a

GAO

United States Government Accountability Office

Report to Subcommittee on Oversight, 

Committee on Ways and Means, House of 

Representatives

July 2006 TAX DEBT

Some Combined 

Federal Campaign 

Charities Owe Payroll 

and Other Federal 

Taxes

GAO-06-887
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2006

TAX DEBT

Some Combined Federal Campaign 

Charities Owe Payroll and Other Federal 

Taxes 

Highlights of GAO-06-887, a report to the 

Subcommittee on Oversight, Committee 

on Ways and Means, House of 

Representatives 

The continued success of the 

Combined Federal Campaign

(CFC), which is administered by

the Office of Personnel 

Management (OPM), is predicated 

on donor confidence that each 

donation reaches a legitimate

charitable organization. 

The Ways and Means Committee’s

review of tax-exempt entities has 

led to concerns that charities listed 

in CFC are failing to remit payroll 

and other taxes to IRS as required

by law. Specifically, GAO was 

asked to determine whether and to 

what extent (1) charities listed in 

the 2005 CFC have unpaid payroll 

and other 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 CFC. 

What GAO Recommends

To ensure donor confidence and

improve control over participation 

in CFC, GAO recommends that 

OPM take the following two 

actions: 

• create and maintain a 

comprehensive database of all 

local, national, and

international charities that 

participate in CFC; and 

• verify with IRS the tax-exempt 

status of all charities applying 

to be included in the CFC. 

OPM concurred with both of our 

recommendations and stated it had 

taken or will take actions to 

address these recommendations. 

More than 1,280 CFC charities, nearly 6 percent of charities in the OPMadministered 2005 campaign, had tax debts totaling almost $36 million as of 

September 30, 2005. While the majority of this debt represented payroll 

taxes, penalties, and interest dating back as far as 1988, the debt also 

included amounts from annual reporting penalties, excise taxes, exempt 

organization business income taxes, unemployment taxes, and other types of 

taxes and penalties. Most of the 1,280 tax delinquent charities (79 percent) 

owed less than $10,000. Further, at least 170 of the charities with tax debt 

received about $1.6 billion in federal grants in 2005.

All 15 of the charities that we selected for detailed audit and investigation 

had abusive and potentially criminal activity related to the federal tax 

system. Specifically, rather than fulfill their role as trustees of this money 

and forward it to the IRS, the directors and senior officers diverted the 

money for charity-related expenses, including their own salaries, some of 

which were in excess of $100,000. Although exempt from federal income tax, 

charities as employers are required to forward payroll taxes withheld from 

their employees’ wages to the IRS. Willful failure to remit payroll taxes is a 

felony under U.S. law. We referred all 15 of these charities to the IRS for 

consideration of additional collection or criminal investigation. 

Examples of Abusive and Potentially Criminal Activity by CFC Charities 

Type of 

charity 

Tax 

debt Charity activity

Museum Over

$100,000 

Repeatedly underpaid payroll taxes. Federal and local liens 

were filed against the charity. The IRS assessed a penalty 

against personal assets of the director who admitted to 

underpaying payroll taxes to fund operations. 

Health 

service 

provider

Over 

$400,000 

Repeatedly remitted payroll taxes late while accruing interest 

and penalties. Executives were paid through a contractor that 

received $3 million from the charity. Received more than $2

million in federal grants from the Department of Health and 

Human Services. 

Mental 

health 

clinic 

Over $1.5 

million 

Repeatedly failed to remit or to remit timely payroll taxes for 

the last 15 years. Director diverted payroll tax to pay his and 

employee salaries. 

Source: GAO’s analysis of IRS, public, and other records. 

OPM does not screen CFC charities for federal tax problems or 

independently validate with the IRS whether the charity is truly a tax-exempt 

organization. Federal law prevents OPM from accessing taxpayer 

information required to screen for tax delinquency. Consequently, OPM was 

unaware of the charities that owed federal tax debt and cannot provide 

assurance that the more than 22,000 participating charities are tax-exempt 

organizations. To demonstrate the vulnerability of this process, GAO created 

a fictitious charity and successfully applied to three large local campaigns. 

www.gao.gov/cgi-bin/getrpt?GAO-06-887.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory D. 

