[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
CHARITIES AND EMPLOYMENT TAXES: ARE
CHARITIES IN THE COMBINED FEDERAL CAMPAIGN
MEETING THEIR EMPLOYMENT TAX
RESPONSIBILITIES?
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HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 25, 2006
__________
Serial No. 109-79
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
30-448 WASHINGTON : 2006
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Washington, DC 20402-0001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
JIM RAMSTAD, Minnesota, Chairman
ERIC CANTOR, Virginia JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado EARL POMEROY, North Dakota
JOHN LINDER, Georgia MICHAEL R. MCNULTY, New York
E. CLAY SHAW, JR., Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
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C O N T E N T S
__________
Page
Advisory of May 18, 2006 announcing the hearing.................. 2
WITNESSES
Miller, Steven T., Internal Revenue Service...................... 18
Green, James S., Office of Personnel Management.................. 28
Kutz, Gregory D., U.S. Government Accountability Office.......... 6
CHARITIES AND EMPLOYMENT TAXES:
ARE CHARITIES IN THE COMBINED FEDERAL
CAMPAIGN MEETING THEIR EMPLOYMENT
TAX RESPONSIBILITIES?
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THURSDAY, MAY 25, 2006
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:02 a.m., in
room 1100, Longworth House Office Building, Hon. Jim Ramstad
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
May 18, 2006
OV-7
Ramstad Announces Hearing on Charities and
Employment Taxes: Are Charities in the
Combined Federal Campaign Meeting
Their Employment Tax Responsibilities?
Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight
of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on charities and employment tax
compliance. The hearing will take place on Thursday, May 25, 2006, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 11:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include the Internal Revenue Service (IRS), U.S.
Government Accountability Office (GAO), and the Office of Personnel
Management (OPM). However, any individual or organization not scheduled
for an oral appearance may submit a written statement for consideration
by the Committee and for inclusion in the printed record of the
hearing.
BACKGROUND:
Under the law, employers who compensate their employees are
required to withhold certain taxes from an employee's paycheck, known
as employment or payroll taxes. Employment taxes include Federal income
tax withholding, Social Security, Medicare and Federal Unemployment
Tax. Entities organized under section 501(c)(3) of the Internal Revenue
Code must pay all employment taxes except Federal Unemployment Tax.
Employers are responsible for withholding employment taxes from
employees' pay, and then remitting the employment taxes, as well as the
appropriate forms to the IRS for the purpose of revenue collection, and
properly crediting a worker's Social Security record.
Charities are a significant part of the economy, and payroll tax
compliance by charities is an important part of overall employment tax
compliance. According to the GAO, in 2002, charities reported revenues
of more than $941 billion, representing 8 percent of gross domestic
product. Their personnel accounted for approximately 8.6 percent of the
civilian workforce in 2001. The IRS is responsible for enforcement of
all employment tax cases, including those relating to charities and
other tax-exempt organizations. The IRS uses a variety of means to find
and collect unpaid employment taxes. This hearing will explore whether
the IRS uses its significant regulatory authority over charities to
ensure that they are meeting their payroll tax obligations.
In order to better understand the extent of payroll tax
noncompliance by charities, the Subcommittee has asked GAO to review
whether any charities participating in the Combined Federal Campaign
(CFC) have outstanding tax debts. The CFC is a program administered by
OPM in order to facilitate charitable contributions by federal
employees. While all charities receive a tax subsidy, CFC charities
receive substantial additional benefits from the Federal Government.
The most significant of these benefits is that by accepting a charity
in the CFC, OPM is indicating that a charity meets certain basic
standards regarding its charitable purpose, transparency and public
accountability. Therefore, it is important to see whether these
charities have any outstanding payroll tax debt, and whether the OPM's
procedures for reviewing charities' qualifications are effective.
The hearing will examine the following issues:
What is the IRS doing to ensure that charities comply
with their payroll tax obligations?
Is the IRS effectively using its regulatory authority
over charities to ensure that they pay their taxes?
Is it appropriate for charities with substantial tax debt
to maintain their tax-exempt status?
Do any charities participating in the CFC have tax debt?
Is it appropriate for charities with tax debt to
participate in the CFC?
Does the OPM perform effective background checks on the
charities participating in the CFC?
Are there tax-exempt organizations with significant tax
debt that receive other benefits from the Federal Government, such as
grants?
In announcing the hearing, Chairman Ramstad stated, ``The Federal
Government's fiscal health cannot be maintained without effective
employment tax compliance. It is important to ensure that tax deadbeats
are not unnecessarily receiving benefits from the Federal Government,
whether through tax-exempt status, grants, or promotion in the Combined
Federal Campaign.''
FOCUS OF THE HEARING:
The hearing will focus on compliance by charities with their
employment tax obligations.
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Chairman RAMSTAD. The Committee hearing will come to order.
We welcome our witnesses as well as our guests in the audience
here today. Nice to see you, Ranking Member Lewis, my dear
friend.
Mr. LEWIS. Thank you sir.
Chairman RAMSTAD. The Committee on Ways and Means has been
conducting a wide-ranging review of tax-exempt entities to
ensure that these tax-exempt entities are providing the
benefits that Congress intended in exchange for their tax-
exempt status. Today, as part of this ongoing review, we will
learn more about whether charities are fulfilling their tax
obligations.
While charities do not pay income taxes, they are still
responsible for collecting payroll taxes. Given the fact that
charities' employees account for 9 percent of the Nation's work
force, these payroll taxes are not inconsequential. Therefore,
we will hear testimony from the Internal Revenue Service (IRS)
which will explain what it does to ensure that charities pay
their taxes.
To analyze payroll tax compliance by charities, I asked the
government Accountability Office (GAO) to review the charities
participating in the Combined Federal Campaign (CFC). The focus
on the CFC is appropriate, I believe, as those charities
receive additional benefits from the Federal government above
and beyond the tax subsidy received by all charities. CFC
charities receive, first of all, the Federal Government's seal
of approval. They also get extensive promotion and fundraising
assistance.
As a result of GAO's work, we learned several disturbing
facts. First, a number of CFC charities have Substantial tax
debts. The GAO found almost 1,300 CFC charities that owed tax
debts, totaling over $36 million. As detailed in the GAO
testimony, some of the charities have been engaged in serious
abuse of the Federal tax system. I want to know among other
things if the witnesses here today think it is appropriate for
charities with substantial tax debts to be participating in the
CFC, and if not, what should be done about it?
We also learned pursuant to the GAO review, in addition to
participating in the CFC, many of these tax delinquent
charities received substantial grants from various Federal
agencies totaling $1.6 billion. That is $1 billion with a ``B''
and $600 million dollars. We learned that the Office of
Personnel Management (OPM), apparently does not conduct even
the most basic background checks about entities applying to
participate in the CFC. For example, the OPM does not even have
a list of the charities participating in the CFC, and despite
weeks of work, GAO was never able to get a list of the
charities authorized to participate in the CFC. If there is
one, we hope to hear about it today, but GAO could not find it.
Perhaps most disturbing of all, we learned that the OPM
does not even make sure that charities approved to participate
in the CFC are in fact legitimate charities. The GAO applied to
three different local CFC campaigns as a fictitious charity in
a sting-type operation and was accepted into each of the three
campaigns. Again, fictitious charities applying to the CFC
campaigns were accepted into all three campaigns. The GAO could
have been caught in the sting operation if someone at the local
campaign or at OPM had simply picked up the phone and asked the
IRS if the applicant were a legitimate if the applicant were a
legitimate charity. In fact, GAO's work in this case reminds me
of an old Seinfeld episode in which George Costanza sets up a
up a fake charity, called ``The Human Fund,'' with a memorable
motto, ``money for people,'' ``give to The Human Fund.'' I see
some heads in the audience shaking affirmatively, ``give to the
human fund,'' ``money for people.'' George set up his fake
charity so that he could tell his coworkers that donations had
been made in their name to the Human Fund and thereby avoid
giving them actual Christmas presents. While fake charities
like The Human Fund might be funny on a sitcom, when it comes
to the CFC, they are not a laughing matter.
The OPM procedures appear to be so minimal that anyone
could pull a Costanza, create a fake charity and be accepted
into the CFC and then use that designation, that imprimatur or
aura of legitimacy, to take advantage of donors.
Now, we all know the vast majority of charities in the CFC
are established, legitimate, well-intended organizations, and
they certainly perform valuable services. It is critical that
we not allow the reputations of these charities, of these
legitimate organizations, to suffer because of the weak
controls that OPM maintains over the CFC.
I am eager to hear more about the GAO's work on this issue,
and I am certainly interested in hearing what the OPM and the
IRS can do to improve this situation. This situation, these
revelations by the GAO, cannot continue. I will now recognize
my good friend, the ranking Member, Mr. Lewis.
Mr. LEWIS. Thank you very much, Mr. Chairman, and thank you
for holding this hearing today. Let me take just a moment to
thank all of the witnesses for being here. The press release
for today's hearing asks the overall question: Are charities
complying with their employment tax obligations? I think today
we will find that the answer is, yes. I look forward to hearing
from the witnesses about what the Federal Government can do to
ensure even greater compliance with our employment tax laws.
A related issue to be considered by the Subcommittee
involves tax law compliance by charities participating in the
CFC. The CFC was officially created in 1961 by President
Kennedy and has raised more than $5.5 billion in charitable
donations from Federal workers. That is a lot of money on the
part of Federal workers. It is the world's largest and most
successful workplace giving campaign.
Again, Mr. Chairman, I want to thank you for holding
today's hearing because I think it is important that the
Subcommittee review these issues. Workers expect that the
amounts withheld from their paychecks are correctly sent to the
IRS by their employers.
Government employees expect that charitable paycheck
contributions are forwarded to first class charity
organizations. That is what we need to find out, and I agree,
Mr. Chairman, that this is an issue that we must deal with.
Thank you very much.
Chairman RAMSTAD. Thank you very much, Mr. Lewis. We will
now call our first panel, first and only panel, Gregory Kutz,
Managing Director of Forensic Audits and Special Investigations
for the U.S. GAO. Welcome, Mr. Kutz. Our second witness will be
Mr. Steven T. Miller, Commissioner, Tax Exempt and government
Entities (TE/GE) Division of the IRS. Welcome, Mr. Miller.
Finally, James S. Green, Associate General Counsel,
Compensation, Benefits, Products and Services Group of the OPM.
Welcome, Mr. Green. We will begin by hearing from Mr. Kutz,
please.
STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. KUTZ. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to discuss the CFC.
Last year, Federal workers gave $250 million to CFC
charities, helping thousands of people that were in need. Our
investigation focused on whether and to what extent these
charities had Federal tax problems. The bottom line of my
testimony is that the vast majority of CFC charities pay their
fair share of taxes. However, we found that 6 percent had $36
million of unpaid Federal taxes.
My testimony has two parts: first, charity tax problems
and, second, oversight of the CFC program. First, we found that
1,280 CFC charities had $36 million of unpaid Federal taxes.
The monitor shows the composition of these unpaid taxes. As you
can see, $28 million represent payroll taxes. Note the payroll
taxes include amounts withheld from an employee's wages for
Federal income taxes, Social Security and Medicare, along with
the employer match. Willful failure to remit payroll taxes is a
felony.
Our analysis clearly understates the number of CFC
charities with tax problems. For example, our analysis excludes
charities that are nonfilers or that underreport payroll or
other taxes. Further, in addition to the benefits of CFC, as
you mentioned, Mr. Chairman, 170 of these tax delinquent
charities received at least $1.6 billion of Federal grants.
Examples of where the grants came from include the Departments
of Health and Human Services, Education, Energy, the U.S.
Agency for International Development (USAID) and the National
Aeronautics and Space Administration (NASA).
In order to determine the story behind these charities and
their executives, we investigated 15 that owed between $100,000
and $1.5 million of Federal taxes. All 15 charities that we
investigated were involved with abusive and potentially
criminal activity related to the Federal tax system. For
example, rather than fulfill their role as trustees of the
payroll tax money and forward it to the IRS, these executives
diverted the money for other charity expenses, including their
own salaries. Many of these individuals had salaries in excess
of $100,000.
We also found evidence of severe cash flow problems. For
example, several of the charities had filed for bankruptcy
protection. In other cases, the auditor of the charity had
issued what is referred to as a going-concern opinion on the
financial statements. This means that the ability of the
charity to survive for another year is in serious doubt.
Regarding my second point, OPM and the 300 CFC campaigns do
not screen charities for Federal tax problems before allowing
them to be listed in the CFC program. Under current law, OPM
would need consent from the charities to access IRS tax
records. The OPM and the campaigns also do not validate with
IRS each CFC applicant's tax-exempt status. To demonstrate the
vulnerability of this process, we applied to three CFC
campaigns using a bogus charity. The monitor shows one of the
three letters that we received this month in response to our
application. As you can see, the letter documents the
acceptance of our bogus charity into the 2006 CFC. Unlike
delinquent tax records, IRS data on tax-exempt status is
available to OPM.
In conclusion, our investigation raises several important
policy questions. First, should charities with tax problems be
allowed to be listed with the CFC? Further, should they be
allowed to continue to enjoy their status as tax-exempt
organizations and receive Federal grants? Regardless of what
policy choices are made, OPM can better ensure the integrity of
the CFC program through enhanced oversight. Let us not forget
that the vast majority of CFC charities are good corporate
citizens that help thousands of those that are truly in need.
Mr. Chairman, this ends my statement. I look forward to
your questions.
[The prepared statement of Mr. Kutz follows:]
Statement of Gregory D. Kutz, Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability Office
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to assist the subcommittee as it
reviews tax-exempt organizations. This testimony builds on our
experience investigating entities that have abused the federal tax
system \i\ while benefiting from doing business with the federal
government. \ii\ Today, our testimony addresses whether organizations
exempt from federal income taxes were delinquent in remitting payroll
and other federal taxes to the Internal Revenue Service (IRS) while
participating in the 2005 Combined Federal Campaign (CFC).
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\i\ We considered activity to be abusive when a 501(c)(3)
organization's actions (e.g., diversion of payroll tax funds) or
inactions (e.g., failure to remit the annual Form 990 return, which is
the basis for review of whether an organization continues to meet
requirements for exempt status) took advantage of the existing tax
enforcement and administration system to avoid fulfilling federal tax
obligations and were deficient or improper when compared with behavior
that a prudent person would consider reasonable.
\ii\ See GAO, Financial Management: Thousands of GSA Contractors
Abuse the Federal Tax System, GAO-06-492T (Washington, D.C.: Mar. 14,
2006), Financial Management: Thousands of Civilian Agency Contractors
Abuse the Federal Tax System with Little Consequence, GAO-05-637
(Washington, D.C.: June 16, 2005), and Financial Management: Some DOD
Contractors Abuse the Federal Tax System with Little Consequence, GAO-
04-95 (Washington, D.C.: Feb. 12, 2004).
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The CFC, which is administered and promoted by the Office of
Personnel Management (OPM) and about 300 local campaigns, gave more
than 22,000 charities access to the federal workplace, where they
collected more than $250 million in donations during the 2005 campaign.
The success of CFC has made a notable difference in the benefits
provided to those in need. The CFC represents that it brings three
unique qualities to those it serves--''the three C's of CFC''--by
offering donors a ``choice'' to select from thousands of charities to
support, allowing the ``convenience'' of making payroll deductions, and
ensuring donors' ``confidence'' that charities listed with the campaign
meet CFC's specific eligibility requirements. In the spirit of ensuring
that donors can trust their contributions are going to organizations
that have met CFC's specific eligibility requirements, and are
legitimate charities, you asked us to investigate charities listed with
the CFC.
