Tax Compliance: Thousands of Organizations Exempt from Federal
Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes
(29-JUN-07, GAO-07-563).
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. To follow up on the CFC
work, the subcommittee requested that GAO determine 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. GAO referred all 25 cases to IRS for
collection activity and criminal investigation, if warranted. In
its oral comments on a draft of this report, IRS noted several
actions it is taking to enhance exempt organizations' tax
compliance.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-563
ACCNO: A71726
TITLE: Tax Compliance: Thousands of Organizations Exempt from
Federal Income Tax Owe Nearly $1 Billion in Payroll and Other
Taxes
DATE: 06/29/2007
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
Combined Federal Campaign
Internal Revenue Service
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GAO-07-563
* [1]Results in Brief
* [2]Background
* [3]Federal Grants
* [4]Exempt Organizations Had Nearly $1 Billion in Unpaid Federal
* [5]Characteristics of Unpaid Taxes Owed by Exempt Organizations
* [6]Amount of Unpaid Federal Taxes Is Understated for Exempt Org
* [7]Selected Exempt Organizations Were Involved in Abusive and P
* [8]Exempt Organizations with Unpaid Federal Taxes Received Bill
* [9]Tax Delinquent Exempt Organizations Received Billions in Fed
* [10]Exempt Organizations with Tax Debt Misrepresented Their Tax
* [11]Concluding Observations
* [12]Agency Comments and Our Evaluation
* [13]Appendix I: Objectives, Scope, and Methodology
* [14]Data Reliability Assessment
* [15]Appendix II: Exempt Organizations with Unpaid Federal Taxes
* [16]Appendix III: Types of Exempt Organizations
* [17]Appendix IV: OMB Form SF 424 - Application for Federal Assis
* [18]Appendix V: GAO Contact and Staff Acknowledgments
* [19]GAO Contact
* [20]Acknowledgments
* [21]Order by Mail or Phone
Report to the Ranking Minority Member, Subcommittee on Oversight,
Committee on Ways and Means, House of Representatives
United States Government Accountability Office
GAO
June 2007
TAX COMPLIANCE
Thousands of Organizations Exempt from Federal Income Tax Owe Nearly
$1 Billion in Payroll and Other Taxes
GAO-07-563
Contents
Letter 1
Results in Brief 3
Background 5
Exempt Organizations Had Nearly $1 Billion in Unpaid Federal Taxes 8
Selected Exempt Organizations Were Involved in Abusive and Potentially
Criminal Activity Related to the Federal Tax System 12
Exempt Organizations with Unpaid Federal Taxes Received Billions in
Federal Grant Payments 18
Concluding Observations 21
Agency Comments and Our Evaluation 21
Appendix I Objectives, Scope, and Methodology 23
Appendix II Exempt Organizations with Unpaid Federal Taxes 26
Appendix III Types of Exempt Organizations 29
Appendix IV OMB Form SF 424 - Application for Federal Assistance 31
Appendix V GAO Contact and Staff Acknowledgments 32
Tables
Table 1: Exempt Organizations with Unpaid Federal Taxes 13
Table 2: Exempt Organizations with Unpaid Federal Taxes 26
Table 3: Organizations That Qualify for Exemption from Federal Income
Taxes 29
Figures
Figure 1: Unpaid Federal Tax Debt of Exempt Organizations by Tax Type 9
Figure 2: Age of Federal Tax Debt Owed by Exempt Organizations 9
Figure 3: Excerpt of SF 424 Showing Failure to Declare Delinquent Tax Debt
20
Abbreviations
ASAP Automated Standard Application Payment
CFC Combined Federal Campaign
EO Exempt Organization
FAADS Federal Assistance Award Data System
FMS Financial Management Service
GAPS Grant Administration and Payment System
HHS Department of Health and Human Services
IRS Internal Revenue Service
OASDI Old Age, Survivors, and Disability Insurance
PMS Payment Management System
SB/SE Small Business/Self-Employed
SF standard form
TE/GE Tax Exempt and Government Entities Division
TFRP trust fund recovery penalty
TIN taxpayer identification number
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office
Washington, DC 20548
June 29, 2007
The Honorable Jim Ramstad
Ranking Minority Member
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives
Dear Mr. Ramstad:
The success of our tax system depends on the public's perception of its
fairness, including the extent to which taxpayers believe their friends,
neighbors, and business competitors are complying with the tax laws and
are actually paying their taxes. Unfortunately, a large tax gap--the
difference between what taxpayers should pay on a timely basis and what
the Internal Revenue Service (IRS) collects through voluntary compliance
and enforcement activities--currently exists. This tax gap undermines the
credibility of the tax system and costs the federal government billions of
dollars in lost revenue. IRS has reported that the estimated annual net
tax gap is $290 billion.^1
Since 2004, we have issued testimonies and reports highlighting government
contractors, Medicare providers, and charities participating in the
Combined Federal Campaign (CFC) that abused the federal tax system.^2 In
these prior documents, we reported that tens of thousands of contractors,
Medicare providers, and CFC charities contributed to the tax gap and
undermined the federal tax system by owing billions in unpaid federal
taxes while at the same time enjoying the benefits of doing business with
the federal government or receiving donations from federal employees.
