Charities Failed to Pay $36-Million in Payroll Taxes, Government Study Finds

A government investigation has concluded that almost 1,300 charities that raise funds through the Combined Federal Campaign — the annual charity drive for federal workers — owe a total of at least $36-million in back payroll and other federal taxes.

The Government Accountability Office, the investigative arm of Congress, also found that the federal campaign's screening process was so lax that a fake charity was able to join three different local fund-raising drives.

"We learned that the Office of Personnel Management does not conduct even the most basic background checks about entities applying to participate in the [Combined Federal Campaign]," Rep. Jim Ramstad, chairman of the U.S. House Ways and Means Committee oversight subcommittee, which ordered the report, said at a hearing to discuss the report's findings.

More than 22,000 charities participated in the Combined Federal Campaign in 2005, collecting more than $250-million from federal workers across the country. Almost 80 percent of the delinquent payments uncovered by the investigation involved payroll taxes — money that charities must withhold from employees' wages for federal income taxes, Social Security, and Medicare, as well as matching contributions they owe Social Security and Medicare.

The Government Accountability Office, which did not identify any organizations by name, found that the majority of delinquent charities owed less than $10,000 apiece. But in a report prepared for the hearing, it highlighted a handful that owed significant amounts — for example a mental-health clinic that had accrued $1.5-million in tax debts since the early 1990s.The clinic's executive director, who was paid more than $100,000 a year, admitted to underpaying payroll taxes to cover the charity's operations, including his own salary, the report said.

The report said investigators had referred 15 organizations — including a museum, a hospital, and a homeless shelter — to the Internal Revenue Service for further action, saying they had "engaged in abusive and potentially criminal activity related to the federal tax system." It noted that willful failure to remit payroll taxes is a felony under federal law.

At least 170 of the delinquent charities had received federal grants in 2005, totaling about $1.6 billion, the report added.

Sceening Process Questioned

In its report, the Government Accountability Office accused the Office of Personnel Management, which oversees the Combined Federal Campaign, of not screen participating charities for federal tax problems or validating with the IRS whether an organization is truly a tax-exempt entity."

The report said federal law prevents the personnel office from gaining access to information about charities that would be necessary to check them for tax delinquency.

However, Steven T. Miller, who oversees tax-exempt organizations for the Internal Revenue Service, told the hearing that it is easy to check whether an organization is eligible for charitable donations by consulting the IRS's Web site.

James S. Green, associate general counsel for the Office of Personnel Management, pledged that the Combined Federal Campaign would check all applicants against Internal Revenue Service records for the national fund-raising drive and the roughly 300 local campaigns that will be held across the country next fall.

"We are confident that all charities will be checked before the 2006 campaign season," he told the hearing.

Asked several times by Mr. Ramstad, Republican of Minnesota, whether the Internal Revenue Service could revoke a charity's tax-exempt status if it failed to pay employment taxes, Mr. Miller said it could probably not do that unless the delinquency prevented the organization from carrying out its charitable mission.

"Perhaps we need to look at the law and change the law," Mr. Ramstad said.

One subcommittee member, Earl Pomeroy, Democrat of North Dakota, said he was frustrated that the panel was not taking up broader tax questions, such as how to improve tax-collection methods or curb abuses of tax shelters. He asked Gregory D. Kutz, who oversees special investigations for the Government Accountability Office, if his agency had also investigated tax liabilities by federal government contractors.

Mr. Kutz responded that the agency had conducted a similar investigation of for-profit contractors and found that they owed $7- to $10-billion in payroll and other taxes, adding that it had referred 120 cases to the Internal Revenue Service over the last several years. He said some executives were "lining their pockets" with payroll taxes. "There was much more egregious behavior than on the parts of charity executives," he said.