Specifically, you asked us to investigate and determine whether and
to what extent (1) charities listed in the 2005 CFC have unpaid payroll
and other federal taxes; (2) selected charities, their directors or
senior officers are abusing the federal tax system; and (3) OPM screens
charities for federal tax problems before allowing them to be listed
with the CFC.
As you know, to qualify as exempt from federal income taxes, an
organization must meet the requirements set forth in the Internal
Revenue Code\iii\ and formally receive tax-exemption designation under
501(c)(3) to participate in the CFC. Regardless of tax-exempt status,
all employers are required to withhold from their employees' wages
payroll taxes for Social Security and Medicare and other taxes. Willful
failure to remit payroll taxes is a felony under U.S. law.\iv\
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\iii\ 26 U.S.C. Sec. 501(c)(3).
\iv\ 26 U.S.C. Sec. 7202.
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To determine whether and to what extent CFC 501(c)(3) charities had
unpaid payroll and other federal taxes, we obtained and analyzed IRS
unpaid tax debt data as of September 30, 2005. We matched organizations
with unpaid tax debts to the CFC's list of charities that participated
in the 2005 campaign.\v\ To further analyze abuse of the federal tax
system by selected charities, their directors, or senior officers, we
applied certain criteria--the amount of outstanding tax debt, the
number and age of reporting periods for which taxes were due, and the
type of outstanding tax--to select 15 organizations for detailed audit
and investigation. For these 15 organizations, we reviewed tax records
and performed additional searches of criminal, financial, and other
public records.
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\v\ The campaign cycle for CFC consists of a 2-year reporting
period, which marks the beginning of a campaign and the end of a
campaign. Most campaigns will begin operation on or about March 15 of
the first year of the campaign and end around March 14 2 years later,
depending on the final disbursement for the campaign. For example,
March 15, 2005, begins the fall 2005 campaign and March 14, 2007, marks
the end of the fall 2005 campaign. Typically, the annual campaign runs
for a 6-week period from September 1 through December 15. Actual dates
may vary from one campaign to another.
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To determine whether OPM screens organizations for federal tax
problems before allowing them to be listed with the CFC, we identified
the legal criteria for doing so and gained an understanding of the
screening process through meetings with OPM's Office of CFC Operations
and others responsible for processing applications. To test OPM's
process of screening for legitimate charities, we created a fictitious
charity and applied to three large campaigns in various parts of the
country. We also matched the CFC's list of charities that participated
in the 2005 campaign against the list of all tax-exempt organizations
identified by the IRS to determine whether non-tax-exempt organizations
participated in the 2005 campaign. For further details on our scope and
methodology, see appendix I.
We conducted our audit work from January 2006 through May 2006 in
accordance with U.S. generally accepted government auditing standards.
We performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Summary
More than 1,280 CFC charities had tax debts totaling at least $35.6
million as of September 30, 2005. This represented nearly 6 percent of
the charities that participated in the OPM-administered 2005 campaign.
Of this debt, $27.7 million represented payroll taxes, penalties, and
interest dating back as far as 1988. The remaining $7.9 million
includes annual reporting penalties, excise taxes, exempt organization
business income taxes, unemployment taxes, and other types of taxes and
penalties. The majority of the 1,280 delinquent charities, 78.6
percent, owed less than $10,000 in delinquent taxes. The $35.6 million
in delinquent taxes is likely understated because we took a
conservative approach to identifying the amount of tax debt owed to the
IRS by CFC charities. The delinquent tax totals do not include amounts
for charities that do not file required tax returns and related taxes
or charities that underreport unrelated business income or payroll
taxes.
In addition to CFC donations, we found that more than 170 of these
tax-delinquent charities received about $1.6 billion in federal grants
during fiscal year 2005. Five of 15 case study charities we reviewed in
detail were among the more than 170 charities that received federal
grants. These 5 charities received grants from the Departments of
Health and Human Services (excluding Medicaid) and Education that
totaled more than $6.5 million.
Our detailed audit and investigation of the 15 CFC charities with
tax debt and their directors or senior officers identified abusive and
potentially criminal activity. Although charities are exempt from
certain taxes (e.g., federal income tax), the executives of the 15
charities we investigated were required by law but failed in their
roles as ``trustees'' to forward payroll taxes to the IRS, which
include amounts withheld from their employees' wages for Social
Security, Medicare, and the employer's matching portion of these taxes
and individual income taxes.
During interviews, three of the 15 selected charities' executives
denied owing payroll and other taxes when IRS records showed otherwise.
Executives from 5 other charities explained that they knowingly
withheld payroll taxes in order to have enough funds available to pay
for charity activities and the salaries of charity employees. As a
result of remitting tax payments late, the charities accumulated tens
of thousands of dollars in penalties and interest. Our investigations
also showed that several of the executives who potentially could be
assessed trust fund recovery penalties for the debts of their charities
had salaries in excess of $100,000 and owned significant personal
assets. In addition, according to independent audit reports, some of
the charities appeared to have significant cash flow problems. Willful
failure to remit payroll taxes is a felony under U.S. law\vi\. We
referred all 15 cases detailed in our report to the IRS so that it can
determine whether additional collection action or criminal
investigation is warranted.
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\vi\ 26 U.S.C. Sec. 7202. Under section 7202, it must be shown that
a defendant voluntarily and intentionally acted in violation of a known
legal duty. Cheek v. United States, 498 U.S. 192 (1991).
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Neither OPM nor the approximately 300 local campaigns dispersed
throughout the United States screen charities for federal tax problems
before allowing the charities to be listed with the CFC. OPM policies
do not require such screening. Additionally, federal law generally
prohibits the disclosure of taxpayer data and, consequently, even if
OPM had specific policies to check for unpaid taxes, it has no access
to a specific charity's tax data. The administration of CFC does not
have the internal controls necessary to assure donors that charities
listed with and backed by the CFC are meeting federal laws.
We also found that OPM, its local campaigns, and federations do not
validate with the IRS each CFC applicant's tax-exempt status. To be
eligible for the CFC, a charity must submit as part of its application
a copy of a standard IRS letter showing that it has received tax-
exemption status from the IRS under 501(c)(3) of the Internal Revenue
Code \vii\ To demonstrate the vulnerability of OPM's lack of validation
of tax-exempt status, we applied as a fictitious charity to three local
campaigns using fake documents and an erroneous IRS taxpayer
identification number. In all three cases, our fictitious charity was
accepted into the local CFC. Furthermore, our match of CFC charities
from the 2005 campaign against IRS's database of tax-exempt
organizations identified charities whose 501(c)(3) status could not be
confirmed. Therefore, we referred these charities to OPM and IRS for
further review and confirmation of their tax-exempt status.
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\vii\ Exempt from this requirement are organizations seeking local
eligibility in Puerto Rico or the U.S. Virgin Islands. However, these
organizations must include in their applications, the appropriate local
forms demonstrating their status as charitable organizations. 5 C.F.R.
Pt. 950.204(b)(2)(iii).
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More Than 1,280 CFC Charities Had Tax Debt's Totaling $35.6 Million
Based on our analysis, more than 1,280 CFC charities had federal
tax debts totaling $35.6 million as of September 30, 2005. This
represented nearly 6 percent of the charities that participated in the
OPM-administered 2005 campaign. $27.7 million of this debt represented
payroll taxes, penalties, and interest dating as far back as 1988. The
remaining $7.9 million includes annual reporting penalties, excise
taxes, exempt organization business income, unemployment taxes, and
other types of taxes and penalties. In performing our analysis, we took
a conservative approach to identifying the amount of tax debt owed by
the CFC's charities, and therefore the number of delinquent charities
and amount due to the IRS are likely understated. We also found that at
least 170 charities with unpaid taxes also benefited by receiving about
$1.6 billion in federal grants.
Unpaid Payroll Taxes Comprised Almost 80 Percent of Chariries' Federal
Tax Debt
As indicated in figure 1, payroll taxes comprised $27.7 million, or
almost 80 percent, of the $35.6 million in unpaid federal taxes owed by
CFC charities. Unpaid payroll taxes included amounts that were withheld
from employees' wages for federal income taxes, Social Security, and
Medicare but not remitted to the IRS, as well as the matching employer
contributions for Social Security and Medicare. Employers who fail to
remit payroll taxes to the federal government may be subject to civil
and criminal penalties. Figure 1 shows the types of federal taxes owed
by CFC charities as of September 30, 2005.
Figure 1: Types of Federal Tax Debt Owed by CFC Charities
The next largest component, annual reporting penalties, was $4.5
million or almost 13 percent of the unpaid taxes. Generally, the IRS
requires 501(c)(3) charities with more than $25,000 of income to file
an annual return (i.e., Form 990). This annual return serves as the
basis for review in determining whether an organization continues to
meet requirements for exempt status. Failure to file an annual return
at all or in a timely manner, as well as filing an incomplete return,
results in various types of penalties. Excise taxes related to employee
benefit plans, exempt organization business income taxes, unemployment,
and other types of taxes and penalties comprised the remaining $3.4
million.
The majority of the approximately 1,280 delinquent charities, 78
percent, owed less than $10,000 in delinquent taxes. Fifteen percent
owed from $10,000 to $50,000, and 7 percent owed more than $50,000 in
delinquent taxes. Also, 91 percent of 1,280 charities were delinquent
for up to 4 tax periods, 7 percent of charities for 5 to 9 tax periods,
and 2 percent for 10 or more tax periods.\viii\
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\viii\A tax period varies by tax type. For example, the tax period
for payroll and excise taxes is generally one quarter of a year. The
taxpayer is required to file quarterly returns with IRS for these types
of taxes, although payment of taxes occurs throughout the quarter. In
contrast, for income, corporate, and unemployment taxes, a tax period
is 1 year.
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Amount of Unpaid Federal Taxes Is Understated for CFC Charities
The amount of unpaid federal taxes we identified among CFC
charities--$35.6 million--is understated. To avoid overestimating the
amount owed by CFC charities, we intentionally limited our scope to tax
debts that were affirmed by either the charity or a tax court for tax
periods prior to 2005.\ix\ We did not include the most current tax year
because recently assessed tax debts that appear as unpaid taxes may
involve matters that are routinely resolved between the taxpayer and
the IRS, with the taxes paid, abated,\x\ or both within a short period.
We eliminated these types of debt by focusing on unpaid federal taxes
for tax periods prior to calendar year 2005 and eliminating tax debt of
$100 or less.
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\ix\ We eliminated from our analysis all tax debt coded by IRS as
not having been agreed to by the taxpayer (for example, by filing a
balance due return) or a tax court. For financial reporting, those
cases are referred to as compliance assessments.
\x\ Abatements are reductions in the amount of taxes owed and can
occur for a variety of reasons, such as to correct errors made by IRS
or taxpayers or to provide relief from interest and penalties. 26
U.S.C. Sec. 6404.
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Also limiting our estimate of CFC charities' unpaid federal taxes
is the fact that the IRS tax database reflects only the amount of
unpaid taxes either reported by the charity on a tax return or assessed
by the IRS through various enforcement programs. The IRS database upon
which we relied exclusively does not reflect amounts owed by charities
that have not filed tax returns or that have underreported the owed
taxes in their return and for which the IRS has not assessed tax
amounts due. According to the IRS, underreporting of payroll taxes
accounts for about $60 to $70 billion of the estimated $345 billion
annual gross tax gap. Consequently, the true extent of unpaid taxes for
these charities is unknown.
Some CFC Charities with Delinquent Tax Debt Also Received Substantial
Federal Grants
In performing our analysis, we identified at least 170 of the CFC
charities with delinquent tax debt that also received federal grants
totaling about $1.6 billion from the Departments of Health and Human
Services (excluding Medicaid), Education, and others in 2005. These
charities are benefiting from the federal government through their tax-
exempt status and receipt of substantial amounts of federal grants,
while not meeting their responsibility to pay required federal taxes.
Included in the $1.6 billion are grants to 5 of the 15 charities we
selected, totaling more than $6.5 million.
Certain CFC Charity Executives We Investigated Abused the Federal Tax
System
Executives responsible for the tax debts of the 15 charities we
investigated abused the federal tax system and may have violated the
law by diverting payroll or other taxes due to the IRS. Willful failure
to remit payroll taxes is a felony under U.S. law,\xi\ and the IRS can
assess a trust fund recovery penalty (TFRP) equal to the total amount
of taxes not collected or not accounted for and paid against all
individuals who are determined by the IRS to be ``willful and
responsible'' for the nonpayment of withheld payroll taxes.\xii\ In
this regard, one executive from these 15 case study CFC charities was
assessed a TFRP for what IRS determined to be his abusive behavior.
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\xi\ 26 U.S.C. Sec. 7202.
\xii\ 26 U.S.C. Sec. 6672. The amount of a TFRP does not include
employers' matching amounts.
---------------------------------------------------------------------------
Table 1 highlights 5 of the 15 case study CFC charities that we
investigated with payroll tax issues.
Table 1: CFC Charities with Unpaid Federal Taxes
----------------------------------------------------------------------------------------------------------------
Nature of the
Charity charity Tax debt a Comments
----------------------------------------------------------------------------------------------------------------
1 Museum Over $100,000 Payroll tax debt covers
more than 12 tax periods dating
back to the mid 1990s.
The IRS assessed a TFRP
against the charity's director.
Federal and local tax liens
have been filed against the
charity.
The charity filed for
bankruptcy protection in the past
but the court denied the petition.
The executive director
admitted to underpaying payroll
taxes to fund the charity's
operations.
----------------------------------------------------------------------------------------------------------------
2 Hospital Nearly $1 million Payroll tax debt covers
more than 5 periods dating back
several years.
The charity paid two of its
executives a salary of more than
$200,000 each.
The charity received about
$1.5 million in federal grants from
the Department of Health and Human
Services (non-Medicaid) and the
Department of Education.
----------------------------------------------------------------------------------------------------------------
3 Mental health Over $1.5 million Payroll tax debt covers
clinic more than 12 tax periods dating
back to the early 1990s.
The charity recently signed
an installment agreement.
Federal, state, and local
tax liens have been filed against
the charity.
The executive director
received a salary of more than
$100,000.
The executive director
admitted to underpaying payroll
taxes to fund the charity's
operations, which includes the
director's salary.
----------------------------------------------------------------------------------------------------------------
4 Homeless shelter Over $300,000 Charity failed to submit
payroll tax payments for more than
5 tax periods over several years.
The executive director
received a salary of more than
$100,000 per year.
----------------------------------------------------------------------------------------------------------------
5 General health Over $700,000 Payroll tax debt covers 7
clinic tax periods dating back over 5
years.
The charity submitted an
offer in compromise, which is
pending.
The chief executive officer
received a salary of more than
$100,000 per year.
----------------------------------------------------------------------------------------------------------------
Source: GAO's analysis of IRS, OPM, public, and other records.
\a\ Tax debt amount includes principal, interest, and penalties as of September 30, 2005.
For the five charities in table 1, tax debt ranged from about
$100,000 to more than $1.5 million, and the unpaid taxes spanned a
period ranging from 5 to more than 12 payroll tax periods. In addition
to the federal tax debt, two of the five CFC charities had unpaid state
and/or local taxes, where state and/or local taxing authorities filed
multiple tax liens against them.
During the time frames for which these charities were not paying
their taxes, funds were available to cover other charity expenses,
including officer salaries. Executives at two charities explained that
they knowingly withheld payroll taxes in order to have enough funds
available to pay their own salaries and the salaries of charity
employees, in addition to charity expenses. One executive we
investigated denied owing payroll or other taxes when IRS records
showed otherwise. In at least one case, the charity's executives
remitted payroll taxes later than the IRS required to pay their
salaries, while the charity accumulated tens of thousands of dollars in
penalties and interest for remitting late.