Because of the significance of the issues raised in prior work, and most
notably our findings that CFC charities, which are exempt from federal
income taxes but are still required to pay payroll^3 and other taxes,
abused the federal tax system, you requested that we perform work to
determine whether other organizations exempt from federal income taxes
were engaged in similar abuses of the federal tax system.^4 Specifically,
you asked us to determine 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.
^1The net tax gap is calculated by subtracting from the gross tax gap
amounts IRS expects to recover through enforcement actions and late
payments. In 2001 IRS estimated the gross tax gap was $345 billion, $55
billion of which IRS estimates it will receive through its collection
efforts and late payments.
^2GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, [22]GAO-04-95 (Washington, D.C.: Feb. 12,
2004); Financial Management: Thousands of Civilian Agency Contractors
Abuse the Federal Tax System with Little Consequence, [23]GAO-05-637
(Washington, D.C.: June 16, 2005); Financial Management: Thousands of GSA
Contractors Abuse the Federal Tax System, [24]GAO-06-492T (Washington,
D.C.: Mar. 14, 2006); Tax Debt: Some Combined Federal Campaign Charities
Owe Payroll and Other Federal Taxes, [25]GAO-06-755T (Washington, D.C.:
May 25, 2006); and Medicare: Thousands of Medicare Part B Providers Abuse
the Federal Tax System, [26]GAO-07-587T (Washington, D.C.: Mar. 20, 2007).
To determine the extent to which exempt organizations have unpaid federal
taxes, including payroll taxes, we obtained and analyzed IRS's unpaid tax
data as of September 30, 2006. We matched IRS's tax debt data 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 Internal Revenue Code (I.R.C.) S 501
and interviewed IRS officials on their process for revoking tax exempt
status.
^3Payroll taxes include employee's income taxes, Social Security and
Medicare taxes, and the employer's matching share of Social Security and
Medicare withheld from an employee's paycheck. Employers are to collect
and remit these taxes to the federal government.
^4We considered activity to be abusive when an exempt organization's
actions (e.g., diversion of payroll tax funds) or inactions (e.g., failure
to remit the annual Form 990 return, which is the basis for determining
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.
^5To ensure reliability of data in IRS's Unpaid Assessments File and
Exempt Organization databases, we considered the results of our IRS
financial audit, interviewed IRS officials, performed electronic testing
of specific data elements, or a combination of these. See app. I for
additional information on our scope and methodology and tests of data
reliability.
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 derived from our first engagement objective to
selected agencies' grant disbursement data for fiscal years 2005 and 2006.
The grant disbursement data used to conduct this analysis were provided by
the Department of Education (Education), the Department of the Treasury's
Financial Management Service, and the Department of Health and Human
Services (HHS). These three agencies process the majority of federal
grants. We reviewed the grant applications of selected exempt
organizations with tax debts that received federal grants 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. See appendix I for further details on our scope and methodology.
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. We requested comments on a draft of this report
from the Commissioner of IRS. We received oral comments from IRS's Tax
Exempt and Government Entities Division.
Results in Brief
While most exempt organizations appeared to pay their 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. Seventy-one
percent of the unpaid taxes owed by tax exempt organizations consist of
payroll taxes and related penalties and interest dating as far back as
1981. Over $600 million of the nearly $1 billion is accounted for by about
1,500 exempt organizations that individually owe over $100,000. Some of
these entities owed more than $10 million in unpaid federal taxes.
Further, the nearly $1 billion in delinquent taxes is understated. 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. Further, our estimate understates all types of taxes owed by exempt
organizations because the IRS data used in our analysis do not include
debts owed by organizations that did not file federal tax returns or for
which IRS has not yet assessed the exact 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.
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.^7
We found multiple instances in our case studies where the payroll taxes
were diverted to fund operations or to pay hundreds of thousands of
dollars in compensation to the organization's top officials--and in one
case, over $1 million at the same time that the exempt organization owed
millions 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 the 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.
^7I.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 tax
debt received over $14 billion in direct federal grants in fiscal years
2005 and 2006. This number is substantially understated because our audit
did not include all federal agencies 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 (FAADS), pass-through grants account 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 appear to have violated the
False Statement Act^8 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.^9 IRS provided oral comments on a draft of
this report, outlining planned actions to enhance tax exempt
organizations' compliance with tax law.
Background
Section 501(c) of the I.R.C. grants an exemption from federal income taxes
to organizations that meet certain requirements.^10 Exempt organization
data provided by IRS indicated that nearly 1.8 million organizations in
various classifications^11 are currently recognized as being tax exempt.
