy laws. Officials at three granting agencies informed us that
procedurally, if tax debt were declared on the SF424, the agencies would
request further information, including consent to verify tax debt with
IRS, to determine the financial responsibility of the applicant and
whether any action needs to be taken, including withholding grant payments
until a payment plan has been entered into with IRS. Without accurate debt
information, granting agencies are limited in their ability to fully
evaluate whether the grantee is a responsible party and should receive the
grant, whether additional action needs to be taken, or a combination of
these.19

Concluding Observations

The vast majority of exempt organizations pay their fair share of federal
taxes. However, our work has shown that tens of thousands of exempt
organizations and their officers have taken advantage of the opportunity
to avoid paying their federal taxes, in part because IRS does not have the
authority to revoke exempt status for failure to pay taxes. In many cases,
officers of these delinquent organizations are responsible for diversion
of payroll tax money--a felony offense--to pay their substantial salaries
and accumulate substantial personal wealth. It is likely that many of
these exempt organizations have provided significant and positive services
to those in need. Nevertheless, it is also important that they comply with
federal tax law in order for the federal government to collect the funds
to which it is entitled to finance critical government priorities, and to
help improve the overall level of compliance with the nation's tax laws.

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.

19Further actions granting agencies can take include placing restrictions
on the funding, requiring that the prospective grantee enter into a
payment agreement with IRS, or denying the grant.

Appendix I: Exempt Organizations with Unpaid Federal Taxes

Table 1, in the main portion of the testimony, provides data on 5 detailed
case studies. Table 2 provides details of the remaining 20 exempt
organizations we selected as case studies. As with the 5 cases discussed
in the body of this testimony, we also found abuse, potential criminal
activity, or both related to the federal tax system during our audit and
investigations of these 20 case studies. The case studies primarily
involved exempt organizations with unpaid payroll taxes, one for as many
as 14 years.

Table 2: Exempt Organizations with Unpaid Federal Taxes

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

aAs described earlier in this testimony, a case study consists in some
cases of multiple related entities, some or all of which have tax debts.
The number of tax periods and the accumulated tax debts cited earlier in
this testimony pertain solely to the exempt organization. The number of
tax periods and the accumulated tax debts cited here pertain to the
accumulated tax periods and tax debts of the exempt organization and its
related entities.

bRounded dollar amount of unpaid federal taxes as of September 30, 2006.

(192253)

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[34]www.gao.gov/cgi-bin/getrpt?GAO-07-1090T .

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and methodology, click on the link above.

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Highlights of [35]GAO-07-1090T , a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives

July 24, 2007

TAX COMPLIANCE

Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1
Billion in Payroll and Other Taxes

As of September 2006, nearly 1.8 million entities were recognized as tax
exempt organizations by the Internal Revenue Service (IRS). As such, they
do not have to pay federal income taxes. Exempt organizations are still
required to remit amounts withheld from employees' wages for federal
income tax, Social Security and Medicare, as well as other taxes.

Previous GAO work identified numerous government contractors, Medicare
providers, and charities participating in the Combined Federal Campaign
(CFC) with billions in unpaid federal taxes. Today's testimony, based on a
report that we are releasing today, summarizes the results of work we
performed at the request of Representative Ramstad, Ranking Member of this
subcommittee, to audit exempt organizations. Specifically, this testimony
covers whether and to what extent (1) exempt organizations have unpaid
federal taxes, including payroll taxes; (2) selected case study
organizations and their executives are involved in abusive or potentially
criminal activity; and (3) exempt organizations with unpaid federal taxes
received direct grants from certain federal agencies.

GAO reviewed unpaid taxes and exempt organization data from IRS and
selected 25 case studies for audit and investigation. GAO also reviewed
data from 3 major grant disbursement systems.

Nearly 55,000 exempt organizations had almost $1 billion in unpaid federal
taxes as of September 30, 2006, with charitable organizations being
responsible for more than 85 percent of the $1 billion in debt. About
1,500 of these entities each had over $100,000 in federal tax debts, with
some owing multi-million dollars in federal taxes. The majority of this
debt represented payroll taxes and associated penalties and interest
dating as far back as the early 1980s. Willful failure to remit payroll
taxes is a felony under U.S. tax law. The $1 billion figure is understated
because some exempt organizations have understated tax liabilities or did
not file tax returns.

GAO selected 25 exempt organizations for investigation based primarily on
amount of tax debt and number of periods delinquent. In all 25 cases, we
found abusive and potentially criminal activity, including repeated
failure to remit payroll taxes withheld from employees. Officials diverted
the money to fund their operations, including paying themselves salaries
ranging from hundreds of thousands of dollars to over $1 million. Many of
the officials accumulated substantial assets, such as multimillion-dollar
homes and luxury vehicles. Key officials and employees at 4 entities were
engaged in criminal activities, including attempted bribery of an IRS
official and illegal gambling. Despite repeatedly abusing the federal tax
system, these entities continued to retain their exempt status. IRS does
not have the authority to revoke an organization's exempt status because
of unpaid federal taxes.

Examples of Abusive and Potentially Criminal Activity by Exempt
Organizations

Source: GAO analysis of IRS data and available public records.

Over 1,200 of these exempt organizations with unpaid federal taxes
received over $14 billion in federal grants in fiscal years 2005 and 2006.
Six of the 25 exempt organizations GAO investigated received grants; of
those 6 entities, 5 appear to have violated the False Statement Act by not
disclosing their tax debt as required. For example, one entity that
received millions of dollars in grants did not disclose unpaid taxes on
multiple applications. Taxpayer privacy statutes prevent granting agencies
from verifying an applicant's tax status with IRS unless the taxpayer
authorizes such disclosure.

References

Visible links
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-07-742T
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-06-755T
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-06-492T
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-05-637
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-04-95
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-755T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-06-887
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  28. http://www.gao.gov/
  29. http://www.gao.gov/
  30. http://www.gao.gov/fraudnet/fraudnet.htm
  31. mailto:[email protected]
  32. mailto:[email protected]
  33. mailto:[email protected]
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1090T
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1090T
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