We also identified directors and senior executives who potentially
could be assessed TFRPs by the IRS for the debts of their charities.
Some of these directors and executives had salaries in excess of
$100,000 and owned significant personal assets. One of these executives
has already been assessed a TFRP.
See appendix III for the details on the other 10 CFC charities
reviewed in detail. We referred all 15 cases discussed in our report to
the IRS so that it can determine whether additional collection action
or criminal investigation is warranted.
OPM Does Not Screen Charities for Delinquent Tax Debt
OPM does not screen charities for federal tax debt prior to
granting CFC eligibility, thereby making charities with unpaid federal
taxes eligible to receive donations from federal civilian employees and
military personnel. OPM policies do not specifically require CFC
charities to be screened for these problems. Additionally, federal law
generally prohibits the disclosure of taxpayer data and, consequently,
even if OPM had specific policies to check for unpaid taxes, it has no
access to a specific charity's tax data. OPM determines the
completeness of a charity applicants' paperwork, but it does not
perform third-party verification of documents as part of that process.
For example, OPM does not verify with the IRS the tax-exempt status of
CFC applicants and relies solely on each applicant's submission of IRS
documentation that it is a bona fide charity. To demonstrate the
vulnerability of OPM's lack of validation of tax-exempt status, we
applied to three of CFC's largest local 2006 campaigns using a
fictitious charity with entirely false documents and an erroneous IRS
taxpayer identification number. We were accepted into all three
campaigns.
Tax Debt Are Not Considered When Granting Charities Eligibility to
Participate in the CFC
OPM does not screen charities for tax debts prior to granting CFC
eligibility and, ultimately, charities with unpaid federal taxes are
eligible to receive donations from federal civilian employees and
military personnel. Federal law implemented in the Code of Federal
Regulations does not require OPM to screen charities for federal tax
delinquency nor does it explicitly authorize CFC to reject charity
applicants that have delinquent tax debt from participation in the CFC.
Consequently, CFC's processes for determining eligibility are based on
and limited to what is required of the CFC in Part 950 of Title 5,
C.F.R.
Restrictions on Tax Debt Hamper Identification of Charities with
Delinquent Taxes
Federal law does not permit the IRS to disclose taxpayer
information, including tax debts.\xiii\ Thus, unless the taxpayer
provides consent, certain tax debt information can only be discovered
from public records when the IRS files a federal tax lien against the
property of a tax debtor.\xiv\ However, public record information is
limited because the IRS does not file tax liens on all tax debtors,
and, while the IRS has a central repository of tax liens, OPM officials
do not have access to that information. Further, the listing of a
federal tax lien in the credit reports of an entity or its key
officials may not be a reliable indicator of a charity's tax
indebtedness because of deficiencies in the IRS's internal controls
that have resulted in the IRS not always releasing tax liens from
property when the tax debt has been satisfied.\xv\
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\xiii\ 26 U.S.C. 6103.
\xiv\ Under section 6321 of the Internal Revenue Code, IRS has the
authority to file a lien upon all property and rights to property,
whether real or personal, of a delinquent taxpayer.
\xv\ GAO, IRS Lien Management Report: Opportunities to Improve
Timeliness of IRS Lien Releases,GAO-05-26R (Washington, D.C.: Jan. 10,
2005).
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OPM Does Not Verfy Charity Applicant's Exempt Organization Status
Part 950 of Title 5 of the Code of Federal Regulations requires
that applicants to the CFC include in their application packages a copy
of their most recent IRS determination letter\xvi\ showing the
charity's 501(c)(3) status. OPM does not perform any independent
verification of charity applicants' tax-exempt status. The IRS does
have publicly available data wherein OPM could verify an applicant's
tax exempt status, but this is not an OPM-required procedure in the CFC
eligibility determination process. Other documents OPM requires
applicants to include in the CFC application package are a copy of the
charity's most recent form 990, their most recent annual audit report,
and an application with various self-certifications. According to an
official from one of the CFC's largest local campaigns, the single most
frequent reason for rejecting an applicant from the CFC is the
applicant's failure to submit its IRS determination letter.
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\xvi\ A determination letter to an organization is the IRS's
notification that it has reviewed the organization's application
package and qualified it as exempt from federal income taxes.
---------------------------------------------------------------------------
Control Weaknesses Allowed GAO to Enroll Fictitious Charities
To determine whether and to what extent CFC's eligibility
determination processes are vulnerable, we applied to three local
campaigns with a fictitious charity using fake documents and an
erroneous IRS taxpayer identification number. In all three campaigns,
our application for participation in the 2006 CFC was accepted. Figure
2 shows one example of the three letters we received regarding our
acceptance into the 2006 CFC. Immediately after our applications were
accepted, we notified CFC officials and withdrew our charity from the
campaigns in order to prevent donations to our fictitious charity.
In addition to our direct testing of OPM's screening process, our
match of CFC charities from the 2005 campaign against IRS's database of
tax-exempt organizations identified charities whose 501(c)(3) status
could not be confirmed. Therefore, we referred these charities to OPM
and IRS for further review and confirmation of their tax-exempt status.
Figure 2: Copy of an Acceptance Letter from One of the Three Local CFC
Campaigns for Our Fictitious Charity
Concluding Observations
The success of the OPM's CFC is predicated on each donor's
confidence in a system that ensures that their donations reach
charitable organizations that have met the CFC's specific eligibility
requirements and are legitimate charities. The bona fide charities
participating in the annual campaign have the most to lose when such
confidence is shaken because of the abuse of a minority of
participating charities. Until OPM takes steps to independently
validate whether applicants are legitimate 501(c)(3) organizations, the
campaign is vulnerable to entities that fraudulently purport to be
charities. Further, tax-abusing charities will continue to benefit by
being eligible to participate and receive donations unless OPM is
provided access to their tax debt information and determines whether
sanctions such as expulsion from the CFC are warranted. OPM and each
local CFC cannot provide the assurance needed to sustain such
confidence. This could have devastating consequences for the vast
majority of eligible and tax-compliant charities that are dependent on
donor contributions to support their critical missions.
Mr. Chairman and Members of the Subcommittee, this concludes my
statement. I would be pleased to answer any questions that you or other
members of the committee may have at this time.
Appendix I: Objectives, Scope, and Methodology
Our objectives were to investigate and determine whether and to
what extent (1) charities listed in the 2005 Combined Federal Campaign
(CFC) have unpaid payroll and other federal taxes; (2) selected
charities, their directors, or senior officers are abusing the federal
tax system; and (3) the Office of Personnel Management (OPM) screens
charities for federal tax problems before allowing them to be listed
with the CFC.
To determine whether any of the charities listed in the 2005 CFC
have unpaid payroll and other federal taxes, we first identified
charities that participated in the 2005 campaign. To identify CFC
charities we requested data from CFC headquarters. To obtain these
data, CFC headquarters requested data from the 299 local campaigns
throughout the United States. We received data from 291 of the
299\xvii\ local campaigns.
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\xvii\ Data from the remaining 8 local campaigns were either not
received or not sufficient for analysis.
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To identify CFC charities with unpaid federal taxes, we obtained
and analyzed the Internal Revenue Service's (IRS) September 30, 2005,
Unpaid Assessments file. We matched the CFC charity data to the IRS
unpaid assessment data using the taxpayer identification number (TIN)
field. To avoid overstating the amount owed by charities with unpaid
federal tax debts and to capture only significant tax debt, we excluded
tax debts meeting specific criteria. The criteria we used to exclude
tax debts are as follows:
tax debts the IRS classified as compliance assessments or
memo accounts for financial reporting,\xviii\
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\xviii\ Under federal accounting standards, unpaid assessments
require taxpayer or court agreement to be considered federal taxes
receivables. Compliance assessments and memo accounts are not
considered federal taxes receivable because they are not agreed to by
the taxpayers or the courts.
---------------------------------------------------------------------------
tax debts from calendar year 2005 tax periods, and
charities with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be
under dispute or generally duplicative or invalid and tax debts that
are recently incurred. Specifically, compliance assessments or memo
accounts were excluded because these taxes have neither been agreed to
by the taxpayers nor affirmed by the court, or these taxes could be
invalid or duplicative of other taxes already reported. We excluded tax
debts from calendar year 2005 tax periods to eliminate tax debt that
may involve matters that are routinely resolved between the taxpayers
and the IRS, with the taxes paid or abated within a short period. We
also excluded tax debts of $100 or less because they are insignificant
for the purpose of determining the extent of taxes owed by CFC
charities.
The 2005 pledged donation (pledges) information was unavailable at
the time we selected our charity cases for investigations. We requested
pledge information from the CFC and were in the process of receiving
these data, piecemeal, from the CFC's 299 campaigns as of the end of
our fieldwork. The pledge information we received through the end of
fieldwork lacked the detail necessary to efficiently determine the
amount of pledges for tax-delinquent charities. Consequently, we were
unable to determine the amount of pledges received for tax-delinquent
charities we identified.
To determine whether selected charities, their directors, or senior
officers are abusing the federal tax system, we selected 15 charities
for a detailed audit and investigation. We selected the 15 charities
using a nonrepresentative selection approach based on our judgment,
data mining, and a number of other criteria, including the amount of
unpaid taxes, number of unpaid tax periods, amount of payments reported
by the IRS, and indications that key officials might be involved in
multiple charities with tax debts.
We obtained copies of automated tax transcripts and other tax
records (for example, revenue officers' notes) from the IRS as of
September 30, 2005, and reviewed these records to exclude charities
that had recently paid off their unpaid tax balances and considered
other factors before reducing the selection of charities to 15 case
studies. For the selected 15 cases, we reviewed the charity CFC
application files and performed additional searches of criminal,
financial, and public records. Our investigators also contacted several
of the charities and conducted interviews.
To determine whether and to what extent OPM screens charities for
federal tax problems before allowing them to be listed with the CFC, we
reviewed OPM's policies and procedures, performed process walkthroughs,
and interviewed key CFC officials at CFC Headquarters and three local
campaigns. We reviewed laws and regulations governing OPM's
administration of the CFC. We identified processes and procedures
performed by the CFC during the annual application period. To confirm
our understanding of the requirements placed on charity applicants and
to test whether OPM's processes would identify fraudulent charities, we
attempted to gain acceptance into the 2006 CFC by posing as a charity.
We prepared and submitted application packages for each of three local
campaigns using fake documentation for a fictitious charity. To test
the effectiveness of OPM's processes and procedures to identify charity
applicants that are not valid tax-exempt organizations, a primary
requirement for participation in the CFC, we matched the list of CFC
charities that participated in the 2005 campaign with the IRS's
database of tax-exempt organizations.
We conducted our audit work from January 2006 through May 2006 in
accordance with U.S. generally accepted government auditing standards,
and we performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Data Reliability Assessment
For the IRS unpaid assessments data, we relied on the work we
performed during our annual audits of the IRS's financial statements.
While our financial statement audits have identified some data
reliability problems associated with the coding of some of the fields
in the IRS's tax records, including errors and delays in recording
taxpayer information and payments, we determined that the data were
sufficiently reliable to address this testimony's objectives. Our
financial audit procedures, including the reconciliation of the value
of unpaid taxes recorded in IRS's master file to IRS's general ledger,
identified no material differences.
To help ensure reliability of CFC-provided data, we performed
electronic testing of specific data elements in the databases that we
used to perform our work and performed other procedures to ensure the
accuracy of the charity data provided by the CFC.
Based on our discussions with agency officials, our review of
agency documents, and our own testing, we concluded that the data
elements used for this testimony were sufficiently reliable for our
purposes.
Appendix II: Background
The Combined Federal Campaign (CFC) is the only authorized
solicitation of employees in the federal workplace on behalf of
charitable organizations. The CFC's mission is to promote and support
philanthropy through a program that provides all federal employees the
opportunity to improve the quality of life for others through donations
to eligible nonprofit organizations. In 1971, the CFC began operation
as a combined campaign with donations solicited once a year. Also
during this period, charitable contributions in the form of payroll
deduction were made possible. Contributions grew dramatically from
$12.9 million in 1964 to $82.8 million in 1979. Growth in the number of
participating charities was slow through the 1970s, increasing from 23
charities in 1969 to only 33 charities in 1979. Significant changes in
CFC regulations occurred in the late 1970s and early 1980s\xix\ which
in April 1984 opened the CFC to organizations that received tax-exempt
status under 501(c)(3) of the Internal Revenue Code. The CFC has grown
to a campaign consisting of approximately 1,700 (2005 campaign)
national and international charitable organizations and more than
21,000 local charities. Contributions have also increased from about
$95 million in 1981 to more than $255 million in 2004.
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\xix\ Including a court order that prohibited OPM from excluding
legal defense and advocacy groups from the CFC because of their
``indirect'' support of health and welfare or their lobbying/advocacy
activities.
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Each campaign is conducted during a 6-week period, varying by local
campaign from September 1 through December 15, at every federal agency
in the campaign community. During this period, current federal civilian
and active duty military employees, throughout the country and
internationally, donate tens of millions of dollars to these nonprofit
organizations that provide health and human service benefits throughout
the world.
The Director of the Office of Personnel Management (OPM) exercises
general supervision over all operations of the CFC and takes steps to
ensure the campaign objectives are achieved. The CFC is decentralized;
therefore, each of the approximately 300 campaigns manages its local
campaign and then reports statistics in aggregate to OPM. The Local
Federal Coordinating Committee (LFCC) is the leadership element of the
local CFC and is comprised of members from the federal community--
federal civilian, military, and postal. The LFCC solicits annually a
principle combined fund organization (PCFO), conducts local agency
eligibility, approves campaign material, conducts compliance audits, is
the liaison to federal agency heads, and is generally engaged in a host
of the scheduled campaign activities. The PCFO manages all aspects of
the campaign. The PCFO develops campaign materials; serves as fiscal
agent; collects, processes, and distributes pledges; and trains loaned
executives and campaign personnel. The PCFO and the LFCC are
responsible for reporting to the OPM summary data about their campaign
results.
Appendix III: CFC Charities with Unpaid Taxes
Table 1 in the main portion of this testimony provides data on 5
detailed case studies. Table 2 shows the remaining case studies that we
audited and investigated. As with the 5 cases discussed in the body of
this testimony, for all 10 of these case studies we found abuse or
potentially criminal activity related to the federal tax system. All 10
charities in table 2 had unpaid payroll taxes.
Table 2: CFC Charities with Unpaid Federal Taxes
Charity Nature of charity Tax debt a Comments
----------------------------------------------------------------------------------------------------------------
6 Rehabilitation Over $100,000 The charity failed to pay its
services payroll taxes in full or on time,
resulting in delinquent payroll taxes
and subsequent interest and penalties.
A federal tax lien has been
filed against the charity.
Although these taxes remain
outstanding, one of the executives of
this charity recently placed property
into a family trust.
----------------------------------------------------------------------------------------------------------------
7 Psychiatric Over $1 million This entity owes more than
center $600,000 in penalties and interest.
A state tax lien of $200,000
has been filed against the charity.
The charity repeatedly
underpaid payroll taxes in 1 year
recently.
Executive director received a
salary of more than $100,000.
A recent independent auditor's
report states there is substantial
doubt regarding the entity's ability to
continue operating (i.e., a going
concern).
An officer of the charity told
us that rather than remitting the
payroll taxes to the IRS, the officer
used them to pay operating expenses,
which included the officer's own
salary.