Charitable organizations (I.R.C. S 501(c)3)^12 constitute the largest
classification, accounting for over 60 percent of all exempt organizations
as of September 30, 2006. Other classifications of exempt organization
include civic and business leagues, labor organizations, recreational
clubs, domestic fraternal societies, and credit unions. Differences
between the various classifications include whether donations to the
exempt organization are tax deductible and whether the exempt organization
has to submit an application to IRS for specific recognition of its tax
exempt status. Specifically, donations to certain exempt organizations,
such as charitable and religious organizations, certain veteran's
organizations, and certain cemetery companies, are deductible on the
donor's individual tax return.^13 Donations to other organizations not
specifically recognized as such are not deductible. Organizations that are
qualified to receive deductible donations, with the exception of churches,
are required to apply to IRS and receive a formal determination of their
exempt status.^14 Generally, each exempt organization is required to file
an annual informational return^15 that provides IRS with information about
the organization and its operations, officers and directors, and whether
it is required to obtain specific IRS recognition of its exempt status. An
exempt organization's annual information return (Form 990) also provides
the public with the primary or sole source of information about the
organization.
^818 U.S.C. S 1001.
^9Federal taxpayers can request or consent to the disclosure of their tax
information. I.R.C. S 6103(c).
^10Other sections of the I.R.C. also exempt certain organizations from
federal income tax, including sections 501(d), 501(e), and 527.
^11See app. III for a list of types of exempt organizations.
^12This report uses the broad term charitable organization to describe an
I.R.C. S 501(c)3 organization. I.R.C. S 501(c)3 also includes religious,
scientific, educational, literary, and other organizations.
The determination of exempt status and monitoring of exempt organizations
is the responsibility of the Tax Exempt and Government Entities Division
(TE/GE) of IRS. The division's responsibilities include accepting
applications for and determining whether organizations qualify as exempt
under the I.R.C., monitoring exempt organizations for continued compliance
with the I.R.C., and when appropriate, revoking the exempt status of an
organization that no longer meets requirements for exemption.
Like all other employers, exempt organizations with employees are required
to pay payroll taxes that they withhold from employees' wages "in trust"
for the federal government, as well as other applicable federal taxes.
Payroll taxes withheld from employees consist of income taxes;^16 Old Age,
Survivors, and Disability Insurance (OASDI), commonly referred to as
Social Security; and Medicare. OASDI is taxed at 6.2 percent on the first
$94,200 of an employee's salary,^17 and Medicare is taxed at 1.45 percent
with no income cap. The employer is also taxed, at the same rate, for
OASDI and Medicare on employee wages. To the extent that payroll taxes are
withheld and not forwarded to IRS, individuals within the business (e.g.,
exempt organization officials) may be held personally liable for the
withheld amounts not forwarded, and they can be assessed a civil monetary
penalty known as a trust fund recovery penalty (TFRP).^18 Willful failure
to remit payroll taxes is a felony under U.S. law punishable by a fine,
imprisonment, or both, and the failure to properly segregate payroll taxes
can be a criminal misdemeanor offense.^19
^13I.R.C. S 170.
^14I.R.C. S 508(a).
^15The annual return exempt organizations are required to file is IRS Form
990, Return of Organization Exempt from Income Tax. Faith-based
organizations and exempt organizations with less than $25,000 in annual
revenues are not required to file Form 990.
^16I.R.C. S 3402.
Within TE/GE, the Exempt Organization (EO) Examinations Office is charged
with promoting compliance with the I.R.C. The EO Examinations Office's
activities include analyzing the operational and financial activities of
exempt organizations and developing other processes to identify areas of
noncompliance, developing corrective strategies, and assisting other
exempt organization functions in implementing these strategies. In the
process of performing the analysis, the EO Examinations Office may assess
exempt organizations' payroll or other taxes. If the EO Examinations
Office assesses taxes and the taxpayer does not make payment, the matter
is referred to IRS's Small Business / Self-Employed (SB/SE) Collections
Office. SB/SE Collections Office becomes responsible for collecting the
delinquent debt and may use means such as federal tax liens, levies, and
seizures, and may assess a TFRP against an organization's officials.
Federal Grants
A federal grant is an award of financial assistance from a federal agency
to an organization to carry out an agreed-upon public purpose. As such,
federal grants are not used for the direct acquisition of goods or
services for the federal government. Based on our analysis of fiscal year
2004 and 2005 data from FAADS, federal agencies collectively awarded
grants of approximately $300 billion annually. Further analysis of the
FAADS data indicates that approximately 80 percent of all federal grants
are pass-through grants, that is, they are federal grants provided to the
state and local governments, which, in turn, disburse the grants to the
ultimate recipients. Consequently, only about 20 percent of grants are
provided directly from the federal government to the organization that
ultimately spends the money.
^17Tax rates and wage limits are as of 2006. OASDI is taxed at 6.2 percent
on the first $97,500 as of 2007.
^18I.R.C. S 6672.
^19I.R.C. S 7202, 7215, and 7512 (b).