Kutz at (202) 512-7455 or kutzg@gao.gov. 
Page i GAO-06-887 Tax Debt

Contents

Letter 1

Overview of Testimony 2

Conclusion 4

Recommendations for Executive Action 4

Agency Comments and Our Evaluation 4

Appendixes

Appendix I: Testimony on CFC Charities with Unpaid Federal Tax Debt 6

Appendix II: Comments from the Office of Personnel Management 31

Appendix III: Comments from the Internal Revenue Service 41

Appendix IV: GAO Contact and Staff Acknowledgments 43

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-887 Tax Debt

United States Government Accountability Office

Washington, D.C. 20548

A

July 28, 2006 Letr

The Honorable Jim Ramstad

Chairman

Subcommittee on Oversight

Committee on Ways and Means

The House of Representatives 

Dear Mr. Chairman:

On May 25, 2006, we testified before the Subcommittee on Oversight of the 

House of Representatives’ Committee on Ways and Means on the results of 

our audit and investigations of 2005 Combined Federal Campaign (CFC) 

charities with unpaid federal taxes.1

 CFC, which is administered and 

promoted by the Office of Personnel Management (OPM) and about 300 

local campaigns, is the only authorized solicitation of employees in the 

federal workplace on behalf of charitable organizations. In order to 

participate in CFC, an organization must be recognized as tax-exempt by 

the Internal Revenue Service (IRS). Notwithstanding this status, all 

employers are required to withhold from their employees’ wages payroll 

taxes for Social Security, Medicare, and other taxes. Willful failure to remit 

payroll taxes is a felony under U.S. law.2

 Our work focused on determining 

whether and to what extent (1) charities listed in the 2005 CFC had 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 

CFC. 

This report summarizes our testimony, which is reprinted in appendix I, 

and makes specific recommendations for corrective actions. 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.

1

 GAO, Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other 

Federal Taxes, GAO-06-755T (Washington, D.C.: May 25, 2006).

2

 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 US 192 

(1991).
Page 2 GAO-06-887 Tax Debt

Overview of Testimony In our testimony, we stated that more than 1,280 CFC charities, nearly 6 

percent of the charities that participated in the OPM-administered 2005 

campaign, had federal tax debts totaling $35.6 million as of September 30, 

2005. While the majority of this debt represented payroll taxes, penalties, 

and interest dating back as far as 1988, the unpaid debt also included 

amounts from annual reporting penalties, excise taxes, exempt 

organization business income taxes, unemployment taxes, and other types 

of taxes and penalties. Most of the 1,280 delinquent charities, 79 percent, 

owed less than $10,000 in delinquent taxes. Further, in identifying charities 

with unpaid tax debt we took a conservative approach, so the $35.6 million 

in delinquent taxes is likely understated. For example, the delinquent tax 

totals do not include amounts for charities that do not file required tax 

returns or taxes for charities that underreport unrelated business income 

or payroll taxes. 

In addition to receiving exclusive access to the federal workplace, we also 

found that more than 170 of these tax-delinquent CFC charities received 

about $1.6 billion in federal grants during fiscal year 2005. Five of the 15 

charities we investigated were among the more than 170 charities that 

received federal grants. These 5 charities received grants from the 

Departments of Health and Human Services (not including Medicaid) and 

Education that totaled more than $6.5 million. 

Our detailed audit and investigation of 15 CFC charities with tax debt and 

their directors or senior officers identified abusive and potentially criminal 

activity.3 Specifically, we found that the executives of the 15 charities we 

investigated failed in their role as “trustees” to forward payroll taxes to IRS. 

Although the charities themselves are exempt from federal income taxes, 

the charities as employers are still required by law to withhold amounts 

from their employees’ wages for Social Security, Medicare, and individual 

income taxes. Willful failure to remit payroll taxes is a felony. 