----------------------------------------------------------------------------------------------------------------
8 Healthcare Over $400,000 Federal tax lien has been filed
provider of against the charity.
hospital and The charity filed for Chapter
nursing home 11 bankruptcy protection.
services The top executives of the
charity and several part-time
management personnel were employed
through a contracting firm and were
paid wages that totaled more than $3
million.
The charity received over $2
million in grants from the Department
of Health and Human Services.
----------------------------------------------------------------------------------------------------------------
9 Drug and alcohol Over $70,000 The charity has substantial
rehabilitation equity in a multi-acre parcel of real
center estate located in a major metropolitan
area.
The charity owns a boat that is
primarily used by the executive
director.
----------------------------------------------------------------------------------------------------------------
10 Charity provides Nearly $300,000 A recent independent auditor's
social welfare report states there is substantial
programs doubt regarding the entity's ability to
continue operating (i.e., a going
concern).
The charity received federal
grants of more than $2.5 million from
the Department of Health and Human
Services.
----------------------------------------------------------------------------------------------------------------
11 Social services Nearly $100,000 The charity has more than 13
for the blind periods of payroll tax debt dating back
several years.
The charity entered into an
installment agreement that the IRS
terminated after the charity did not
make the required payments.
----------------------------------------------------------------------------------------------------------------
12 Prevent and treat Over $120,000 Charity owes over $120,000 in
child abuse payroll taxes, penalties and interest
from the late 1990s.
Charity requested an offer in
compromise on the tax debt.
State and local tax liens have
been filed against the charity's real
estate.
After the charity was
delinquent in paying its payroll taxes,
it obtained more than $600,000 to
construct a new building.
An officer of the charity told
us that rather than remitting the
payroll taxes to the IRS, the officer
used them to pay the charity's workers,
which included the officer's own
salary.
The charity received federal
grants of $40,000.
----------------------------------------------------------------------------------------------------------------
13 Counseling Over $500,000 The charity's tax debt covers
service for more than six tax periods.
adults, Charity paid consultant more
adolescents, and than $100,000 for professional
children services.
----------------------------------------------------------------------------------------------------------------
14 Adult and senior Nearly $200,000 Federal tax lien has been filed
services against the charity.
The charity received federal
grants of $140,000.
----------------------------------------------------------------------------------------------------------------
15 Family social Over $500,000 The charity's tax debt covers
services more than 20 tax periods of payroll
taxes.
Federal tax lien has been filed
against the charity.
An officer of the charity told
us that rather than remitting the
payroll taxes to the IRS, the officer
used them to pay operating expenses,
which included the officer's own
salary.
Source: GAO's analysis of IRS, OPM, public, and other records.
\a\ Tax debt amount includes principal, interest, and penalties as of September 30, 2005.
Chairman RAMSTAD. Thank you, Mr. Kutz. Mr. Miller, please.
STATEMENT OF STEVE T. MILLER, COMMISSIONER, TAX-EXEMPT AND
GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE
Mr. MILLER. Thank you, Mr. Chairman, Ranking Member Lewis
and Members of the Subcommittee.
To encourage employment tax compliance by tax-exempt
entities, the IRS begins with customer education outreach and
follows up with document matching, examinations, collections
and other traditional forms of enforcement. We start with an
expansive educational effort. Our exempt organizations function
conducts workshops and maintains numerous publications and an
active Internet Web site on the topic. Our enforcement efforts
are best understood by dividing the discussion into two
categories: First is the Combined Annual Wage Reporting System
(CAWR), and its related programs. Second is the examination
program run out of my organization, TE/GE. Now, ideally, form
941 and similar returns we receive should match forms W-2 and
W-3 that Social Security Administration (SSA) receives. To
verify this, the CAWR program matches reported earnings and
reported withholding of taxes. To reconcile differences, the
IRS, working with SSA, maintains three programs. The first two,
SSA CAWR and IRS CAWR, deal with instances where the agency
actually has received all returns, but there is a mismatch in
the information. The third program deals with instances where
it appears that the IRS does not have a form 941 to match with
the SSA data. Under the first two programs for 2004, mismatch
issues related to almost 30,000 TE/GE taxpayers were pursued.
We estimate that about 20,000 of these were section 501(c)(3)
organizations. The third CAWR program identifies and refers to
the potential 941 non-filers. The TE/GE receives around 4,000
CAWR referrals per year, substantially comprised in terms of
dollars of governmental entities and pension plans. Since 2001,
the potential value of tax owed by referred TE/GE entities has
declined dramatically from $1.29 billion in 2001 to $180
million in 2004. Of the $180 million, $17 million relates to
501(c)(3) organizations.
Our Exempt Organization Examination Process (EO) function
has pursued form 941 non-filers not through the CAWR system in
actuality but through a different program that matches 941s to
the charities form 990. So, where compensation exceeds a
certain amount as reported on the 990 but no 941 was found, we
have conducted more than 800 examinations in recent years to
resolve that issue. However, few improper non-filers were
found. We have actually recently discontinued this program
while continuing to look for better ways to select cases. As
part of this effort, this winter, we will begin to pilot a new
computer-based modeling system to select better cases including
those in the employment tax area. Outside of CAWR and similar
programs, the examination of exempt organizations for
employment tax is integrated otherwise into our EO General
Examination Program, and it is within this structure that the
great majority of our examinations are conducted. We do about
1,200 of these per year.
Beyond our document matching and examination programs is
the collection program. In determining whom to pursue in the
collection process, charities are treated like any other
taxpayer. As a result, in the collection area, the numbers I
have that I can use today relate to all TE/GE taxpayers and all
taxes, not just charities and not just employment tax. For
example, I can say that, in 2005, a total of 282,000 first
notices were issued to TE/GE taxpayers generally. A little over
half were resolved by the taxpayer's self-correction during
this notice process. Only about 27,000 TE/GE taxpayers
continued past the notice phase in 2005 for potential contact
by either a revenue agent knocking on the door or through one
of our call sites. As stated, whether or not these get worked
is determined by criteria that are not TE/GE specific.
Let me wind up by stating that the IRS has a credible and
considered program for enforcing the employment tax laws that
apply to charities. While the law does not generally
contemplate the revocation of a charity's tax-exempt status for
failure to comply fully with employment tax law, it does give
us other tools to insist that charities meet their employment
tax obligations, and we have an active program in place to do
just that. Thank you.
[The prepared statement of Mr. Miller follows:]
Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government
Entities Division, Internal Revenue Service
I. Introduction
Chairman Ramstad, Ranking Member Lewis and members of the
Subcommittee, I appreciate the opportunity to testify this morning on
the Internal Revenue Service's enforcement efforts with respect to
charities' payment of employment taxes.
I am the Commissioner, Tax Exempt and Government Entities (TE/GE).
TE/GE is one of four operating divisions at the IRS. We have principal
responsibility for tax-exempt entities. In addition to the charities
that are the subject of today's hearing, we are also responsible for
other tax-favored entities: qualified retirement plans, all types of
tax-exempt organizations, tax-exempt bonds, Indian tribal governments,
and federal, state and local governments in their role as employers,
which makes them responsible for employment taxes.
In addition to discussing what my division, TE/GE, does to enforce
the law with respect to charities' employment tax obligations, I will
also discuss this morning the role played by another of our operating
divisions in detecting and collecting employment taxes from charities.
This is the Small Business/Self Employed division (SB/SE). As will be
apparent, SB/SE plays a major role within the IRS in enforcing the tax
law as it relates to employment taxes.
The IRS appreciates your focus on complete compliance, with all
aspects of the tax law, by all classes of taxpayers, including those
designated as ``tax-exempt.'' Even charities and tax-exempt entities
have employment tax obligations, a point I will elaborate on in a
moment. Commissioner Everson has established the enhanced enforcement
of the tax law as one of the three goals of his tenure as Commissioner
of Internal Revenue. Further, he has specifically identified, as a
principal objective of this goal, the task of deterring abuse within
tax-exempt and governmental entities and the misuse of such entities by
third parties for tax avoidance or other unintended purposes.
In furtherance of these goals, the Commissioner has, in recent
years, requested additional resources for enforcement generally. Within
TE/GE, we have concentrated the new resources we have received in two
of our functions, Exempt Operations (EO) and Federal, State and Local
Governments (FSLG). In FY 2001, we had 812 FTE in EO and 50 FTE in
FSLG. In 2005, those numbers had increased to 845 and 100,
respectively. EO and FSLG are the functions in TE/GE where we most
often address employment tax issues. We have also used these resources
to address a number of serious problems within the tax-exempt sector.
These include, for example, the abuse of tax-exemption by credit
counseling organizations, the practice of executives of some charities
awarding themselves excessive compensation packages, and the improper
intervention by charities in political campaigns.
This morning, I would like to begin with an overview of the law
governing employment tax, with an emphasis on how it applies to exempt
organizations. Next, I will discuss the IRS's enforcement and
collection efforts in this area. In doing so, I will discuss the
Combined Annual Wage Reporting program (CAWR), which involves
cooperation between the Social Security Administration (SSA) and SB/SE.
I will also discuss TE/GE specific programs that address employment tax
among tax-exempt and governmental entities. Finally, I will briefly
speak of our future plans for enforcement in this area.
II. Applicable Law
Overview of Employment Tax Requirements
Let me begin with the applicable law. What follows in this section
of my testimony is a broad discussion of the main employment tax
obligations imposed on employers. There are many specific details and
exceptions that affect the amount of an employer's liability and how
the employer goes about reporting and paying the tax.
In general, employers are required to pay employment taxes on
wages, and to report wages and certain other payments to the IRS.
Federal employment taxes include three components: (i) federal income
tax withholding, (ii) social security, and Medicare taxes (the Federal
Insurance Contributions Act ``FICA'' taxes), and (iii) the Federal
Unemployment Tax Act (FUTA) tax. Employers are required to make
deposits of employment taxes on a daily, semi-weekly, monthly or
quarterly schedule, depending upon the amount of tax they accumulate
for deposit.
For purposes of today's discussion, it is important to note that
charities described in section 501(c)(3) that are exempt from income
tax under section 501(a), as well as Federal, state and local
government agencies and instrumentalities, are not liable for taxes
under the FUTA. This is a significant distinction from other employers.
Determining Liability for Tax
The first step in evaluating liability for federal employment taxes
is to determine whether a worker is an employee or an independent
contractor. The Code applies the multi-factor common law test for this
purpose. Under the common law test, an employer-employee relationship
exists when the person for whom the services are performed has the
right to control and direct the individual who performs them. More
detailed information is available in Independent Contractor or
Employee? Training Materials (1996), issued by the IRS and available on
the IRS web site at http://www.irs.gov/pub/irs-utl/emporind.pdf.
Employers are generally liable for employment taxes, and the associated
withholding, reporting and deposits, on the wages they pay their
employees.
Employers are also required to withhold and pay the employee
portion of social security taxes (currently 6.2 percent of wages up to
the maximum wage base, which is $94,200 for 2006) and Medicare taxes
(currently 1.45 percent of all wages) from payments of wages, and to
pay the equivalent employer portion of social security and Medicare
taxes with respect to wages paid to the employees. If the employer
fails to withhold the proper amount of income tax or the employee
portion of social security or Medicare taxes from wages paid to the
employee, the employer remains liable for such tax.
The law provides exceptions from the general rules for certain
employers. We will discuss the special rules for charities below, but
will first note that there are also special rules that apply to
governments. For example, state and local government workers are not
subject to social security tax if they are otherwise covered by a
retirement system providing a benefit similar to social security. A
state or local government employee will be exempt from the Medicare tax
if the employee has been continuously employed by the same employer
since 1986, and is also covered by a retirement system. Additionally,
Federal employees hired before January 1, 1984, are generally not
subject to social security tax. These exceptions do not apply for
purposes of income tax withholding.
How employment tax is paid
Employers are required to withhold income tax from wages in
accordance with tables provided by the IRS and published in Publication
15, Circular E, and Employer's Tax Guide, which is updated at least
annually and is found at the following URL: www.irs.gov/pub/irs-pdf/
p15.pdf. If the employer fails to withhold income tax, and the employee
does not pay the income tax, the employer remains liable for the
missing withholding.
In general, employers must pay federal employment tax by depositing
federal income tax withholding and both the employer and employee
social security and Medicare taxes. In calculating the amount to be
deposited the employer must take into account any adjustments to tax
liability for prior periods and the amount of any advance earned income
credit payments. The liability for employment tax arises when the wages
are paid. If an employer accumulates $100,000 or more of employment tax
liability, the employer must deposit the employment taxes by the end of
the next business day. Less frequent deposits are required for smaller
liabilities. Some employers are required to deposit using the
Electronic Federal Tax Deposit System (EFTPS).
Filing of Tax Returns and Information Reporting
In addition to determining the liability for employment taxes and
making timely deposits, employers are responsible for filing
appropriate tax and information returns. Employers are required to file
Form 941, Employer's Quarterly Federal Tax Return, reporting liability
for Federal income tax withholding, social security, and Medicare tax
on a quarterly basis. Beginning January 1, 2006, employers with an
estimated annual employment tax liability of $1,000 or less may file
the new Form 944 (Employers Annual Federal Tax Return) once a year
rather than filing Form 941 four times a year. The IRS mailed
notification letters between February 1 and February 15, 2006 to
eligible small employers for calendar year 2006.
Employers must also provide each employee with a copy of his Form
W-2 for the preceding year by January 31. Employers are required
annually to file Form W-3, Transmittal of Wage and Tax Statements, with
the Social Security Administration along with copies of the Forms W-2
for all employees.
All taxpayers are required to maintain the records necessary to
support the information submitted on their tax returns. If an employer
discovers that it has made a mistake in computing its social security
and Medicare tax liability in a prior tax return, IRS procedures call
for the employer to amend its returns and pay any social security and
Medicare taxes that it owes. Under Code section 6205, adjustments
related to the FICA tax are made ``interest free'' on a subsequent Form
941 with an attached Form 941C explaining the adjustment. Generally,
this rule applies for errors related to income tax withholding only if
the error is discovered within the same calendar year.
IRS procedures also call for the employer to provide the employee
with a corrected Form W-2.
Personal liability for employment taxes
Section 6672(a) of the Code imposes a liability equal to the amount
of unpaid ``trust fund taxes'' upon any person responsible for
collecting, accounting for or paying over such taxes who willfully
fails to do so. ``Trust fund taxes'' include income tax withholding and
the employee portion of social security and Medicare taxes.
Special Rules Applicable to Exempt Organizations
If an exempt organization has employees, it is responsible for
federal, state, and local taxes. Exempt organizations follow the same
employment tax filing and reporting requirements as non-exempt
organizations, with two exceptions. The first applies to exempt
organizations that are exempt from income tax under section 501(c)(3)
of the Internal Revenue Code. Such an organization is also exempt from
FUTA. This exemption cannot be waived.
The second exception applies to churches, and concerns all three
employment taxes: withholding, FICA and FUTA.
Churches are not required to withhold income tax on compensation
paid to ministers for performing services in the exercise of their
ministry, although a minister may request voluntary income tax
withholding. Whether tax is withheld or not, the church reports the
minister's compensation on Form W-2, if the minister is an employee, or
on Form 1099, if the minister is an independent contractor. If the
minister is the only employee, the church may have no form 941
requirement.
Churches are required to withhold income tax for their other
employees, and the general rules apply for determining whether a worker
providing services is an employee or an independent contractor. The
Church reports an employee's compensation on Form W-2, or issues a Form
1099 for an independent contractor.
Churches are also not required to withhold or pay FICA taxes on
compensation paid to ministers for performing services in the exercise
of their ministry. However, a minister is subject to SECA, unless he or
she applies timely for an exemption on the basis of his or her
religious beliefs.