Grant applicants that apply directly to the federal government are
required to complete Standard Form (SF) 424. The SF 424 requires grant
applicants to certify whether they are delinquent on any federal debt,
including federal tax debt.^20
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. 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 period to more than
80 tax periods.^21 However, the dollar amount of federal taxes owed by
exempt organizations is understated because some organizations underreport
their tax liability or fail to file returns altogether. Further, we
excluded certain classifications of exempt organizations, tax debts for
current periods, and disputed tax debts.
Characteristics of Unpaid Taxes Owed by Exempt Organizations
As shown in figure 1, about 71 percent of the nearly $1 billion in unpaid
federal taxes comprised payroll taxes and related penalties and interest.
About 19 percent, or over $180 million, related to annual reporting
penalties. IRS imposes reporting penalties on entities that fail to file
annual returns at all or in a timely manner or that file inaccurate
returns.^22 The remaining 10 percent of the nearly $1 billion in
delinquent taxes consisted of unrelated business income, excise, and other
types of taxes.
^20All of the SF 424s we reviewed were related to our case investigations
and were prescribed by Office of Management and Budget Circular A-102,
revised September 2003. Effective October 2005, the SF 424 was revised but
continued to include essentially the same question concerning whether the
applicant was delinquent on any federal debt.
^21A "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. As
described later in this report, 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 we are reporting reflect the
accumulated tax periods and tax debts of all related entities.
^22Generally, IRS requires exempt organizations with $25,000 or more of
revenues to file an annual return (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 by exempt organizations
has 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, over a quarter of the unpaid taxes are for tax
periods prior to 2001.
Figure 2: Age of Federal Tax Debt Owed by Exempt Organizations
Our previous work has shown that as unpaid taxes age, the likelihood of
collecting all or a portion of the amount owed decreases.^23 This is, in
part, because of the continued accrual of interest and penalties on the
outstanding tax debt. Similarly, tax problems such as the tax gap are
aggravated over time if not addressed early on.^24
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 in 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 is related to payroll taxes
withheld from employees and not remitted to the federal government and
annual reporting penalties. Further, many exempt organizations in this
group repeatedly failed to remit taxes in multiple tax periods.
Amount of Unpaid Federal Taxes Is Understated for Exempt Organizations
Although the nearly $1 billion in unpaid federal taxes we identified that
were 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) or underreported 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.^25
Limiting our ability to more fully estimate the extent of exempt
organizations with unpaid federal taxes is the fact that IRS's tax
database reflects only the amount of unpaid taxes reported by the exempt
organization on a tax return or assessed by IRS through various
enforcement programs. IRS's tax database does not reflect amounts owed by
exempt organizations that have not filed tax returns and for which IRS has
not assessed tax amounts due. Additionally, our analysis did not account
for exempt organizations that underreported payroll taxes and had not been
identified by IRS. As reported previously^26 and as indicated in our case
study investigations, some exempt organizations underreported payroll
taxes or failed to file returns. IRS estimates that underreporting
accounts for more than 80 percent of the gross tax gap.^27
^23GAO, Internal Revenue Service: Recommendations to Improve Financial and
Operational Management, [27]GAO-01-42 (Washington, D.C.: Nov. 17, 2000).
^242006 Annual Report to the Congress, the National Taxpayer Advocate.
^25IRS'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. See app. I for more details on our scope
and methodology.
We also took a number of steps in determining the amount of tax debt owed
by exempt organizations to avoid overestimation. For example, some
recently assessed tax debts that appear as unpaid taxes through a matching
of IRS unpaid tax and exempt organization records may involve matters that
are routinely resolved between the exempt organization and IRS, with the
taxes paid, abated,^28 or both within a short period. We eliminated these
types of debt by including only unpaid federal taxes for tax periods prior
to calendar year 2006. Further, we did not include exempt organizations
with tax debt of $100 or less because these small debts likely do not
represent abusive behavior. We also eliminated all tax debt IRS identified
as not agreed to^29 by the exempt organization.
Further, the amount of exempt organization tax debt excludes amounts owed
by exempt organizations for which the statutory collection period expired.
Generally, there is a 10-year statutory collection period beyond which IRS
is prohibited from attempting to collect tax debt.^30 Consequently, if
exempt organizations owe federal taxes beyond the 10-year statutory
collection period, the older tax debt may have been removed from IRS's
records. We were unable to determine the amount of tax debt that had been
removed.
^26 [28]GAO-06-755T .
^27According to IRS, nonfilers and those that underpay taxes constitute
the rest of the gross tax gap.
^28Abatements are reductions in the amount of taxes owed and can occur for
a variety of reasons, such as to correct errors made by IRS or taxpayers
or to provide relief from interest and penalties. I.R.C. S 6404.
^29We eliminated from our analysis all tax debt coded by IRS as not having
been agreed to by the taxpayer (for example, by filing a balance due
return) or a tax court. For financial reporting, those cases are referred
to as compliance assessments.
