United States Government Accountability Office

Washington, DC 20548 

July 7, 2006 

The Honorable Jim Ramstad 

Chairman 

Subcommittee on Oversight

Committee on Ways and Means 

House of Representatives

Subject: CFC Charities: Responses to Posthearing Questions

Dear Mr. Chairman: 

This letter responds to your request for additional information related to the 

subcommittee’s May 25, 2006 hearing on whether charities participating in the 

Combined Federal Campaign (CFC) are meeting their employment tax 

responsibilities. Enclosed are our responses to the supplemental questions you 

submitted. Our responses are based on work performed during our audit,

communication with the Internal Revenue Service, our views of generally accepted 

accounting principles and generally accepted auditing standards, and on professional 

judgment. 

If you have any further questions or would like to discuss these responses, I can be 

reached at (202) 512-7455 or Kutzg@gao.gov. 

Sincerely yours, 

Gregory D. Kutz 

Managing Director 

Forensic Audits and Special Investigations 

Enclosure—1 

GAO-06-959R Response to Posthearing Questions
Enclosure I

Responses to Supplemental Questions for the Record

Submitted by

Representative Jim Ramstad

Subcommittee on Oversight

Hearing on

Charities and Employment Taxes: Are Charities in the

Combined Federal Campaign Meeting their

Employment Tax Responsibilities? 

May 25, 2006

1. It is my understanding that you came across a number of CFC charities

about which the IRS has no current information, and which they classify as

being in “unable to locate” status. Is that correct? How many of these did

you find participating in the CFC? 

Answer: 

We referred Combined Federal Campaign (CFC) charities with questionable exempt 

status to the Internal Revenue Service (IRS) for further review. Based on preliminary 

research, the IRS classified as “unable to locate” more than 40 organizations that 

participated in the 2005 CFC. The IRS also classified more than 80 other 

organizations as “terminated or merged” that participated in the 2005 campaign. 

According to the IRS, this status indicates the IRS either revoked the 501(c) (3) status 

or received notification that the charity had merged with another charity. In addition, 

the IRS identified about 70 organizations from the 2005 CFC whose employer 

identification numbers (EIN) matched an EIN of a taxable organization with the same

or similar name. Therefore, about 200 organizations of the 22,000 charities that 

participated in the 2005 CFC have questionable tax exempt status and may not be 

legitimate charities under 501(c)(3). 

Page 2 GAO-06-959R Response to Posthearing Questions
2. OPM emphasizes that it requires financial audits of an organization for 

admission into the CFC. Yet there were more than 1,280 charities with tax

debt. Wouldn’t an independent audit detect any tax debt when reviewing an

organization’s finances? Can you explain if GAO discovered this during its

examination of CFC charities?

Answer: 

A charity’s outstanding tax debt may or may not be disclosed in a charity’s financial 

statements prepared in conformity with Generally Accepted Accounting Principles 

(GAAP), depending on the specific facts and circumstances. Several factors affect (1) 

management’s decisions about whether to separately disclose liabilities for taxes, and 

(2) the ability of a financial audit to detect a situation where the financial statements

did not conform with GAAP. For example, management may decide to not separately 

report the liability in the financial statements or specifically disclose it in the related 

footnotes if the amount is not material to the financial statements taken as a whole. 

In addition, if charity management assesses the probability of payment to be remote,1

an amount would not be recorded or disclosed under GAAP.

Generally accepted auditing standards require an auditor to plan and perform an 

audit to obtain reasonable, but not absolute, assurance about whether the financial 

statements are free of misstatements, including any material misstatement of tax 

debt. However, it is possible that an audit would not in all cases detect improper 

recording or disclosure of tax debt, particularly if the amounts involved are 

immaterial to the financial statements or the risk of material misstatement is very 

low. 

As part of our audit and investigative procedures, we requested from CFC copies of

the charities’ independently audited financial statements. We found that 4 of the 13 

 1

For example, the entity may consider the likelihood of payment remote because management 

disagrees with the amount of a tax assessment or there may be disputed penalties and interest charges. 

GAAP defines remote as a slight chance of a future event or events occurring. 

Page 3 GAO-06-959R Response to Posthearing Questions
charities we investigated with significant tax debt had financial statements that

separately reported outstanding tax debt either in the body or the footnotes to the 

financial statements.2

 For the remaining 9 charities, we are unaware of the reasons 

why the tax debt was not disclosed. 

(192215) 

 

2

We investigated 15 charities and requested from CFC copies of audited financial statements included

with each of the charity’s application packages. As of the end of our fieldwork we received audited

financial statements for 13 of the 15 charities we investigated. 

Page 4 GAO-06-959R Response to Posthearing Questions
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