Other church employees are subject to FICA unless the church pays
the employee less than $108.28 in a calendar year or the church applies
for an exemption from FICA due to religious reasons. If a church makes
such an election not to pay FICA, the employees are subject to SECA.
Churches, like other 501(c)(3) organizations, are not subject to
the FUTA tax for any of their employees.
Is Failure to Pay Employment Tax a Cause for Revocation of Tax-
Exempt Status?
Under section 508 of the Code, a charitable organization wishing to
obtain tax-exempt status, must apply to the IRS for exemption. These
applications come to TE/GE's EO unit, where they are reviewed. If the
applicant demonstrates its eligibility for exemption, we issue it a
determination letter recognizing its tax-exempt status.
Under section 508(c), churches, their integrated auxiliaries, and
conventions or associations of churches are not required to complete
this determination process.
Exempt status, once recognized, can be lost. The IRS is authorized
to, and does, revoke the tax-exempt status of organizations that cease
to act in pursuance of an exempt purpose, or that violate specific
provisions of the Code pertinent to tax-exempt status. For example,
section 501(c)(3) prohibits, among other things, inurement or
participation or intervention in political campaigns. As I mentioned a
moment ago, TE/GE is conducting enforcement programs aimed at
organizations that violate these prohibitions.
Compliance with employment tax rules is not, in general, a
requirement for continuing recognition as a tax-exempt organization. In
exceptional circumstances, revocation of section 501(c)(3) exempt
status for violation of employment tax provisions, while an
extraordinary measure, may be warranted where the violation of
employment tax law is so substantial that the organization can be found
to have a substantial non-exempt purpose. Available records do not
indicate that we have revoked the tax-exempt status of any organization
solely because of employment tax non-compliance.
The facts of the case would be critical in any case where such a
revocation was contemplated. For example, if the unpaid employment
taxes are being pocketed by individuals for their personal enrichment,
it is likely that a private benefit or inurement issue is present that
may warrant revocation. However, if the organization does not pay the
employment taxes because the organization is short of money and chooses
to use that which it has to meet net payroll and to further its exempt
purpose, then the failure to pay may not rise to the level of a
violation of the operational test.
III. IRS Compliance Efforts Directed at Charities
As I noted in the introduction, two operating divisions of the IRS
are primarily responsible for enforcing the payment of federal
employment taxes by charities: SB/SE and TE/GE.
To encourage and enforce compliance by tax-exempt entities with the
requirements of employment tax law, we begin with customer education
and outreach and follow-up with document matching, examinations,
collections, and traditional forms of enforcement. I'd like to begin
this portion of my testimony by discussing TE/GE's customer education
and outreach programs for tax-exempt entities, and then move to a
discussion of IRS enforcement efforts.
A. Outreach and Education.
Exempt Organizations
TE/GE's Exempt Organizations (EO) function conducts a vigorous
customer education and outreach program to educate charities and other
exempt organizations about their tax responsibilities, including their
employment tax obligations. This effort is especially important for
small and mid-sized organizations, whose officials may not be
experienced in business operations. EO includes information about
employment tax obligations in its plain language publications, notably
Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt
Organizations, Publication 1828, Tax Guide for Churches and Religious
Organizations, and Publication 557, Tax-Exempt Status for Your
Organization. EO also addresses employment taxes in workshops and via
the internet.
For example, in EO's Small and Mid-sized Exempt Organizations
Workshop program, offered in six cities across the country each year,
we include a session on Employment Taxes as one of five parts of the
day-long workshop. The session has three objectives:
Identify the main factors used to categorize a worker as
either an employee or an independent contractor;
Identify the workers that are statutorily classified as
employees and those that are statutorily classified as independent
contractors; and
Introduce the major employment tax forms and their uses
for the typical small EO.
During the presentation, attendees participate in an Employment
Issues Quiz, which reviews the concepts covered in the session. Each
attendee also receives a copy of the Small and Mid-sized EO Workshop
Textbook, which includes a chapter on Employment Taxes. Next year, we
will also make those workshops available on a CD, while continuing to
offer the program in certain cities.
With respect to the internet, employment taxes are a prominent
component of the interactive ``Life Cycle of a Public Charity'' and
``Life Cycle of a Private Foundation'' features that appear on EO's
external web page. The Life Cycle features are easy-to-use guides that
provide a general discussion of the basic requirements for reporting,
withholding, and depositing employment taxes, the distinction between
independent contractors and employees, and the e-filing options for
exempt organizations. Importantly, they also provide links to more
detailed information and additional resources, as well as to all
necessary forms.
EO advertised the availability of the employment tax web site to
all members of the EO e-mail subscription list,EO Update, which
currently has almost 12,000 subscribers, and placed an article about it
in the Social Security Administration newsletter, the SSA Reporter,
which reaches both employers and employees.
Government Entities
TE/GE's Government Entities (GE) function also conducts a strong
customer education and outreach effort about employment taxes. In two
of GE's three functional units--Federal, State and Local Government
(FSLG), and Indian Tribal Governments (ITG)--a primary concern has been
to improve compliance with employment tax law within the governmental
and tribal communities. During the period FY 2001--2005, GE employment
tax educational efforts included 4,069 events that reached 150,969
participants. In addition to these face-to-face events, FSLG and ITG
have established a substantial educational presence on the internet.
This includes:
Employment tax Frequently Asked Questions directed
towards the unique needs of the governmental and tribal communities;
Electronic publications, such as the ITG Employment Tax
Desk Guide and the FSLG Federal-State Reference Guide;
Electronic newsletters on current law changes impacting
the communities; and
``Ask-us'' mailbox for general questions primarily
relating to employment tax compliance.
B. Enforcement
The IRS's enforcement program with respect to employment tax
obligations of tax-exempt entities may be divided into two categories.
The first is the Combined Annual Wage Reporting (CAWR) and other
programs which SB/SE operates. The second is the examination program
run by the EO function of TE/GE, including initiatives and special
programs.
CAWR
The IRS and the Social Security Administration (SSA) jointly
administer the CAWR program. The CAWR matches reported earnings and
reported withholding of taxes. As noted, employers are responsible for
withholding income, Social Security, and Medicare taxes from their
employees' wages. They must pay over the amounts withheld and file Form
94X series returns (Forms 940, 941, and 945) with the IRS.
The employer is also required to file Form W-2 Wage and Tax
Statements for each employee, and Form W-3 (Transmittal of Income Tax
Statements) with SSA. Correct Forms W-2 should include the same
information summarized quarterly on the Forms 94X, while the Form W-3
summarizes the Forms W-2.
Ideally, all information reported on Forms 94X should match the
information on Forms W-2 for a given year. The IRS, working with SSA,
maintains three programs in this area. The first two, SSA CAWR and IRS
CAWR, deal with instances where the Agencies have received all returns
but there is a mismatch in the information reported. The third program
deals with instances where the IRS does not have a Form 94X to match
with the SSA data. In this testimony, we will refer to this third
program as the CAWR Referral Program.
The SSA CAWR program resolves discrepancies between information
(tax and credits) reported on Forms W-2 and W-3 information returns and
data reported on the series 94X returns. Cases normally involve
situations where the 94X reports higher wages than the Forms W-2 and W-
3. The purpose of this program is to reconcile SSA accounts. SSA refers
cases to the IRS where the employer fails to respond to two SSA
inquiries. Under an agreement between the IRS and SSA, the IRS pursues
all SSA CAWR cases. We may assess penalties where the discrepancy
cannot be resolved.
Under this program, SB/SE pursues all of these SSA referrals
without regard to what type of taxpayer is involved, whether it is a
charity, government or a for-profit business.
Of the 157,355 SSA CAWR cases and closures in 2005, some 11,396
(7.2%), were TE/GE taxpayers. Of these, it appears that at least 7,700
were section 501(c)(3) organizations.
The second program is the IRS CAWR. This portion of CAWR resolves
discrepancies between information (tax and credits) reported on the
series 94X returns and the data reported on Forms W-2 and W-3
information returns. Where amounts reported on forms W-2 and W-3 are
greater than those reported on Form 94X, IRS may assess additional tax
and penalties where the discrepancy cannot be resolved.
Like the SSA CAWR, this work is done by tax examiners at several
CAWR units at Service Centers, and is undertaken on behalf of the
entire IRS. Unlike the SSA CAWR, IRS CAWR work is not mandatory, and
therefore not all cases are pursued. Charities are selected and pursued
using the same criteria as other IRS taxpayers. The criteria for
selection are based generally on the amount of the assessments
involved.
For 2005, of the universe of 659,717 IRS CAWR cases, 60,013 (9.1%)
were TE/GE taxpayers. Of the 166,619 closures, 18,598 (11.2%) were TE/
GE cases. Thus, approximately 25% of all IRS CAWR cases, and 31% of TE/
GE IRS CAWR cases were pursued. Of the TE/GE closures, more than 12,400
were entities described in section 501(c)(3).
CAWR Referral Program--Potential Form 941 Non-filers.
The CAWR Referral Program concerns mismatches that occur when SSA
has received Form W-3 & W-2 records from an employer, but the IRS has
no record of a 941 being filed. These mismatches are posted to a
database accessible by relevant operating divisions of the IRS,
including TE/GE. The table below sets out the number of referrals.
Unlike the SSA CAWR and IRS CAWR programs, SB/SE refers these cases to
the other Operating Divisions for consideration.
CAWR Referral Activity
------------------------------------------------------------------------
Year SB/SE TE/GE LMSB Total
------------------------------------------------------------------------
FY03 (tax year 2001) 64,226 4,367 3,558 72,151
------------------------------------------------------------------------
FY04 (tax year 2002) 59,346 4,432 3,646 67,424
------------------------------------------------------------------------
FY05 (tax year 2003) 51,735 3,935 2,183 57,853
------------------------------------------------------------------------
Projection FY06 (tax year 2004) 53,647 3,950 3,113 60,710
------------------------------------------------------------------------
TE/GE cases placed on the database include all TE/GE taxpayers:
governments, tribes, exempt organizations, and pension plans. A
review of the referrals indicates that by far the largest dollar
amounts of these mismatches relate to governmental taxpayers and
pension plans. The review also shows that well over half of the
referrals are churches that appear to have no Form 941 reporting
requirement.
The potential value of tax owed by all TE/GE entities on the CAWR
database has declined dramatically. For 2001, the value of the tax owed
cases was $1.29 billion. This declined to $1.16 billion for 2002, $356
million for 2003, and $180 million for 2004, the most current year. Of
this $180 million, the potential value of tax owed by 501(c)(3)
organizations is $17 million.
This large decline reflects in part, we believe, the significant
attention that TE/GE, and in particular its Federal, State, and Local
Governments unit (FSLG), has devoted to employment tax cases. FSLG uses
the CAWR referral database, as well as other CAWR data, in its case
selection work.
EO has not used the CAWR database. Instead, it pursued Form 941
non-filers through the use of Form 990 information returns. In 2002 and
continuing until recently, EO used an automated system to select for
examination organizations that reported salaries, wages, or executive
compensation on the Form 990, but showed no filed Form 941 for the
corresponding periods. EO conducted more than 800 examinations as part
of this project. EO initiated the program because it believed that this
set of circumstances was likely to identify high potential
noncompliance. However, examination results did not support this
hypothesis. We therefore discontinued the program and began work to
find improved methods of case selection. As part of this effort, we
will begin using CAWR referrals and other CAWR data as part of a
broader case selection process through an automated system similar to
that used by FSLG. EO also is working on an improved computer-based
modeling system to help select productive employment tax examination
cases. This new system, which uses all available data, including CAWR
data and examination results, will be piloted this winter.
TE/GE--EO Examination Program
TE/GE's EO function contains an examination unit, EO Examinations.
In five years, EO Examinations has grown from 432 FTE in 2001 to 472
FTE in 2005. The examination of exempt organization employment tax
returns is integrated into EO's general examination program, and it is
within this structure that most EO employment examinations are
conducted.
In 2006, EO Examinations plans to close 6,100 returnsof exempt
organizations. In conducting these examinations, when the preliminary
review indicates that further inquiry is appropriate, the agent obtains
and conducts an examination of the exempt organization's employment tax
returns. This has resulted in EO Examinations closing more than 1,200
employment tax returns of exempt organizations in each recent year.
The number of employment tax examination closures does not fully
reflect the level of effort in the employment tax area because we
evaluate whether to open an employment tax audit in most of our exempt
organization examinations. However, unless a problem surfaces, time
spent on this review is not reflected in our examination data systems
because the agent does not open a formal employment tax examination. We
have also created correspondence units whose work is accounted for
separately.
In EO, we select employment tax cases in several ways. We selected
most of our employment tax cases as part of an examination of other
returns. Beyond that, we have a number of initiatives and special
projects that address employment taxes. I will discuss each of these in
turn.
Required Review of Exempt Organizations' Employment Tax Filings
Within EO, we examine exempt organizations' compliance with
employment tax obligations as part of standard exempt organization
audits. We do this by following our EO Examinations ``Required Filing
Checks''--that is, a guide to the elements we expect an agent to review
in the course of an audit.
Exempt Organization examinations ordinarily include a ``Required
Filing Check'' to determine if the organization is in compliance with
all federal tax return filing requirements--including employment tax
returns--and whether all returns report substantially correct tax. When
warranted, we expand the examination to focus on specific returns.
Required Filing Checks address employment tax (including
questionable Form W-4 procedures), excise tax, information returns,
pension plan returns, and Forms 8300. The specific forms include:
Form 940, Employers Annual Federal Unemployment (FUTA)
Tax Return
Form 942, Employer's Quarterly Federal Tax Return
Form W-2, Wage and Tax Statement
Form W-4, Employee's Withholding Allowance Certificate
Form 1096, Annual Summary and Transmittal of U.S.
Information Returns, including Form 1099 series
Form 1120-POL, U.S. Income Tax Return for Certain
Political Organizations
Form 4720, Return of Certain Excise Taxes on Charities
and other persons under Chapters 41 and 42 of the IRC
Form 5500 series, Annual Return/report of Employee
Benefit Plan
Form 8300, Reports of Cash Payments Over $10,000 Received in a
Trade or Business.
When EO decides to open an employment tax exam, as a result of the
Required Filing Check process, we first insure that the tax has not
already been paid, and that it has not been filed under an incorrect
EIN number. When these preliminaries are completed, we open the case
Initiatives and Special Programs
Beyond its standard examination program, Exempt Organizations also
conducts initiatives and special programs that focus on compliance with
employment tax requirements by specific classes of exempt
organizations. We have already discussed the EO Form 941 matching
program. Another example of an employment tax initiative is the Medical
Residents FICA program. The issue here is whether the medical residents
are students employed by a school, college or university, and therefore
exempt from FICA, or not. The IRS has taken the position that medical
residents are subject to FICA, and that position has been strenuously
challenged. We have won a case in a federal district court in the 11th
Circuit, but lost two cases in the 8th Circuit on this question. The
district court case in the 11th Circuit is now on appeal. We have a
large number of claims pending in this area as well.
Another example of such an initiative involves the failure of some
colleges and universities to comply with the withholding tax
regulations on payments (such as wages, grants, scholarships and other
income) to non-resident alien students, faculty and researchers. Under
prior programs, we allowed taxpayers to voluntarily come in to us to
resolve problems in this area. Subsequently, we decided to follow-up to
see if compliance had improved after our educational and voluntary
compliance programs. We conducted 12 examinations and 319 compliance
checks. The change rate on the examinations was 92%. In the compliance
checks program, delinquent returns were secured in 38% of the cases.