3

 We characterized as “potentially criminal” any activity related to federal tax liability that 

may be a crime under a specific provision of the Internal Revenue Code. Depending on the 

potential penalty provided by statute, the activity could be a felony (punishable by 

imprisonment of more than 1 year) or a misdemeanor (punishable by imprisonment of 1 

year or less). Some potential crimes under the Internal Revenue Code constitute fraud 

because of the presence of intent to defraud, intentional misrepresentation or deception, or 

other required legal elements.
Page 3 GAO-06-887 Tax Debt

Executives from 3 of the 15 selected charities denied owing payroll and 

other taxes when IRS records showed otherwise. Another 5 charities’ 

executives explained that they knowingly withheld payroll taxes in order to 

have enough funds available to pay for their salaries and the salaries of 

charity employees, in addition to charity expenses. Our work 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, the 

independent audit reports for some of the charities indicated significant 

cash flow problems. We referred all 15 cases detailed in our report to IRS 

so that it can determine whether additional collection action or criminal 

investigation is warranted. 

Neither OPM nor the approximately 300 local campaigns screen charities 

for federal tax problems before allowing charities to be listed with CFC. 

Neither federal regulations nor OPM policies require federal tax debt to be 

considered when determining CFC eligibility. 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. Nevertheless, CFC does not have the internal 

control necessary to assure donors that charities listed with and backed by 

CFC are meeting federal laws. 

We also found that OPM and its local campaigns do not validate with IRS 

each CFC applicant’s tax-exempt status. To be eligible for CFC, a charity 

must submit as part of its application a copy of a standard IRS letter 

showing that it has received tax-exempt status from IRS under 501(c)(3) of 

the Internal Revenue Code.4

 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. Further, from our referral of more than 1,300 CFC 

charities whose 501(c)(3) status we could not confirm using publicly 

available IRS data, IRS identified a number of charities that are not valid 

501(c)(3) entities.

4

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 CFR § 

950.204(b)(2)(iii).
Page 4 GAO-06-887 Tax Debt

Conclusion Federal employees have made a notable difference in the lives of those in 

need through CFC. The continued success of CFC is predicated on each 

donor’s confidence in a system that ensures their donations reach 

legitimate charitable organizations. Bona fide charities of CFC have the 

most to lose when such confidence is shaken because of the abuse of a 

small number of charities. Until a governmentwide policy is developed that 

addresses availability of federally sponsored benefits to entities that fail to 

pay their federal tax obligations, tax delinquent CFC charities may 

continue to benefit by participating in CFC and potentially receiving 

donations. Further, unless OPM centralizes charity information and 

validates whether applicants are legitimate 501(c)(3) organizations, the 

campaign will also be vulnerable to entities that fraudulently purport to be 

charities. These weaknesses could have devastating consequences for the 

vast majority of eligible and tax-compliant charities that are dependent on 

donor contributions to support their critical missions. 

Recommendations for 

Executive Action

To help ensure continuing donor confidence and improve control over 

participation in CFC, we recommend that the Director of the Office of 

Personnel Management direct the Director of CFC Operations to take the 

following actions:

• create and maintain a comprehensive database of all local, national, and 

international charities that participate in CFC; and

• verify with IRS the tax-exempt status of all charities applying to be 

included in CFC. 

Agency Comments and 

Our Evaluation

Both OPM and IRS provided written comments on a draft of this report, 

which are reprinted in appendix II and appendix III, respectively. OPM 

concurred with both of our recommendations and explained the actions it 

has already taken or plans to take to implement them. For example, OPM 

has initiated and expects to complete by the fall of 2007 the creation of a 

“National Charity Registry” that would provide OPM with the ability to 

independently verify data on participating charities. In addition, OPM has 

begun implementing a series of steps for verifying with IRS the tax-exempt 

status of all charities applying to CFC. OPM expects to finish this screening 

for the 2006 Campaign by September 30, 2006. Although we did not make 

any specific recommendations directly to IRS, it provided and has agreed 

to continue providing OPM assistance in verifying the tax-exempt status of 
Page 5 GAO-06-887 Tax Debt

CFC charities. Also, IRS stated it is reviewing the 15 cases we referred to 

IRS for collection and criminal investigation and will take further action if 

warranted.