^30The 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, fig. 2 includes taxes that are for tax
periods from more than 10 years ago.
Selected Exempt Organizations Were Involved in Abusive and Potentially Criminal
Activity Related to the Federal Tax System
For all 25 cases^31 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.
These cases reiterate the need for IRS to improve its enforcement of tax
laws as previously noted by GAO.^32 The amount of unpaid taxes associated
with these cases ranged from over $300,000 to nearly $30 million. All 25
exempt organizations had unpaid payroll taxes, some dating as far back as
the late 1980s. In one instance, an exempt organization had not remitted
payroll taxes to IRS for 14 years, thereby accumulating unpaid federal
taxes of nearly $8 million at the time of our audit. Rather than fulfill
their role as "trustees" of this money and forward it to IRS as required
by law, the officials responsible for these exempt organizations diverted
the money to fund the organizations' operations, which sometimes included
millions of dollars in management fees to related entities, or for
personal benefits, such as their own salaries. At the time of our audit,
IRS had completed TFRP assessments on officials of 15 of the 25 exempt
organizations.^33 However, as we have previously reported, collections of
TFRP assessments are generally minimal.^34 Further, available data show
that IRS has taken some collection action and placed liens on the assets
of 23 of the 25 entities or their officials. However, IRS initiated
actions to seize assets of only 1 of the 25 exempt organizations in our
case studies.
Our investigations revealed that despite owing substantial amounts of
federal taxes to IRS, top officials of some exempt organizations received
substantial salaries--often in the six-figure range and in one case in
excess of $1 million--and had substantial personal assets, including
multimillion-dollar homes and luxury cars. Our investigations found that 3
of these exempt organizations are related to other exempt organizations,
for-profit entities, or both that are also tax delinquent. The related
entities were primarily discovered because of common top officials.
Combined, the 3 exempt organizations and their related entities owed
nearly $40 million in delinquent taxes. Further, 4 of the 25 case study
organizations we investigated had key officials and other employees who
were convicted of criminal activities, including tax evasion and operating
an illegal gambling establishment, at the same time the organizations
continued to benefit from a tax exempt status. One entity was fined by a
state for employing convicted felons in positions of trust.
^31Case includes the exempt organization and, if applicable, any related
exempt or for-profit organizations discovered during the audit and
investigation. Related parties were determined by the presence of common
controlling individuals. Tax debt totals for cases involving related
organizations include debt from all the related organizations.
^32GAO, High-Risk Series, An Update, [29]GAO-07-310 (Washington, D.C.:
Jan. 2007).
^33In addition, IRS records indicate that three other entities are being
considered for TFRP assessment. IRS has also completed a TFRP review and
decided against assessing a TFRP on one other entity.
^34 [30]GAO-04-95 .
Table 1 highlights 10 of the 25 organizations with unpaid taxes that we
investigated. Appendix II provides a summary of the other 15 cases we
examined. We are referring all 25 cases we examined to IRS for further
collection activity and criminal investigation, if warranted.
Table 1: Exempt Organizations with Unpaid Federal Taxes
Source: GAO analysis of IRS data and public and other records.
aDollar amounts are rounded.
The following provide illustrative detailed information on several of
these cases:
Case 1: This exempt organization is related to several for-profit entities
that provide health care and other services, all of which have tax debts.
The related entities appear to be set up under complex forms of ownership
designed to shield income and assets, such as limited liability companies
and offshore entities. Combined, these entities owe nearly $30 million in
federal taxes, of which more than $10 million is attributable to the
exempt organization. The exempt organization in particular had not paid
federal taxes since the late 1990s, despite receiving millions in federal
payments. At the same time, the exempt organization paid millions in
management fees to a contractor that, according to available public
records, is affiliated with the exempt organization. IRS has not placed a
TFRP on any individual with respect to this exempt organization's tax
debt.
Case 2: This industry association owes more than $6 million in tax debt
dating back to the late 1990s. A top official of the association admitted
that he intentionally failed to remit payroll taxes in order to fund
operations, which in a recent year included providing more than 10
officials with six-figure salaries, with one receiving a salary in excess
of $500,000. At the same time, another top officer owned a
multimillion-dollar luxury estate and purchased luxury vehicles. IRS has
assessed a multimillion-dollar TFRP against an officer of the
organization.
Case 3: This health care organization owes more than $15 million in tax
debt dating back to the early 2000s. While not paying its payroll taxes,
the organization paid several employees large amounts of annual
compensation, including a total compensation package for a top official in
excess of $1 million annually, and several other employees with combined
compensation of over $1 million. The top official also made several
hundred thousand dollars in cash transactions at banks and casinos while
the organization owed millions in unpaid taxes. Despite holding the
organization's top office and earning seven-figure compensation, this
official told IRS that he was not responsible for the exempt
organization's unpaid taxes.