After this program was completed, a research team took a second look to
determine whether there was improvement in the filing of the required
forms by the taxpayers involved. The team found a marked improvement.
All but 8 of the colleges and universities were in compliance. More
work in this area will occur in 2007.
A third initiative involves the use of one of EO's new enforcement
units, the EO Compliance Unit (EOCU). This project focuses on exempt
organizations that have filed a Form 941 showing a specific level of
wages, but not a Form 990. In such cases, we would expect an
organization that filed a 941 to also file a Form 990. The EOCU is
conducting compliance checks on a statistically-valid sample of 654
cases for tax years 2002 and 2003 to look into this situation.
III. Collection Practices
Another important part of the IRS's over-all employment tax
enforcement strategy is the collection program for tax-exempt
taxpayers. SB/SE conducts this program on behalf of TE/GE, as it does
for the entire IRS. This section of the testimony describes the volume
of TE/GE collection cases, the notice process and its effectiveness,
and the manner in which cases are selected for individual collection
actions.
The figures presented in this section include all TE/GE taxpayers.
They include government agencies, Indian tribes, pension plans, and
non-profits as well as charitable organizations. Our collection
activity reports do not separate out these individual categories in
greater detail.
It should be noted that in determining who to pursue in the
collection process, SB/SE does not consider whether the taxpayer is a
TE/GE taxpayer. Thus, TE/GE taxpayers, including charities, are treated
in a manner similar to all other taxpayers.
To begin the Collection process, all entities showing a balance due
are automatically contacted by notice sent from our Service Centers. In
FY 2005 a total of 282,049 first notices were issued on balance-due
accounts of TE/GE taxpayers. This amounts to about 2% of the more than
13,870,000 first notices issued to all types of taxpayers that year.
About 53% of the TE/GE accounts are resolved by the taxpayer's self-
correction before the fourth or final notice is issued.
A total of 131,669 TE/GE accounts required a fourth notice. (Of
these 68,390, or about 52%, involved employment tax (trust fund)
delinquencies.) About 49% of all fourth notices are resolved in that
status.
Some 64,801 TE/GE accounts associated with 27,452 taxpayers
continued into delinquent status for potential contact by telephone or
by a revenue officer in the field. After application of certain
screening criteria, 26,884 TE/GE accounts associated with 6,498
taxpayers met the criteria for assignment to the field for personal
contact by a revenue officer.
At the end of FY 2005, 26,007 accounts, representing $250 million
in assessed balances due, were in the queue awaiting assignment. Of
these 1,407 accounts--or 5%--represented nearly half of the total
dollars due. The average balance due of the remaining 24,600 accounts
was $5,335.
As indicated, no distinction is made with respect to the type of
taxpayer when prioritizing cases for assignment to employees in the
call sites, or in the field for personal contact. As these employees
are available for new work, cases are assigned according to a risk-
based process. Although the process is complex, and there are some
minor exceptions, generally the priorities are set with a focus on
three factors:
a. The type of tax being collected, which weighs more heavily
toward employment taxes;
b. The age of the delinquency; where the newest delinquency
receives the higher priority; and
c. The amount due; where the priority increases as more money is
involved.
The absence of figures relating exclusively to exempt
organizations' accounts makes difficult a precise evaluation of the
IRS's collection program for exempt organizations employment tax. It is
clear, however, that such cases are pursued, according to the same
criteria that apply to other types of collection cases. Thus, the
employment tax obligations of tax exempt organizations are pursued.
IV. Future Plans
Within the IRS, and within TE/GE, we have been hard at work on
improving compliance with employment tax obligations across the board,
and we have achieved some noteworthy successes, particularly with
respect to potential tax due from Federal, state and local governments.
We continue to look for ways to improve charities' compliance with
employment tax law, and to improve our collection of employment taxes
owed but unpaid. We want, of course, to collect the tax, but we also
hope that by developing better methods of detecting non-compliance in
the employment tax area, we also will be able to detect non-compliance
in other areas of the tax law related to charities.
With that in mind, we continue to develop new processes in the
employment tax area.
Data Mining and Modeling Project
TE/GE currently has underway an initiative to develop a ``risk
model'' that will detect, classify and quantify high risk compliance
patterns. When completed in late September, EO Examinations will pilot
the use of this risk model in selecting taxpayers for examination. In
developing the risk model, all available sources of data are being
evaluated that could be helpful in identifying organizations likely to
be non-compliant.
One aspect of the model focuses on identifying exempt organizations
that are not fully meeting their employment tax obligations.
The primary source of the data to be used is our RICS
classification system. RICS is a database and search engine that
includes information for all exempt organizations that file, or are
required to file, Forms 990 or 990 PF returns. RICS also includes
information on related returns (including Forms 940 and 941) filed by
these exempt organizations, and audit history information on taxpayers
previously examined. One of the other data sources we are exploring for
possible use in this project is the Combined Annual Wage Reporting
(CAWR) system, discussed above. We hope this will allow us to be
increasingly proactive in our selection of non-compliant charities,
including those that are not meeting their employment tax obligations.
Expansion of Information Available for Case Classification
As mentioned, RICS is a TE/GE computer system that analyzes data
about TE/GE taxpayers to help TE/GE classification staffs select the
most appropriate TE/GE taxpayers for examination, or to identify
appropriate remedies for specific taxpayer situations. RICS can
effectively analyze multiple databases.
With this in mind, TE/GE is working to enlarge RICS' accuracy and
usefulness by expanding RICS' access to relevant databases. Last year,
RICS gained access to updated Business Masterfile (BMF) data, as well
as to all CAWR data. TEGE is now exploring best practices for querying
and using this data to select productive cases for examination.
Access to these databases will also allow us to identify situations
that require our attention but do not rise to the level of a full
examination.
TEGE classifiers are being trained and gaining experience with
these new data sources, and this process will continue into the future.
When fully familiar with the characteristics of the new BMF and CAWR
databases, TE/GE classifiers will be able, among other things, to:
Identify situations where no return has been filed but
substantial tax deposits have been made (a situation amenable to
resolution by ``soft'' contact rather than examination).
Identify situations where a taxpayer thought to be
delinquent has recently filed a return, and an examination would not be
necessary.
Identify situations where a taxpayer is working with
Collections, and initiation of an examination would be inappropriate.
V. Conclusion
In sum, the IRS, using resources primarily from SB/SE and TE/GE,
has a considered program for enforcing the employment tax law as it
applies to charities.
While the law does not generally permit us to revoke a charity's
tax-exempt status for its failure to comply fully with employment tax
law, it does give us other tools to insist that charities meet their
employment tax obligations, and we have active programs in place to do
that. This said, we believe that as we improve selection techniques, we
will be able to increase our coverage in this important area.
Chairman RAMSTAD. Thank you, Mr. Miller. Mr. Green, please.
STATEMENT OF JAMES S. GREEN, ASSOCIATE GENERAL COUNSEL, OFFICE
OF THE GENERAL COUNSEL, U.S. OFFICE OF PERSONNEL MANAGEMENT
Mr. GREEN. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to appear before you this morning
to discuss the CFC, the annual workplace charity solicitation
for Federal, civilian, military and postal employees. The CFC
is actually 299 separate campaigns, each located in a
geographic area with a substantial Federal population. The
largest local campaign being the CFC of the National Capital
Area. In 2005, Federal employees across the Nation and overseas
donated over $268.5 million to the CFC. Charities can apply to
participate locally in the campaign where they provide their
services or, for charities with a demonstrably more national or
global program, apply to participate in all 299 CFCs as a
national or international participant. Each charity wishing to
participate in the CFC, whether as a local or national or
international participant, must apply annually meeting
eligibility and accountability requirements set out in OPM's
CFC regulations. The applications of charities seeking local
list eligibility are reviewed by that campaign's Local Federal
Coordinating Committees (LFCC) made up of Federal employees who
live and work in that geographic area and who volunteer their
services to the LFCC. The LFCC acts as the campaign's board of
directors, applying CFC eligibility and accountability
standards. Charities seeking to participate as national or
international charities apply directly to OPM's Office of CFC
Operations. These national or international applicants also
must meet established eligibility and accountability standards
and must additionally demonstrate that they provide or conduct
real services, benefits, assistance or program activities in 15
or more different states or a foreign country over the 3-year
period immediately preceding the year in which they apply. A
basic CFC eligibility criterion for all local, national or
international charities is recognition by the IRS of tax-exempt
status under section 501(c)(3) of the Internal Revenue Code and
that contributions to that charity are tax deductible. The OPM
has traditionally accepted a certification by the charities as
to that tax-exempt status.
Given the review undertaken by the GAO that led to this
proceeding, OPM is carefully reviewing how it can better assure
itself and the Federal employees whose generosity has made the
CFC a success that the 501(c)(3) status if participating
charities is valid and current. Working with IRS, we are
completing a review to confirm that all national and
international charities participating in the fall of 2006 CFC
have valid and current 501(c)(3) status. A similar review is
currently underway in the National Capital Area's CFC, and we
continue to analyze the best means to utilize that review
process for charities participating in the other 298 local
campaigns. The OPM will work directly with all of those 299
local campaigns on this process. We are confident that the
review will be completed by the beginning of the 2006 CFC in
September. We look forward to working with IRS, GAO and the
Subcommittee to assure the continued integrity of the CFC.
That concludes my oral testimony. I will be pleased to
respond to any questions Members of the Subcommittee might have
for OPM. Thank you.
[The prepared statement of Mr. Green follows:]
Statement of James S. Green, Associate General Counsel, Compensation,
Benefits, Products and Services Group, Office of Personnel Management
Background
Mr. Chairman and members of the Subcommittee, thank you for the
opportunity to testify before you today on the Combined Federal
Campaign (CFC) and the extent to which CFC participating charities
comply with their Federal tax obligations to the Internal Revenue
Service. The CFC is a fund-raising drive conducted every fall that
allows Federal employees and military personnel to donate money to the
charities of their choice through a workplace solicitation. Since its
establishment in 1957 by Executive Order 10728 the campaign has raised
over $5 billion on behalf of charitable organizations across the
country and around the world.
Management and Structure of the CFC
OPM is responsible for the overall management and oversight of the
CFC. However, OPM does not directly manage the Federal employee
contribution process. The CFC structure relies on the dedication and
commitment of the Federal employees who make up the Local Federal
Coordinating Committees (LFCC) to determine which organizations will
administer local campaigns. Only charities seeking national or
international status are vetted at the Office of Combined Federal
Campaign Operations (OCFCO) at OPM headquarters. Through an annual
competition, the LFCC's enter into agreements with a local non-profit
organization, which we refer to as Principal Combined Fund
Organizations (PCFO), to serve as the local fiscal agent, administering
the local campaign by providing marketing, fund receipt and
disbursement, accounting, and other administrative support. LFCC's also
are responsible for reviewing and approving applications for
participation by local charities in each of the 299 local CFC's. OPM's
OCFCO serves a similar role in reviewing and approving the applications
of national and international charitable organizations, which
participate in all of the local CFCs. Thus, Federal employees in the
geographic areas of the 299 local CFC's have a wide choice of donating
to charities that provide local services, to charities that provide
national and international service, or a combination of both.
OPM regulates and provides oversight and guidance to each of the
local campaigns to ensure that each campaign is conducted in accordance
with OPM regulations, congressional mandates, and established policy.
This oversight is primarily conducted through the review of a number of
accountability and status reports from each local campaign throughout
the year. OPM also establishes the criteria for local and national/
international participation. In the 2005 CFC, a total of 1,839
charities applied for national or international participation through
OPM headquarters. Of these 1,714, or approximately 93%, were admitted.
The estimated number of charities participating in all of the 299 local
campaigns is over 20,000.
Although solicitation of Federal employees in the workplace is only
permitted from September 1 through December 15 each year, each yearly
CFC covers an approximate two-year period. The process begins with each
LFCC's selection of a PCFO by March of the year, followed by the review
of applications and completion of eligibility decisions around May of
that year. Both local and national/international applicants have the
right to have initial negative eligibility determinations appealed to
OPM, with an ultimate eligibility determinations made by the Deputy
Director of OPM. By regulation, OPM must complete its review of
national applications and appeals by June 30 of each year. That
timeframe allows sufficient time for the printing and distribution of
the 299 local campaign brochures used as the primary vehicle to educate
and solicit Federal employees as to which charities will be
participating in their local CFC. The brochures list the local
charities unique to each local campaign as well as the national/
international organizations that participate in each CFC. The campaigns
themselves take place during a 6 week period between September and
December of each year. .
The majority of Federal employee contributions are made through
payroll deduction and are processed by the local PCFO over the course
of the 12 month period following the campaign which ran in the
September through December timeframe. Actual distributions of the funds
to the charities are made by each PCFO during that time as well. The
campaign period ends with an audit of each PCFO's activities conducted
by an independent public accountant but a local campaign is not
considered closed until OPM is satisfied with the independent auditor's
report and any findings are resolved.
Due to the decentralized structure of the CFC, a majority of the
specific information related to the local campaigns and its
participating charitable organizations is maintained locally. OPM has
initiated projects to improve access to campaign information and to
promote electronic giving. Specifically, OPM is currently developing a
National Charity Registry that will collect important information on
each charitable organization (international, national and local) that
participates in the CFC. The design of this initiative began last year
and is expected to be completed in time for the 2007 campaign. The
first phase of the project is the assignment of new and unique codes
for each of the estimated 20,000 participating charities. With the
implementation of this centralized Registry of information, OPM will be
in a better position to assess the status of all CFC participating
charitable organizations.
Screening Charities for Participation in the CFC
All CFC participating charities must apply each year for that
year's campaign, with an application made either to OPM or the
appropriate LFCC, depending on whether the applicant is applying as a
national /international or local organization. These applications set
forth the information and background submissions required by OPM's
regulatory eligibility criteria and public accountability standards and
each applicant must certify that information in order to participate in
the CFC. These criteria were designed to ensure Federal donors that
only legitimate, accountable, and responsible charitable organizations
are admitted to the CFC. The criteria for both local and national/
international applicants includes, but is not limited to, a
demonstration by the applicant that it:
Has status as an IRS determined tax-exempt charity under
section 501(c)(3) of the Internal Revenue Code (what is the difference
between this bullet and the next bullet?);
Completed and provided to the IRS a Form 990, the annual
tax return document for non-profits;
Provides real health and human services, benefits,
assistance or program activities; and
Has an active and responsible Board of Directors, in
which a majority of its Board members serve without compensation and
without a conflict of interest.
Determinations of eligibility are based in part on a series of self
certifications by the charitable organization, which affirms that the
information provided is correct and that the charity agrees to comply
with the eligibility criteria. For example, OPM requires that all
applicants submit either to OPM or the local LFCC, depending on
application status, a copy of its IRS 501 (c)(3) determination letter,
a copy of its IRS Form 990, a copy of the organization's audited
financial statement, a detailed description of its claim of providing
real services, a copy of the annual report or more frequently published
document such as a quarterly newsletter, information on its governing
Board of Directors' compensation, meeting dates, and terms of office.
In addition, in 2005 OPM amended the CFC regulations to add a new
certification on compliance with terrorism prevention laws. OPM also is
considering proposing revisions to its CFC regulations which we believe
will streamline the CFC eligibility process and public accountability
standards.
The current eligibility criteria do not require the applicant
organization to disclose the status of its payment of payroll or any
other taxes. A requirement for this type of information has not been
included in the CFC Executive Orders or the existing congressional
eligibility mandates. The current law prevents OPM from making the
existing eligibility criteria more restrictive than it was under the
eligibility criteria in effect in 1984. As such, OPM currently does not
screen charities for compliance with tax payments to the IRS and has
never denied an organization because of non-compliance in this area.