As agreed with your offices, we will send copies to interest congressional 

committees, the Director of the Office of Personnel Management, and the 

Commissioner of the Internal Revenue Service. We will make copies 

available to others upon request. In addition, the report will be available at 

no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-7455 or kutzg@gao.gov if you or your staff 

have any questions concerning this report. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report.Major contributors are acknowledged in appendix IV.

Gregory D. Kutz

Managing Director

Forensic Audits and Special Investigations
Page 6 GAO-06-887 Tax Debt

Appendix I

Testimony on CFC Charities with Unpaid Apendxies

Federal Tax Debt ApendxiI

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Oversight, 

Committee on Ways and Means,

House of Representatives 

TAX DEBT

Some Combined Federal 

Campaign Charities Owe 

Payroll and Other Federal 

Taxes

Statement of Gregory D. Kutz, Managing Director

Forensic Audits and Special Investigations 

For Release on Delivery

Expected at 11:00 a.m. EDT

Thursday, May 25, 2006

GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 7 GAO-06-887 Tax Debt

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights Accountability Integrity Reliability

May 25, 2006

TAX DEBT

Some Combined Federal Campaign 

Charities Owe Payroll and Other Federal 

Taxes Highlights of GAO-06-755T, a testimony

before the Subcommittee on Oversight, 

Committee on Ways and Means, House of

Representatives

The Office of Personnel

Management (OPM) administers

the annual Combined Federal

Campaign (CFC), which gave more

than 22,000 charities access to the

federal workplace, helping those in

need by collecting more than $250

million in donations during the

2005 campaign. The success of the

campaign is predicated on each

donor’s confidence in a system that 

ensures

donations reach charitable

organizations that have met the

CFC’s specific eligibility

requirements and are legitimate

charities. For example, to be

eligible, each charity must have

formally received from the Internal

Revenue Service (IRS) taxexemption designation under

501(c)(3) of the Internal Revenue

Code.

The Subcommittee on Oversight is 

reviewing tax-exempt status

entities and asked GAO to 

determine whether charitable

organizations participating in the 

CFC were remitting their payroll

and other taxes to the IRS as

required by law. Specifically, GAO

was asked to investigate and

determine whether and to what

extent (1) charities listed in the 

2005 CFC have unpaid payroll and

other 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.

More than 1,280 CFC charities, or about 6 percent of charities in the OPMadministered 2005 campaign, had tax debts totaling approximately

$36 million as of September 30, 2005. The majority of delinquent charities

owed less than $10,000. Approximately $28 million of this debt represented 

payroll taxes, penalties, and interest dating back as far as 1988. The

remaining $8 million represented annual reporting penalties, excise taxes,

exempt organization business income, unemployment taxes, and other types 

of taxes and penalties during this same period. Further, at least 170 of the 

charities with tax debt received about $1.6 billion in federal grants in 2005.

GAO investigated 15 CFC charities, selected primarily for the amount and 

age of their outstanding tax debt. All 15 charities engaged in abusive and

potentially criminal activity related to the federal tax system. Although 

exempt from certain taxes (e.g., federal income tax), these charities had not 

forwarded payroll taxes withheld from their employees along with other 

taxes to the IRS. Willful failure to remit payroll taxes is a felony under U.S.

law. However, rather than fulfill their role as trustees of this money and

forward it to the IRS, the directors and senior officers diverted the money 

for charity-related expenses, including their own salaries, some of which 

were in excess of $100,000. We referred all 15 of these charities to the IRS 

for consideration of additional collection or criminal investigation.

Examples of Abusive and Potentially Criminal Activity by CFC Charities

Type of 

charity Tax debt Charity activity

Museum Over

$100,000

Repeatedly underpaid payroll taxes. Federal and local liens were filed 

against the charity. The IRS assessed a penalty against personal 

assets of the director who admitted to underpaying payroll taxes to

fund operations.