Case 5: This children's services organization owes more than $500,000
primarily related to payroll taxes dating back to the late 1980s. The top
official of this exempt organization was convicted of attempting to bribe
an IRS employee. Other organization employees have criminal records,
including records for violent crimes. Further, organization officials
allegedly requested that some payments to it be made in cash.
Case 6: This community services organization owes almost $3 million in tax
debt dating from the late 1990s. The organization was fined for employing
convicted felons in positions responsible for public safety. In addition,
an organization employee was engaged in criminal activity at one of the
organization's job sites. To date, IRS has not assessed a TFRP against
organization officials. The organization has been replaced by a related
entity that is operating out of the same facility. Many of the contracts
awarded to the exempt organization have been transferred to this entity.
Despite continuing to abuse the federal tax system, all of the 25 case
study organizations continued to retain their tax exempt status. Existing
federal statutes do not authorize IRS to revoke exempt status based on an
organization's tax delinquency. However, the I.R.C. provides IRS with the
authority to approve and monitor exempt organizations and also stipulates
the circumstances under which IRS can revoke an organization's tax exempt
status. Specifically, IRS can 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. For example, if an
organization was granted tax exempt status because it was established to
provide employment or other services to underprivileged individuals, and
it ceases to do so, IRS can revoke the organization's tax exempt status.
In addition, if an organization engages in excess benefit behavior,^35 IRS
has the authority to assess a tax against the individual who received the
benefit. The I.R.C. provides IRS authority to revoke an organization's tax
exempt status if it repeatedly engages in excess benefits behavior,
including excess compensation.^36
However, the I.R.C. does not provide IRS the authority to revoke tax
exempt status based on failure to pay taxes. According to IRS officials,
organizations whose exempt status is revoked may have delinquent debts,
but that was not the criteria for revocation. IRS officials also informed
us that revocation is an action of last resort, arrived at after
evaluation of many factors and after imposing intermediate sanctions^37 to
try and correct the problem. Similarly, in cases of excess compensation,
IRS generally tried to impose a tax on the individual who received the
excess benefits,^38 rather than revoke the exempt status of the
organization.
^35According to I.R.C. S 4958, an excess benefit transaction is any
transaction in which an economic benefit is provided by an exempt
organization to or for the use of any disqualified person if the value of
the economic benefit provided exceeds the value of the consideration
(including the performance of services) received for providing such
benefit.
^36IRS does not have a specific dollar value it uses as a benchmark in
determining whether compensation is excessive. Rather, IRS considers each
circumstance on a case-by-case basis. IRS recently completed a project and
issued a report on Exempt Organizations Executive Compensation. See
http://www.irs.gov/pub/irs-tege/exec._comp._final.pdf.
^37Intermediate sanctions include, for example, levying an excess benefit
tax on individuals who have unduly enriched themselves at the expense of
an exempt organization. I.R.C. S 4958.
^38In early calendar year 2007, IRS reported the results of a study done
on exempt organizations' executive compensation. A result of this report
was the proposed assessment of excise taxes totaling $21 million against
40 executives of nonprofit organizations whom it had determined had been
paid excessively.
Exempt Organizations with Unpaid Federal Taxes Received Billions in Federal
Grant Payments
Based on analysis of limited grant payment data, we found that exempt
organizations with unpaid federal taxes received over $14 billion in
direct federal grant payments from three federal agency disbursement
systems in fiscal years 2005 and 2006. Grant applicants are required to
self-certify on the grant application whether they are delinquent on any
federal debt, including federal taxes. Our audit of six case study
organizations with delinquent taxes that also received federal grants
found that five of the six appear to have violated the False Statements
Act^39 because they did not declare their delinquent federal taxes on
their grant applications.
Tax Delinquent Exempt Organizations Received Billions in Federal Grants
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 HHS,^40 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 $70 million in tax debt yet received substantial
amounts in federal grants.
However, our estimate of over $14 billion in federal grants received by
exempt organizations with federal tax debt is likely understated. First,
because our analysis was limited to data from the three federal grant
payment systems, our analysis did not include all federal grant
disbursements. Further, our analysis included only data on direct
recipients of federal grant payments, that is, payments provided directly
by the federal government to the end user. Based on our analysis of data
from FAADS, we estimated that these grants account for only about 20
percent of the total grants awarded by the federal government. The
remaining 80 percent of federal grants are provided to states and local
governments, which, in turn, disburse them to end users.
^3918 U.S.C. S 1001.
^40The HHS amount excludes Medicaid payments. See app. I for further
discussion of the payment databases analyzed.
Exempt Organizations with Tax Debt Misrepresented Their Tax Status to Granting
Agencies
Organizations that are applying for federal grants complete SF 424s 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 SF 424 also requires that the grant
applicant provide information as to whether the applicant has any
delinquent federal debts. The instructions that accompany the SF 424
define federal debt to include taxes owed. The applicant is required to
certify that the information provided on the SF 424 is true and correct.