OPMs Oversight and Monitoring Program
In addition to the eligibility determination process for national/
international applicants, OPM conducts a number of monitoring
activities over local campaigns to minimize the risk of non-compliance
with CFC regulations and prevent abuse in the CFC. In particular, OPM's
OCFCO receives copies of audit reports for each local campaign as
required by CFC regulations. OPM also receives audit reports from OPM's
Office of the Inspector General, which audits approximately 15 local
CFCs each year. The OCFCO reviews all audit findings and works with the
local CFC's to resolve each finding. The OCFCO also selects a sample of
local CFC brochures each year to review for compliance with CFC
regulations and OPM guidance. In addition, the OCFCO requires each
local campaign to report campaign results, including amounts raised,
costs of the campaign, and Federal employee participation rates, after
the solicitation period. This information helps us identify campaign
performance and potential at-risk campaigns that might need assistance,
require merging with another more efficient campaign, or require
dissolution. Finally, OPM regularly communicates with the local
campaigns to ensure that each campaign is operational and has an active
LFCC.
Conclusion and Next Steps
In light of the GAO findings reported today, the Director of OPM
has already requested that staff examine options for improving the
screening process with particular emphasis on preventing charities that
are not in compliance with Federal tax laws from participating in the
CFC.
Mr. Chairman and Subcommittee members, this concludes my remarks. I
am happy to answer any questions you or the members of the Subcommittee
may have.
Chairman RAMSTAD. Thank you, Mr. Green. I want to thank all
three witnesses for your testimony. I appreciate the tone as
well as the words of your testimony, the intent to get it
right. Certainly we do not want to in any way damage the CFC.
That is why we are here today.
The purpose of the CFC, or one of the purposes, is to give
confidence to be donors that the charities are legitimate and
they meet certain basic--certain minimal standards as a
charity. Certainly, we would all have to recognize that the
testimony of Mr. Kutz and the review by GAO raises some very
troubling questions.
I guess the first question I have for you, Mr. Kutz, the
most obvious question, what, if anything, does your review show
that OPM did to approve charities, that is to prove
participation in the CFC was actually a legitimate charity?
Mr. KUTZ. You are talking about with respect to our bogus
charity?
Chairman RAMSTAD. Those three sting operations or bogus----
Mr. KUTZ. What we did is, again, we do these--we used only
publicly available information, we used only off-the-shelf
software, paper, whatever the case may be, to file something
like this, and we pretty much followed the application process
that any charity would follow in applying for the CFC. We put
together the forms, including 990 information about our charity
and the other documents that were required by OPM, and we filed
three separate applications using the same charity for the
campaign. As I mentioned, in May of 2006, several weeks ago, we
received our letters authorizing us or approving our
applications into the program. I believe what you are talking
about is, I think it is a paper review to a large extent. They
get the paper. They look at paper, and I think they approve the
paper without any independent validation. The one thing that
could be done is, as you mentioned, I believe, validation with
the IRS that we indeed are a legitimate charity.
Chairman RAMSTAD. Is there a statutory barrier to that? Is
that what I am hearing you say, Mr. Miller?
Mr. MILLER. There would be a statutory 6103 barrier to
finding out if there is a tax delinquency with respect to a
given taxpayer. We actually--in terms of whether an
organization is exempt or not, we make that available in great
detail both on our Web site and otherwise.
Chairman RAMSTAD. Mr. Green, the obvious question for you
is, wasn't that data consulted, the data that Mr. Miller just
said is readily available? It seems to me there should be an
effort to validate whether an applicant is a legitimate
charity.
Mr. GREEN. Mr. Chairman, we agree. Traditionally, the
application process has in it information about 501(c)(3)
status including a determination letter and a 990 as well as
other information about the charity. There are some 20,000
charities that apply annually, and it is in fact a review with
a dependence on the integrity of that application process. We
are now using IRS databases, as I indicated in my earlier
statement. We are confident that all of the charities will be
checked before the 2006 campaign begins.
Chairman RAMSTAD. Then, it is a fair statement to say,
prior to the GAO review, that database was not checked, and now
as a result of the GAO review, it is being checked to
corroborate that information.
Mr. GREEN. It is correct that it was not checked across the
board. It has been checked where problems have been brought to
our attention or a question has been raised. In this case, the
information we got from the GAO was very legitimate looking and
sounding applications, but we will be checking those now. In
addition, Mr. Chairman, we are----
Chairman RAMSTAD. All of them?
Mr. GREEN. All of them. All of them locally, all the
locals--the 299 locals as well the international and national.
Mr. Chairman, we also are working on developing a registry
which we believe will be in effect by next year's campaign,
will have a one-place-to-go listing which will make that
process easier, more reliable and more continual in campaigns
in the future.
Chairman RAMSTAD. Well, I am encouraged to hear that OPM
recognizes the problem, the obvious problem, and has taken
corrective steps. That is the way government should work. That
is the way we should work because the last thing we want to do
is to damage the CFC and those charities that benefit those
people in need, kids, senior citizens, the poorest of the poor,
people suffering the ravages of disease and addiction and
poverty. I am just grateful to hear that you are taking these
corrective steps. I am grateful by the work that GAO did to
facilitate this corroboration now, this improved checking, and
I hope it continues.
Mr. Miller, beyond the statute you cited, were there any
other barriers to corroborating the applications, the facts
represented on applications by these charities?
Mr. MILLER. I am unaware of any barriers. There may be
some. Obviously, if we did work out something with OPM to do a
tax check on 20,000 organizations, that would be a substantial
resource issue for us, and we would have to talk about that. We
are going to talk to OPM to see what we can do to----
Chairman RAMSTAD. Just the fact of the 501(c)(3)
certification, that speaks volumes from the IRS----
Mr. MILLER. That should be on the Web site. In fact, we can
and will make our master file, which contains more data than is
on the Web site, available to OPM.
Chairman RAMSTAD. Again, I thank all three witnesses. I now
yield to my good friend, the ranking Member, Mr. Lewis.
Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Miller,
do you have any idea of the number of organizations or groups
that have lost their tax-exempt status in recent years for
failing to comply with the tax laws?
Mr. MILLER. We have a process of revocation, as you are
aware, Mr. Lewis. If the question is for failure to comply with
employment tax laws?
Mr. LEWIS. Yes.
Mr. MILLER. In general, I do not think we have any
instances that we were able to come up with. In preparing for
this hearing, we did not find that. I would say more generally
that failure to comply in and of itself with the employment tax
rules is not likely to lead to a revocable sort of activity on
behalf of the service against the organization. Not likely to
revoke for that.
Mr. LEWIS. Would there be other factors that--other reasons
that you would lift the tax-exempt status of a charitable
organization if it is, I think Mr. Kutz said, some of them are
phony, that there may be----
Mr. MILLER. Absolutely, Mr. Lewis. There are a number of
criteria for exemption, and often in some of these cases where
you have someone putting the money in their pocket, that would
be an independent sort of reason to say that that organization
was no longer operating for charitable purposes, and that would
cause a revocation. You might have employment tax problems that
are incident to other underlying problems within the
organization, and I am quite sure we have revoked--we do not
revoke much. In 2005, we revoked perhaps as many as 30
charities, which actually is up a bit from past years. We do
not do it often, but we have done it.
Mr. LEWIS. Do you tend to agree with Mr. Kutz? Do you see
this as a serious problem?
Mr. MILLER. I see it as a problem. There is no question
about that. We do what we can in the employment tax area. We do
quite a bit, in fact. Many of the--many of the deficiencies are
small, and in those cases, it is not likely that we are going
to take much action because we do not have the resources to do
that. I do think it is important and I would concur absolutely
with my copanelists that we make sure that those in the CFC are
shining examples of the charitable community because they are
very much up front parts of the way the charitable sector is
reflected. I would be concerned with too much of a failure to
comply with CFC organizations because, again, they are examples
to the Federal workforce and everywhere that could really taint
the sector more generally. I do not have enough information to
say that the employment tax issue is a real problem in the
exempt sector. I don't know that it is. I can understand that
problems with organizations in the CFC reflect badly on the
sector generally, and that is a separate sort of problem.
Mr. LEWIS. When it comes to paying employment taxes, how
would you compare it with businesses, the larger community? Do
you look at that at all, Mr. Kutz?
Mr. KUTZ. Yes. In fact, we have looked at contractors,
companies doing contracting with the government and their
failure to pay payroll taxes.
Mr. LEWIS. Are people doing this, say, the big large
Defense contractor----
Mr. KUTZ. It is not usually the big large ones. It is the
mid-sized and small that have the payroll tax problems and
those contractors owe $5 to $10 billion of Federal taxes, and
they are getting billions of dollars of government business.
Mr. LEWIS. If you can speculate for a moment or two, why do
you think people fail to do it? Is it a lack of bookkeeping, or
do they just not want to pay their fair share?
Mr. KUTZ. Well, I think the corporations are different than
the charities. The charities, I think they had serious cash
flow problems. The most, I guess, egregious behavior is where
the executives that made the decision not to pay the payroll
taxes are drawing salaries greater than $100,000; they
effectively are choosing to pay themselves before paying the
IRS, and I think that really is a fundamentally difficult issue
to wrestle with.
I think your other point that you were trying to make, too,
and I would say willful failure to remit payroll taxes is a
felony. The question of revocation of charitable status or
501(c)(3) status for someone who may have committed a felony to
me is a relevant question here that needs to be asked, and I
don't really have the answer necessarily, but it is a policy
question for this Subcommittee and your Committee to consider.
Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman.
Chairman RAMSTAD. Thank you, Mr. Lewis. The gentleman from
Arizona, Mr. Hayworth.
Mr. HAYWORTH. Thank you, Mr. Chairman. To our witnesses,
thank you all for being here today highlighting a situation
where we don't want to see the CFC somehow degenerate into a
combined Federal con job. Sadly, as demonstrated by what we are
hearing in your testimony, Mr. Kutz, in terms of fictional
charities in the application, there is a lack of due diligence.
A couple of things have happened, and Mr. Green, perhaps
you are in a position to answer this question best for me. I
have to kind of come at it from another angle because there
have been cases of charities held in pretty high regard that
have been turned down for one reason or another by CFC. An
Arizona-based charity, the Make-A-Wish Foundation, if I am not
mistaken, was taken from that list and was more than a cause of
casual concern for many of my constituents in Arizona.
Could you briefly outline the reasons why Make-A-Wish
failed to make the grade?
Mr. GREEN. Certainly, Mr. Hayworth. Again, each year,
charities have to apply to the CFC. The Make-A-Wish had been in
the CFC for a number of years. One of the criteria that we use
is the rate at which charities spend administrative--money on
administrative funds rather than actually the programs they
administer. As a mathematical formula, under our current
regulations, if that annual fundraising rate exceeds 25
percent, then the charities have to explain to us why and
demonstrate a plan to lower it. That is consistent--in the
charitable community, that is fairly consistent with the
standard. The Make-A-Wish Foundation for several years had been
over the 25 percent limit. In last year's campaign, the
administrative determination by OPM was that their plan to
explain why and what they were doing to improve that after a
couple of years of being at that level was insufficient. They
were denied on that ground. They appealed through the internal
administrative appeal process. The denial was affirmed. They
then brought suit against the OPM in district court here in
Washington, and that case was settled with the result that the
Make-A-Wish Foundation was allowed to participate with a
commitment to improve their fundraising rates.
Mr. HAYWORTH. Okay. A reputable charity based on a
mathematical formula was barred. Everybody ended up in court,
and they were reinstated. I do not believe there is any
question I think the Make-A-Wish people would certainly welcome
the scrutiny of what they do in terms of terminally ill
children having an opportunity to realize their dreams in a
very difficult situation. It points up both the true impulse of
charity on the part of Federal employees and yet what seems to
be on one hand stringent criteria but perhaps mathematical
formulas fitting in a certain way and a lack of due diligence
on, ``Hey, Let's Invent a Charity, Inc.'' and come to the Feds
and find a way to become part of the CFC. I realize that in any
situation there is going to be selective enforcement. I am glad
to hear that Make-A-Wish was restored. I am sorry that it ended
up being such a court case there.
Mr. Kutz, you found that there were more than 1,280
charities with unpaid tax debt participating in the CFC, and
they owed about $36 million in debt. You say that amount is
understated. Can you explain why you think that is a low ball
figure, or was that a deliberative understatement?
Mr. KUTZ. Yes. There would be quite a few reasons why. The
first would be, it is only a portion of what actually the IRS
knows. In other words, it represents only agreed to tax
assessments, either agreed to by the taxpayer or affirmed by a
tax court. We also excluded 2005 because a lot of things get
resolved in the short term. It is truly delinquent. It is 2004
and earlier.
However, the bigger reason it is probably understated is it
does not include the impact of non-filers or those who
underreport, and as you probably on this Subcommittee would
know, based on the tax gap, probably the unknown portion of the
tax gap is greater than the known portion of the tax gap. I
think the unknown portion here would likely or could be bigger
than the known portion.
Mr. HAYWORTH. Mr. Miller, GAO makes it clear that its
estimates of charities with unpaid employment taxes in the CFC
are understated and there are likely more charities that are
underreporting or not filing employment taxes. Do you agree
with that assessment?
Mr. MILLER. If they took known assessments, then I would
agree with that, that there would be more dollars out there in
all likelihood.
Mr. HAYWORTH. One final question, Mr. Green, just to
satisfy curiosity. Often there is an equation, deliberate or
not, in the popular mind some people deem CFC kind of like
United Way with the Federal Government, the notion of unified
charities, combined giving. Sadly, some local United Way
chapters have chosen to restrict the Boy Scouts of America from
funding. Have there been examples on the 299--has there been a
situation where the Boy Scouts of America has been barred in
any way from the CFC?
Mr. GREEN. Mr. Hayworth, the eligibility process is uniform
across all 299--the standards are uniform across all 299 local
campaigns. I do not know if that has happened in any local
campaign, but the local campaigns, if a charity is denied at
the local level, they do appeal. Ultimately that appeal does
come to OPM headquarters and would be reviewed by ultimately
the deputy director of OPM. If there was a local that denied
the Boy Scouts and the Boy Scouts felt that they were
improperly denied, they would have that appeal process. I do
not know off the top of my head whether that has happened, that
that would come----
Mr. HAYWORTH. If you could check and get back to me with
some correspondence, Mr. Green, I would appreciate it.
Mr. GREEN. I would be happy to do that, Mr. Hayworth.
Mr. HAYWORTH. Thank you, Mr. Chairman. Thank you for your
indulgence on the clock there.
Chairman RAMSTAD. Thank you, Mr. Hayworth.
The gentleman from North Dakota, Mr. Pomeroy.
Mr. POMEROY. Mr. Chairman, before I begin on the topic of
today's hearing, I want to express some concern about the
Subcommittee itself, and I do so with the highest respect for
you, and I believe and I want to make this very clear. I
believe that under our present Committee structure,
Subcommittee Chairmen are allowed to do what the Chairman of
the full Committee allows them to do. That said, this is the
17th month of the 109th Congress. This is the eighth hearing of
this Subcommittee. Today's hearing: Are charities in the CFC
meeting their employment tax responsibilities? This is a very
focused inquiry precisely within the jurisdiction of this
Subcommittee. I am happy to follow issues like this, and I hope
that we will have the positive benefit of OPM's being a little
more aggressive in terms of making certain that we have got
only appropriate entities participating in the CFC.