Health

service

provider

Over

$400,000

Repeatedly remitted payroll taxes late while accruing interest and

penalties. Executives were paid through a contractor that received $3

million from the charity. Received more than $2 million in federal 

grants from the Department of Health and Human Services.

Mental

health

clinic

Over

$1.5 million

Repeatedly failed to remit or to remit timely payroll taxes for the last 15 

years. Director diverted payroll tax to pay his and employee salaries.

Source: GAO’s analysis of IRS, public and other records.

OPM does not screen CFC charities for federal tax problems or 

independently validate with the IRS whether the charity is truly a tax-exempt

organization. Federal law prevents OPM from accessing taxpayer

information required to screen for tax delinquency, although information on

exempt status is available to the public. Consequently, OPM was unaware of 

the charities that owed federal tax debt and cannot provide assurance that 

the more than 22,000 participating charities are tax-exempt organizations.

To demonstrate the vulnerability of this process, GAO created a fictitious 

charity and successfully applied to three large local campaigns.

www.gao.gov/cgi-bin/getrpt?GAO-06-755T.

To view the full product, including the scope 

and methodology, click on the link above.

For more information, contact Gregory D.

Kutz at (202) 512-7455 or kutzg@gao.gov.
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 8 GAO-06-887 Tax Debt

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 system1

 while 

benefiting from doing business with the federal government.

2

 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 

making payroll deductions, and ensuring donors’ “confidence” that 

charities listed with the campaign meet CFC’s specific eligibility

requirements. In the spirit of ensuring that donors can trust their 

contributions are going to organizations that have met CFC’s specific 

eligibility requirements, and are legitimate charities, you asked us to 

investigate charities listed with the CFC.

Specifically, you asked us to investigate and determine whether and to 

what extent (1) charities listed in the 2005 CFC have unpaid payroll and 

other federal taxes; (2) selected charities, their directors or senior officers 

1

 We considered activity to be abusive when a 501(c)(3) organization’s actions (e.g.,

diversion of payroll tax funds) or inactions (e.g., failure to remit the annual Form 990 

return, which is the basis for review of whether an organization continues to meet 

requirements for exempt status) took advantage of the existing tax enforcement and 

administration system to avoid fulfilling federal tax obligations and were deficient or 

improper when compared with behavior that a prudent person would consider reasonable.

2

 See GAO, Financial Management: Thousands of GSA Contractors Abuse the Federal Tax

System, GAO-06-492T (Washington, D.C.: Mar. 14, 2006), Financial Management:

Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little

Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005), and Financial Management:

Some DOD Contractors Abuse the Federal Tax System with Little Consequence,

GAO-04-95 (Washington, D.C.: Feb. 12, 2004).

Page 1 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 9 GAO-06-887 Tax Debt

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

Code3

 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.

4

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.

5

 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 

3

 26 U.S.C. § 501(c)(3).

4

 26 U.S.C. § 7202.

5

 The campaign cycle for CFC consists of a 2-year reporting period, which marks the

beginning of a campaign and the end of a campaign. Most campaigns will begin operation 

on or about March 15 of the first year of the campaign and end around March 14 2 years

later, depending on the final disbursement for the campaign. For example, March 15, 2005,

begins the fall 2005 campaign and March 14, 2007, marks the end of the fall 2005 campaign.

Typically, the annual campaign runs for a 6-week period from September 1 through

December 15. Actual dates may vary from one campaign to another.

Page 2 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 10 GAO-06-887 Tax Debt

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.

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.

Summary

In addition to CFC donations, we found that more than 170 of these taxdelinquent charities received about $1.6 billion in federal grants during 

fiscal year 2005. Five of 15 case study charities we reviewed in detail were

among the more than 170 charities that received federal grants. These 5 

charities received grants from the Departments of Health and Human

Services (excluding Medicaid) and Education that totaled more than

$6.5 million.

Our detailed audit and investigation of the 15 CFC charities with tax debt

and their directors or senior officers identified abusive and potentially

criminal activity. Although charities are exempt from certain taxes (e.g.,

federal income tax), the executives of the 15 charities we investigated

were required by law but failed in their roles as “trustees” to forward 

payroll taxes to the IRS, which include amounts withheld from their 

employees’ wages for Social Security, Medicare, and the employer’s

matching portion of these taxes and individual income taxes.