We examined information provided on the SF 424 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 that they had federal tax debts
on the SF 424s 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 SF
424s. The organization subsequently received several million dollars in
grant payments during 2 recent fiscal years. Figure 3 provides excerpts of
an SF 424 for this organization where the applicant appears to have
violated the False Statements Act^41 by not disclosing its delinquent tax
debt. Appendix IV contains a copy of the entire SF 424.
^4118 U.S.C. S 1001.
Figure 3: Excerpt of SF 424 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
do so only in a few cases where the grant applicant discloses having
federal debts. Agencies do 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 is declared on the SF 424, the agencies would
request further information to determine if any action needs to be taken.
Without accurate debt information, granting agencies are limited in their
ability to fully evaluate whether the grantee is a responsible party, the
grantee should receive the grant, additional action needs to be taken, or
a combination of these.^42
Concluding Observations
The majority of exempt organizations appear to pay their 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; but it is also important that they comply with federal tax
law. We have referred all 25 of the cases we investigated to IRS for
collection and criminal investigation.
Agency Comments and Our Evaluation
We provided a draft of this report to the Commissioner of IRS for review
and comment on April 6, 2007. Officials in IRS's TE/GE provided oral
comments on the draft on April 24, 2007. The oral comments highlighted
several planned actions to enhance exempt organizations' tax compliance
efforts. The planned actions cited included analyzing discrepancies
between payroll data reported to the Social Security Administration and
data reported to IRS, and piloting a new modeling program to identify
exempt organizations with a high risk of employment tax noncompliance. In
its oral comments, IRS also agreed with the draft report's finding that
IRS does not have authority to revoke an organization's exempt status for
nonpayment of employment taxes, except under extraordinary circumstances
which rarely occur.
IRS planned actions, if implemented effectively, should help IRS avoid
additional payroll and other tax compliance issues by exempt
organizations. For IRS to ensure that tax exempt organizations comply with
tax law it will be important to use the full range of available
enforcement tools and hold tax exempt organizations and associated key
officials accountable for noncompliance. As discussed in the body of this
report, we identified a number of exempt organizations and their officials
that were delinquent in paying significant dollar amounts in federal
payroll and other taxes.
^42Further 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.
As agreed with your office, unless you announce the contents of this
report earlier, we will not distribute it until 30 days after its date. At
that time, we will send copies to the Secretary of the Treasury, the
Commissioner of the Financial Management Service, the Commissioner of
Internal Revenue, and interested congressional committees and members. We
will also make copies available to others upon request. In addition, this
report will be available at no charge on the GAO Web site at
[31]http://www.gao.gov .
Please contact me at (202) 512-9505 or [32][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. GAO staff who made major contributions to this
report are listed in appendix V.
Sincerely yours,
Gregory D. Kutz
Managing Director
Forensic Audits and SpecialInvestigations
Appendix I: Objectives, Scope, and Methodology
Our objectives were to determine whether and, if so, 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 whether and to what extent exempt organizations have unpaid
payroll and other federal taxes, we first identified the population of
exempt organizations to be included in our analysis. These organizations
include those that either received a formal determination of their exempt
status or met basic criteria to be considered exempt. To perform this
step, we obtained the exempt organization business master file from the
Internal Revenue Service (IRS) as of September 30, 2006. This database
contained information on over 2.5 million entities, each with a code
indicating the most recent "exempt" status. In consultation with IRS, we
identified nearly 1.8 million entities with status codes indicating that
they are currently tax exempt.
To identify exempt organizations with unpaid federal taxes, we obtained
IRS's September 30, 2006, unpaid assessments file and matched it to the
1.8 million entities we identified as currently tax exempt using taxpayer
identification numbers (TIN). To avoid overstating the amount owed by
exempt organizations 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 IRS classified as compliance assessments or memo
accounts for financial reporting,^1
o tax debts from calendar year 2006 tax periods, and
o exempt organizations with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid and tax debts that are
recently incurred. Specifically, compliance assessments or memo accounts
were excluded because these taxes have neither been agreed to by the
taxpayers nor affirmed by the court, or these taxes could be invalid or
duplicative of other taxes already reported. We excluded tax debts from
calendar year 2006 tax periods to eliminate tax debt that may involve
matters that are routinely resolved between the taxpayers and 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 exempt organizations.
^1Under federal accounting standards, unpaid assessments require taxpayer
or court agreements to be considered federal taxes receivable. Compliance
assessments and memo accounts are not considered federal taxes receivable
because they are not agreed to by the taxpayers or the courts.
To prepare case studies of selected exempt organizations and their
directors or senior officers for abuse of the federal tax system, we
selected 25 exempt organizations using a nonrepresentative selection
approach based on data-mining results, our judgment, and a number of other
criteria, including the amount of unpaid taxes, number of unpaid tax
periods, amount of payments reported by IRS, and indications that key
officials might be involved in multiple entities with tax debts.