Yet there are so many other things that I wonder about
relative to the IRS, the administration of the Tax Code, that
are within the purview of this Committee. We have an estimated
tax gap of $312 to $352 billion a year. We are running a
deficit at about that amount. If we could get all the taxes
collected that are owed, maybe we wouldn't have a deficit.
Certainly we wouldn't have a deficit of this dimension. How can
we improve our tax collection efforts? Where are the shortfalls
for the tax gap? Man, that would be an interesting hearing. I
would like to go to that one.
Tax shelters, we have made progress on some. We know there
are billions of dollars of abuse continuing. Often a little
daylight is, as the old saying goes, the best disinfectant and
more focus on tax shelters may prevent some of the accumulating
abuses that we have seen in the past. We have, to my view, an
overall lack of audit of high income, corporate taxpayers.
Maybe this is true; maybe it is not. There are some of us who
think, those of us--they, those on the higher end, high
corporate taxpayers, high-income corporate taxpayers are not
paying what they owe. Let us talk about that. If that is an
erroneous perception, I would sure like to hear from the IRS
about the full gamut of activity they are doing there.
Finally, administration of our pension laws. We are in a
pension conference. The most important pension revisions
considered. The Pension Benefit Guaranty Corporation is 7
months late in publishing its last fiscal year report. What is
that about? I would be very interested in seeing what this
Committee could do to fully develop the information that our
conferees might find helpful relative to pension.
I really am disappointed that the Chairman of the Committee
on Ways and Means clips our wings so severely that today we are
looking at, are charities in the CFC meeting their employment
tax responsibilities? I think we have got more to do than that.
I would hope in the months remaining in this 109th, the
Chairman may allow us to get after the work that the
Subcommittee is charged to do. Again, when I say Chairman, I
don't mean you, Mr. Subcommittee Chairman. I mean the full
Committee Chairman.
Let us talk a bit about this tax-exempt organization
policing function within the IRS. Mr. Miller, that is your
division?
Mr. MILLER. Yes, sir.
Mr. POMEROY. It is my understanding that the number of tax-
exempt organizations have increased 55 percent since 1995. Is
that correct?
Mr. MILLER. I do not know the percentage, but they do go up
probably by 70,000 a year, and they are up into the 1.8--1.8
million range.
Mr. POMEROY. One point eight million entities.
Mr. MILLER. Yes.
Mr. POMEROY. How about the staffing and resources committed
to the Tax-Exempt Organization Department, the department you
run to look after all of this?
Mr. MILLER. We actually have gone up somewhat in the last
couple of years through the work of Congress and Commissioner
Everson.
Mr. POMEROY. I am pleased about that. In any way
commensurate with the additional numbers of----
Mr. MILLER. I do not think we have doubled in size, no,
sir. We have gone up perhaps 20 percent.
Mr. POMEROY. A 20-percent increase in the last 2 years?
Mr. MILLER. In the last 3 years, let us say.
Mr. POMEROY. Do you have enough to do your job?
Mr. MILLER. I think that we continue to push for more
resources. We could always use more resources, but we have
grown nicely in the last couple of years, and we need a little
bit of time, frankly, to incorporate that----
Mr. POMEROY. I completely understand that. My question is,
do you have the resources required to do the job you are
assigned to do?
Mr. MILLER. Yes, we believe we do. We would like to--we
would like the President's budget to be passed, and that would
give us more resources, obviously.
Mr. POMEROY. I thank the gentleman. I yield back.
Chairman RAMSTAD. Since the chair was mentioned in your
critique, Mr. Pomeroy, I just would respond. You say, and I
believe I am quoting, we should do the work that the
Subcommittee is charged to do. Well, certainly the Oversight
Subcommittee of Ways and Means is responsible for conducting
oversight of tax-exempt entities. We have been holding hearings
on tax-exempt entities for more than a year. I guess I am
surprised to hear you at-least implicitly say that when three
fake charities apply to the CFC and are given legitimacy, it is
not a problem. I think it is a problem. It goes to the very
heart of the CFC, and we don't want to see damage done to the
CFC. Our role is to provide oversight.
I also think it is surprising that the 1,280 charities with
unpaid tax debt participating in the CFC seems to be
minimalized. They owe $36 million in debt, and that is real
money, at least where I come from. I think there are problems
that are worthy and I am not--I also, by the way, agree with
you. Let us hold a hearing on the tax gap. I think that is a
worthy subject matter of a future oversight hearing. I
certainly would welcome any discussions, public or private, as
to your ideas for future hearings. I appreciate your concern.
You are a good friend and a good Member of this Subcommittee, a
valued Member of the Subcommittee, but I think to charge that
today's hearing is not appropriate or shouldn't be held, that
it is a problem of a minimal nature, I think is off target.
With that, I look forward to talking with you, Mr. Pomeroy,
about your future ideas for hearings, and we will continue to
work together accordingly.
Do any of the other panelists, any other Committee Members
rather, have further questions?
Mr. POMEROY. Not to prolong the dialog, Mr. Chairman, but
if I just might put into perspective what I intended to say.
Maybe I didn't get it said right. I am happy to participate in
this hearing, interested in the inquiry, hope that we have made
some progress by shining some light here this morning on having
OPM exercise greater diligence for their role in this. The IRS,
too, if it comes to that. This is all well and good. It is a
fine function. I am happy to spend Subcommittee time on this
topic.
There are so many other things, and I am frustrated that we
have not had the license of the full Committee Chairman to, in
my opinion, more aggressively explore this Subcommittee's
jurisdiction on some of these issues, and I am so pleased that
you did indicate the tax gap might be an area we could inquire
into, and I look forward to participating in that hearing.
Thank you.
Chairman RAMSTAD. Well, again, I would just suggest to my
friend from North Dakota that he give me--or the ranking Member
or any of the Members on either side--a suggested list of
subjects to be examined by this Committee. Certainly, the
Subcommittee Chair is open to that, and I will take it to the
full Committee Chair, and so far, I haven't been denied any
requests by the full Committee Chair.
I just want to ask you, Mr. Kutz, a final line of
questions. In your written testimony, you indicated that more
than 170 CFC charities with tax debt also received $1.6 billion
in Federal grants. How is this possible?
Mr. KUTZ. There is nothing that precludes, in our
understanding, by law them from getting those grants. When they
actually apply using, I guess it is called the OMB form 24,
they have to certify whether they have any Federal tax debt,
which would include tax debts, student loans, whatever the case
may be. We did not investigate that form, but we understand
that they certify. Obviously, there is nothing preventing them
from getting those grants similar to there is nothing to
prevent contractors from getting government contracts that have
serious tax problems. It is the----
Chairman RAMSTAD. Doesn't the application for Federal
grants specifically ask the applicant if they are delinquent on
any Federal liability?
Mr. KUTZ. It does. It has a yes/no. If it is a ``yes,'' you
have to explain what the debt is that you owe.
Chairman RAMSTAD. Is it your presumption that these were
fraudulently filed applications?
Mr. KUTZ. They either lied or the people who reviewed the
forms disregarded the answer or didn't follow up on it would be
my assumption, but we did not look at those forms specifically.
Chairman RAMSTAD. Was there any one particular agency that
awarded the majority of the grants to the tax deadbeat
charities?
Mr. KUTZ. Yes. I have the notes of who the entities are.
You have got--Health and Human Services was $811 million of the
amount. Education was $530 million. The USAID was $169 million.
Commerce was $15 million. Energy, $13 million. Labor, $9
million. NASA, $7 million. Then a bunch of other ones were the
rest. Keep in mind, our analysis excluded things like Medicaid.
It was only limited to certain grant systems, and we looked at
the payment systems that were--these were payments made, so
$1.6 billion of payments made related to grant programs at
those specific agencies.
Chairman RAMSTAD. Thank you, Mr. Kutz. Mr. Miller, the
statements you just heard obviously beg the question, the IRS
has regulatory authority over charities and other tax-exempt
organizations. Obviously, it can revoke the tax-exempt status
of an organization for a number of reasons. If a charity was to
repeatedly fail to pay its employment taxes, would this result
in the revocation of its exempt status?
Mr. MILLER. Well, it is going to depend on the fact--I hate
to use the facts and circumstances answer, but it really will
depend if they are small amounts, if there is no attribution to
the board of directors. In most instances, that is not going to
be--create a revocable sort of activity on the part of the
organization. Really the issue is not whether you were
violating employment tax law, but are you violating law? Are
you acting in other than a charitable fashion? In and of
itself, not paying your employment tax as any citizen should is
not going to be a cause for revocation of status.
Chairman RAMSTAD. Should it be?
Mr. MILLER. That really is a policy issue that, you know, I
am not really prepared to answer, to be honest with you.
Chairman RAMSTAD. Any other comments?
Mr. KUTZ. I would just say this with respect to, again, the
felony aspect of this with payroll taxes, willful failure to
remit payroll taxes is a felony under current law and----
Chairman RAMSTAD. Failure to remit.
Mr. KUTZ. Failure to remit, yes. We did interview several
of these charity executives with our Federal agents, and
several of them willingly admitted that they did divert the
money willfully, and part of the money went to pay their
salaries. Effectively, they admitted to us that they had
committed a felony. To me, that would be a serious matter.
Again, I do not know whether that would be a revocable matter
with what Mr. Miller said, but certainly I think it is
something that needs to be on the table.
Chairman RAMSTAD. I think there have been a lot of serious
matters revealed today and certainly by your study that need to
be on the table. Mr. Miller, let me ask you this: Has your
division ever made a criminal referral of one of these cases,
ever?
Mr. MILLER. We--in preparing for the hearing, we did find,
I believe, that we made one referral to our criminal
investigation folks. I believe that was last year.
Chairman RAMSTAD. Are there any follow-up questions? The
gentleman from North Dakota.
Mr. POMEROY. Mr. Chairman, a question for Mr. Kutz. Has GAO
done studies as to the tax liabilities of for-profit entities
that are participating with the Government in a contract
relationship?
Mr. KUTZ. Yes. We have done that for Mr. Ramstad's
colleague over on the Senate, Senator Norm Coleman. I have
testified several times over there on Defense contractors,
civilian agency contractors and also contractors that are on
the GSA schedule. In all cases, we found billions of dollars of
unpaid taxes and I would say even more egregious behavior by
the owners of some of these, as I mentioned to Congressman
Lewis, more small to mid-sized companies, but these people were
clearly in some cases lining their pockets with payroll tax
money, making loans to themselves, and there was much more
egregious behavior there than on the parts of the charity
executives we saw here, although either way if you look at the
law, it is still a felony.
Mr. POMEROY. Yes. I think it is very troubling that we
would have this in the nonprofit, but so we understand the full
picture, we also have trouble with our own government
contractors. Now, is there routinely an application where they
are disqualified from further contracts with the Federal
Government when they are not paying the taxes at all?
Mr. KUTZ. Absolutely not. None of these had been barred
from doing business, and none of them were pursued criminally
by the IRS until we referred them. We referred all 120 of the
most egregious cases that we investigated to the IRS. Again,
whether there will be any indictments and prosecutions of those
has yet to be determined. We have been doing that work for the
last several years.
These contractors, just to get to the numbers you are
talking about, they owe probably anywhere from $7 to $10
billion. There is some fairly significant money associated with
government contractors that have tax problems and a lot of it
is payroll taxes.
Mr. POMEROY. Even though you have turned this information
over to the IRS, you are not aware of a single entity of those
who owe the $7 to $10 billion having lost their ability to
enter further contracts with the government.
Mr. KUTZ. Not as a result of our findings, no. They may
have been doing other things that were revoked. There may have
been product substitution cases or other things like that, but
not as a result of the tax issues that we looked at. I would
say that holds true--you know, we have 15 cases we
investigate----
Mr. POMEROY. Do you know, for example, with Defense
contractors, does the Pentagon have this information? Are
they--do they make decisions on future contracts? Irrespective
of what the IRS is doing, if these people are cheating on their
tax obligations and it is called to the Pentagon's attention,
do they still contract with them some more?
Mr. KUTZ. Well, that gets into the 6103, sharing of
information, and we can certainly have back and forth
information with the IRS, but we were unable to refer any of
our cases to the Defense Department or Homeland Security or
anyone else who has contractors that have these problems. That
would be an issue for this Subcommittee to consider, for
certain purposes, sharing of that information because that does
create an impediment to enforcement of the Tax Code, and it
clearly creates an impediment for law enforcement to go after
these people from a criminal perspective.
Mr. POMEROY. I thank you. I thank the Chair.
Mr. KUTZ. I would just add, too, on the--we did do 15 cases
for this work today and none of those 15 were being pursued
criminally by IRS, although they were all being pursued from a
collection standpoint, and I believe one of the 15 executives
had been assessed a trust fund penalty personally for the
charity payroll tax debt.
Chairman RAMSTAD. Does the gentleman yield back?
Mr. POMEROY. I yield back.
Chairman RAMSTAD. Mr. Miller, I just want to ask you a
summary question really, and we are about ready to wrap up this
Subcommittee hearing. Let us say a charity withholds a million
dollars from its employees' paychecks, and that charity fails
to remit the money to the Government, uses the money, as you
have explained, Mr. Kutz, in some instances to pay the salaries
of the charity's executives; do you think that charity should
maintain its tax-exempt status?
Mr. MILLER. Well, I am going to have a tough time answering
a hypothetical. I would say, it really is going to depend on,
as I say, what are the facts around it? I think we have the--we
at the service have the tools short of revocation including,
quite frankly, an election process, closing down the
organization, short of revocation in many of these instances.
It would be--is this million dollars being funneled to the
pockets--outside of compensation, is it being used for
charitable purposes? Do the people know what they are doing?
All these things. Is there attribution to the organization by
the people who are failing to withhold? There are all these
sorts of things that we would look at. I couldn't give you a
solid answer. I would say that we would at a minimum pursue the
tools we have.
Chairman RAMSTAD. I guess my question is, really, under
current law, you could revoke the tax-exempt status for such
conduct; is that not correct?
Mr. MILLER. Absent more than what you have presented,
perhaps not. Again, it needs to rise to a purpose of the
organization to avoid the tax law. It has to have a substantial
nonexempt purpose of the organization. It is not just violation
of the employment tax rules.
Chairman RAMSTAD. Perhaps we need to look at the law and at
changing the law. Mr. Kutz?
Mr. KUTZ. I think that is a valid policy consideration for
this Subcommittee and the full Committee, yes.
Chairman RAMSTAD. Mr. Green, do you have any comment?
Mr. GREEN. If the IRS was to withdraw 501(c)(3) status,
that would be a disqualifying factor either before application
or during the campaign, and that charity would no longer be
permitted to participate, but we would look to the IRS to
initially make that determination.
Chairman RAMSTAD. Yes. You are alluding to the distinction
Mr. Miller made, which I guess I didn't quite clearly
understand, the difference between removing or disqualifying an
organization, a charity, taking away its tax-exempt status from
shutting it down. Well, aren't the two equivalent?
Mr. MILLER. Well, they are really not. I think the----
Chairman RAMSTAD. In other words, a charity can go out and
solicit funds when its 501(c)(3) status has been revoked?
Mr. MILLER. No. It could solicit funds, though, when
padlocks were on the door because we have tax liens against the
organization.
Chairman RAMSTAD. I see the point you are making.
Well, if there are no further questions from any Members of
the Subcommittee, again, I want to thank all three of you
gentlemen for participating today. I think I am encouraged by
the spirit of collaboration that I heard from the panelists,
and again, Mr. Kutz, I want to commend you and those at GAO who
worked on the review for bringing out some of these troubling
but important revelations. The hearing is adjourned.
[Whereupon, at 12:03 p.m., the Subcommittee was adjourned.]