Page 3 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 11 GAO-06-887 Tax Debt

During interviews, three of the 15 selected charities’ executives denied 

owing payroll and other taxes when IRS records showed otherwise.

Executives from 5 other charities explained that they knowingly withheld

payroll taxes in order to have enough funds available to pay for charity 

activities and the salaries of charity employees. As a result of remitting tax 

payments late, the charities accumulated tens of thousands of dollars in 

penalties and interest. Our investigations also showed that several of the

executives who potentially could be assessed trust fund recovery penalties

for the debts of their charities had salaries in excess of $100,000 and 

owned significant personal assets. In addition, according to independent

audit reports, some of the charities appeared to have significant cash flow 

problems. Willful failure to remit payroll taxes is a felony under U.S. law.

6

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.

7

 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 

6

 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).

7

 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).

Page 4 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 12 GAO-06-887 Tax Debt

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 taxexempt status.

Based on our analysis, more than 1,280 CFC charities had federal tax debts

totaling $35.6 million as of September 30, 2005. This represented nearly 6 

percent of the charities that participated in the OPM-administered 2005

campaign. $27.7 million of this debt represented payroll taxes, penalties, 

and interest dating as far back as 1988. The remaining $7.9 million includes 

annual reporting penalties, excise taxes, exempt organization business 

income, unemployment taxes, and other types of taxes and penalties. In 

performing our analysis, we took a conservative approach to identifying 

the amount of tax debt owed by the CFC’s charities, and therefore the 

number of delinquent charities and amount due to the IRS are likely 

understated. We also found that at least 170 charities with unpaid taxes 

also benefited by receiving about $1.6 billion in federal grants.

More Than 1,280 CFC 

Charities Had Tax

Debts Totaling

$35.6 Million

Unpaid Payroll Taxes

Comprised Almost 80 

Percent of Charities’

Federal Tax Debt 

As indicated in figure 1, payroll taxes comprised $27.7 million, or almost 

80 percent, of the $35.6 million in unpaid federal taxes owed by CFC 

charities. Unpaid payroll taxes included amounts that were withheld from 

employees’ wages for federal income taxes, Social Security, and Medicare

but not remitted to the IRS, as well as the matching employer

contributions for Social Security and Medicare. Employers who fail to 

remit payroll taxes to the federal government may be subject to civil and

criminal penalties. Figure 1 shows the types of federal taxes owed by CFC 

charities as of September 30, 2005.

Page 5 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 13 GAO-06-887 Tax Debt

Figure 1: Types of Federal Tax Debt Owed by CFC Charities

Source: GAO analysis of IRS data as of September 30, 2005 and 2005 CFC data.

13% Annual reporting

penalties

9% Other

78% Payroll

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.

8

8

 A tax period varies by tax type. For example, the tax period for payroll and excise taxes is

generally one quarter of a year. The taxpayer is required to file quarterly returns with IRS 

for these types of taxes, although payment of the taxes occurs throughout the quarter. In 

contrast, for income, corporate, and unemployment taxes, a tax period is 1 year.

Page 6 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 14 GAO-06-887 Tax Debt

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.

9

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,10 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 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.

Amount of Unpaid Federal 

Taxes Is Understated for 

CFC Charities 

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.

9

 We eliminated from our analysis all tax debt coded by IRS as not having been agreed to by

the taxpayer (for example, by filing a balance due return) or a tax court. For financial 

reporting, those cases are referred to as compliance assessments.

10 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.

Page 7 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 15 GAO-06-887 Tax Debt

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,11 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.

12 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.

Certain CFC Charity 

Executives We

Investigated Abused

the Federal Tax

System

Table 1 highlights 5 of the 15 case study CFC charities that we investigated

with payroll tax issues.

11 26 U.S.C. § 7202.

12 26 U.S.C. § 6672. The amount of a TFRP does not include employers’ matching amounts.