We obtained copies of automated tax transcripts and other tax records (for
example, revenue officers' notes) from IRS as of September 30, 2006, and
reviewed these records to exclude exempt organizations that had recently
paid off their unpaid tax balances and considered other factors before
reducing the selection of exempt organizations to 25 case studies. For the
selected 25 cases, we performed searches of criminal, financial, and
public records. Our investigators contacted several of the exempt
organizations and performed interviews.
To determine whether and to what extent exempt organizations with tax debt
received federal grants, we obtained and analyzed federal grant payment
databases from the Department of Education's (Education) Grant
Administration and Payment System (GAPS), the Department of the Treasury
Financial Management Service's (FMS) Automated Standard Application
Payment system (ASAP), and the Department of Health and Human Services'
(HHS) Payment Management System (PMS) for fiscal years 2005 and 2006.
These three agencies process grants on behalf of many other federal
agencies and, in fiscal years 2005 and 2006, processed the majority of
direct and pass-through grants, excluding Medicare and Medicaid. We then
matched the grant payment data to the exempt organizations with federal
tax debt using the TINs. Of the 25 case studies of exempt organizations
with unpaid federal taxes, 6 submitted grant application forms related to
grant payments made during fiscal years 2005 and 2006. We requested and
reviewed the grant application forms for all 6 entities. We also
interviewed officials from HHS, Education, and the Department of
Agriculture on whether tax debts are considered in their decisions on
whether to provide grants to particular grant applicants.
We conducted our audit work from August 2006 through March 2007 in
accordance with U.S. generally accepted government auditing standards, and
we performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Data Reliability Assessment
For IRS unpaid assessments data, we relied on the work we performed during
our annual audits of 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 IRS's tax records, including
errors and delays in recording taxpayer information and payments, we
determined that the data were sufficiently reliable to address our
report'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 the exempt organization data, we interviewed
IRS officials concerning the reliability of the data provided to us. In
addition, we performed electronic testing of specific data elements in the
database that we used to perform our work.
For the GAPS, ASAP, and PMS data, we interviewed officials from Education,
FMS, and HHS responsible for the databases. In addition, we performed
electronic testing of specific data elements that we used to perform our
work.
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 report were sufficiently reliable for our purposes.
We briefed IRS officials on March 27, 2007, on the details of our audit,
including our findings and their implications. On April 6, 2007, we
requested comments on a draft of this report from the Commissioner of IRS.
We received oral comments from the Tax Exempt and Government Entities
Division of IRS on April 24, 2007, and have summarized these comments in
the Agency Comments and Our Evaluation section of this report.
Appendix II: Exempt Organizations with Unpaid Federal Taxes
Table 1 provides data on 10 detailed case studies. Table 2 provides
details of the remaining 15 exempt organizations we selected as case
studies. As with the 10 cases discussed in the body of this report, we
also found abuse, potential criminal activity, or both related to the
federal tax system during our audit and investigations of these 15 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 and public and other records.
Appendix III: Types of Exempt Organizations
Section 501(c) of the Internal Revenue Code (I.R.C.) lists several types
of organizations that qualify for exemption from federal income taxes. The
types of exempt organizations are summarized in table 3.
Table 3: Organizations That Qualify for Exemption from Federal Income
Taxes
Source: IRS Publication 557.
Appendix IV: OMB Form SF 424 - Application for Federal Assistance
Appendix V: GAO Contact and Staff Acknowledgments
GAO Contact
Gregory D. Kutz (202) 512-9505 or [email protected]
Acknowledgments
In addition to the contact named above, the following individuals made
major contributions to this report: Tuyet-Quan Thai, Assistant Director;
Gary Bianchi; Ray Bush; Shafee Carnegie; William Cordrey; Jessica Gray;
Ken Hill; Aaron Holling; Leslie Jones; Shirley Jones; Jason Kelly; John
Kelly; Rick Kusman; Barbara Lewis; Andrew McIntosh; Aaron Piazza; John
Ryan; Barry Shillito; and Michael Zola.
(192222)
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[40]www.gao.gov/cgi-bin/getrpt? GAO- 07-563.
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Highlights of [41]GAO-07-563 , a report to the Ranking Minority Member,
Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives
June2007
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. To follow up on the CFC work,
the subcommittee requested that GAO determine 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. GAO referred all 25 cases to
IRS for collection activity and criminal investigation, if warranted. In
its oral comments on a draft of this report, IRS noted several actions it
is taking to enhance exempt organizations' tax compliance.
Nearly 55,000 exempt organizations had almost $1 billion in unpaid federal
taxes as of September 30, 2006. About 1,500 of these entities each had
over $100,000 in federal tax debts with some owing tens of millions of
dollars. 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. For the 25 cases
investigated GAO 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 large salaries ranging from hundreds of thousands of dollars to
over $1 million. Many of the 25 case studies accumulated substantial
assets, such as million-dollar homes and luxury vehicles. Key officials
and employees at 4 exempt organizations 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
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