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30–448 2006

CHARITIES AND EMPLOYMENT TAXES: ARE 

CHARITIES IN THE COMBINED FEDERAL CAMPAIGN 

MEETING THEIR EMPLOYMENT TAX 

RESPONSIBILITIES? 

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 

( 


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COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

JIM RAMSTAD, Minnesota, Chairman 

ERIC CANTOR, Virginia 

BOB BEAUPREZ, Colorado 

JOHN LINDER, Georgia 

E. CLAY SHAW, JR., Florida 

SAM JOHNSON, Texas 

DEVIN NUNES, California 

J.D. HAYWORTH, Arizona 

JOHN LEWIS, Georgia 

EARL POMEROY, North Dakota 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

CHARLES B. RANGEL, New York 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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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 


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(1) 

CHARITIES AND EMPLOYMENT TAXES: 

ARE CHARITIES IN THE COMBINED FEDERAL 

CAMPAIGN MEETING THEIR EMPLOYMENT 

TAX RESPONSIBILITIES? 

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:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

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 


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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 taxexempt 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. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Thursday, June 

8, 2006. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 


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3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

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 


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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 

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view 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. 


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iWe 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. iiSee 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). 

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). 

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 makVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 E:\HR\OC\30448.XXX 30448

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iii 26 U.S.C. § 501(c)(3). iv 26 U.S.C. § 7202. vThe 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. 

ing 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 Codeiii 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

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. 

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 


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vi 26 U.S.C. § 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). 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). 

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. lawvi. 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. 

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. 

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 total- ing $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 

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viiiA 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. ixWe 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. § 6404. 

eral 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

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. 

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 


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xi 26 U.S.C. § 7202. xii 26 U.S.C. § 6672. The amount of a TFRP does not include employers’ matching amounts. 

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. 

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 

Charity Nature of 

the 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. 


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Charity Nature of 

the charity Tax debt a Comments 

3 Mental 

health 

clinic 

Over $1.5 

million 

• Payroll tax debt covers 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 

clinic 

Over 

$700,000 

• Payroll tax debt covers 7 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. 

aTax 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. 


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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. xvGAO, IRS Lien Management Report: Opportunities to Improve Timeliness of IRS Lien Releases,GAO-05-26R (Washington, D.C.: Jan. 10, 2005). 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. 

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

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 letterxvi 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. 

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. 


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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 


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xviiData from the remaining 8 local campaigns were either not received or not sufficient for 

analysis. 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. 

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 299xvii

local campaigns. 

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

• 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 


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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. 

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 1980sxix 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. 

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 


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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 services 

Over 

$100,000 

• The charity failed to pay its 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 

center 

Over $1 

million 

• This entity owes more than $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 

provider of 

hospital 

and nursing 

home services 

Over 

$400,000 

• Federal tax lien has been filed against the charity. 

• The charity filed for Chapter 11 bankruptcy protection. 

• The top executives of the charity and several parttime 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 rehabilitation 

center 

Over 

$70,000 

• The charity has substantial equity in a multi-acre 

parcel of real estate located in a major metropolitan 

area. 

• The charity owns a boat that is primarily used by the 

executive director. 


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Charity Nature of 

charity Tax debt a Comments 

10 Charity provides social 

welfare programs 

Nearly 

$300,000 

• A recent independent auditor’s report states there is 

substantial doubt regarding the entity’s ability to continue operating (i.e., a going concern). 

• The charity received federal grants of more than $2.5 

million from the Department of Health and Human 

Services. 

11 Social services for the 

blind 

Nearly 

$100,000 

• The charity has more than 13 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 child 

abuse 

Over 

$120,000 

• Charity owes over $120,000 in 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 

service for 

adults, adolescents, 

and children 

Over 

$500,000 

• The charity’s tax debt covers more than six tax periods. 

• Charity paid consultant more than $100,000 for professional services. 

14 Adult and 

senior services 

Nearly 

$200,000 

• Federal tax lien has been filed against the charity. 

• The charity received federal grants of $140,000. 

15 Family social services Over 

$500,000 

• The charity’s tax debt covers 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. 

aTax debt amount includes principal, interest, and penalties as of September 30, 2005. 

f 

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 tradiVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\30448.XXX 30448

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tional 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 


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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 taxexempt 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. 


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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. 


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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 taxexempt 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 substanVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 E:\HR\OC\30448.XXX 30448

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tial 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 easyto-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 


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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 taxexempt 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). 


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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 examVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HR\OC\30448.XXX 30448

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ination. 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 


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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 taxVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 E:\HR\OC\30448.XXX 30448

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payers 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. 

f 

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 camVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\30448.XXX 30448

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paign 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 taxexempt 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. 


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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 


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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 noncompliance 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. 

f 

Chairman RAMSTAD. Thank you, Mr. Green. I want to thank all 

three witnesses for your testimony. I appreciate the tone as well as 


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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. 


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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 

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tion 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. 


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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 perVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\30448.XXX 30448

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haps 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. 


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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. 


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Mr. POMEROY. It is my understanding that the number of taxexempt 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 


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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 


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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 


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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 collecVerDate Aug 31 2005 00:28 Dec 23, 2006 Jkt 030448 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\30448.XXX 30448

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tion 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. 


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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.] 

Æ 


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