Page 8 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 16 GAO-06-887 Tax Debt

Table 1: CFC Charities with Unpaid Federal Taxes

Charity

Nature of the

charity Tax debta

Comments

1 Museum Over $100,000 • Payroll tax debt covers more than 12 tax periods dating back to the mid 1990s.

• The IRS assessed a TFRP against the charity’s director. 

• Federal and local tax liens have been filed against the charity.

• The charity filed for bankruptcy protection in the past but the court denied the 

petition.

• The executive director admitted to underpaying payroll taxes to fund the charity’s

operations.

2 Hospital Nearly $1 million • Payroll tax debt covers more than 5 periods dating back several years.

• The charity paid two of its executives a salary of more than $200,000 each.

• The charity received about $1.5 million in federal grants from the Department of 

Health and Human Services (non-Medicaid) and the Department of Education.

3 Mental health

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.

a

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

For the five charities in table 1, tax debt ranged from about $100,000 to

more than $1.5 million, and the unpaid taxes spanned a period ranging 

from 5 to more than 12 payroll tax periods. In addition to the federal tax 

debt, two of the five CFC charities had unpaid state and/or local taxes, 

where state and/or local taxing authorities filed multiple tax liens against 

them.

During the time frames for which these charities were not paying their 

taxes, funds were available to cover other charity expenses, including

officer salaries. Executives at two charities explained that they knowingly 

withheld payroll taxes in order to have enough funds available to pay their 

own salaries and the salaries of charity employees, in addition to charity 

expenses. One executive we investigated denied owing payroll or other 

Page 9 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 17 GAO-06-887 Tax Debt

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 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.

OPM Does Not Screen 

Charities for 

Delinquent Tax Debt 

Tax Debts 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 

Page 10 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 18 GAO-06-887 Tax Debt

determining eligibility are based on and limited to what is required of the 

CFC in Part 950 of Title 5, C.F.R.

Federal law does not permit the IRS to disclose taxpayer information,

including tax debts.

13 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.

14 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.

15

Restrictions on Tax Data 

Hamper Identification of 

Charities with Delinquent 

Taxes

OPM Does Not Verify

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 letter16 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 selfcertifications. 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.

13 26 U.S.C. § 6103.

14 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.

15 GAO, IRS Lien Management Report: Opportunities to Improve Timeliness of IRS Lien

Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 2005).

16 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.

Page 11 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 19 GAO-06-887 Tax Debt

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.

Control Weaknesses

Allowed GAO to Enroll 

Fictitious Charities in the 

CFC

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 taxexempt 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.

Page 12 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 20 GAO-06-887 Tax Debt

Figure 2: Copy of an Acceptance Letter from One of the Three Local CFC

Campaigns for Our Fictitious Charity

Source: GAO.

Page 13 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 21 GAO-06-887 Tax Debt

The success of the OPM’s CFC is predicated on each donor’s confidence in

a system that ensures that their donations reach charitable organizations

that have met the CFC’s specific eligibility requirements and are legitimate

charities. The bona fide charities participating in the annual campaign 

have the most to lose when such confidence is shaken because of the 

abuse of a minority of participating charities. Until OPM takes steps to 

independently validate whether applicants are legitimate 501(c)(3)

organizations, the campaign is vulnerable to entities that fraudulently

purport to be charities. Further, tax-abusing charities will continue to 

benefit by being eligible to participate and receive donations unless OPM 

is provided access to their tax debt information and determines whether 

sanctions such as expulsion from the CFC are warranted. OPM and each 

local CFC cannot provide the assurance needed to sustain such 

confidence. This could have devastating consequences for the vast 

majority of eligible and tax-compliant charities that are dependent on 

donor contributions to support their critical missions.

Mr. Chairman and Members of the Subcommittee, this concludes my 

statement. I would be pleased to answer any questions that you or other 

members of the committee may have at this time.

For further information about this testimony, please contact Gregory D.

Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony.

Concluding

Observations

Contacts and 

Acknowledgments

Page 14 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 22 GAO-06-887 Tax Debt

Appendix I: Objectives, Scope, and

Methodology

Page 15 GAO-06-755T

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 2991

 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,2

• 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

1

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

analysis.

2

 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.
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 23 GAO-06-887 Tax Debt

Appendix I: Objectives, Scope, and

Methodology

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 taxdelinquent charities. Consequently, we were unable to determine the 

amount of pledges received for tax-delinquent charities we identified.

To determine whether selected charities, their directors, or senior officers 

are abusing the federal tax system, we selected 15 charities for a detailed

audit and investigation. We selected the 15 charities using a 

nonrepresentative selection approach based on our judgment, data mining,

and a number of other criteria, including the amount of unpaid taxes, 

number of unpaid tax periods, amount of payments reported by the IRS, 

and indications that key officials might be involved in multiple charities

with tax debts.

We obtained copies of automated tax transcripts and other tax records 

(for example, revenue officers’ notes) from the IRS as of September 30, 

2005, and reviewed these records to exclude charities that had recently

paid off their unpaid tax balances and considered other factors before 

reducing the selection of charities to 15 case studies. For the selected 15

cases, we reviewed the charity CFC application files and performed

additional searches of criminal, financial, and public records. Our 

investigators also contacted several of the charities and conducted

interviews.

To determine whether and to what extent OPM screens charities for 

federal tax problems before allowing them to be listed with the CFC, we 

reviewed OPM’s policies and procedures, performed process 

walkthroughs, and interviewed key CFC officials at CFC Headquarters and

three local campaigns. We reviewed laws and regulations governing OPM’s 

administration of the CFC. We identified processes and procedures 

performed by the CFC during the annual application period. To confirm 

our understanding of the requirements placed on charity applicants and to

test whether OPM’s processes would identify fraudulent charities, we 

attempted to gain acceptance into the 2006 CFC by posing as a charity. We

Page 16 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 24 GAO-06-887 Tax Debt

Appendix I: Objectives, Scope, and

Methodology

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.

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.

Data Reliability 

Assessment

Page 17 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 25 GAO-06-887 Tax Debt

Appendix II: Background

Page 18 GAO-06-755T

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 1980s1

 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 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, 

1

 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.
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 26 GAO-06-887 Tax Debt

Appendix II: Background

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.

Page 19 GAO-06-755T
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 27 GAO-06-887 Tax Debt

Appendix III: CFC Charities with Unpaid

Taxes

Page 20 GAO-06-755T

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 debta

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 part-time management

personnel were employed through a contracting firm and were paid wages

that totaled more than $3 million.

• The charity received over $2 million in grants from the Department of Health

and Human Services.

9 Drug and alcohol

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.

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.

Appendix III: CFC Charities with Unpaid 

Taxes
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 28 GAO-06-887 Tax Debt

Appendix III: CFC Charities with Unpaid

Taxes

Charity Nature of charity Tax debta Comments

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.

a

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

Page 21 GAO-06-755T (192200)
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 29 GAO-06-887 Tax Debt

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Appendix I

Testimony on CFC Charities with Unpaid 

Federal Tax Debt

Page 30 GAO-06-887 Tax Debt

GAO’s Mission The Government Accountability Office, the audit, evaluation and

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies;

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.”

The first copy of each printed report is free. Additional copies are $2 each.

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to:

U.S. Government Accountability Office

441 G Street NW, Room LM 

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000

TDD: (202) 512-2537

Fax: (202) 512-6061

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149

Washington, D.C. 20548

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional

Relations

Public Affairs 

PRINTED ON RECYCLED PAPER
Page 31 GAO-06-887 Tax Debt

Appendix II

Comments from the Office of Personnel 

Management ApendxiI
Appendix II

Comments from the Office of Personnel 

Management

Page 32 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 33 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 34 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 35 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 36 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 37 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 38 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 39 GAO-06-887 Tax Debt
Appendix II

Comments from the Office of Personnel 

Management

Page 40 GAO-06-887 Tax Debt
Page 41 GAO-06-887 Tax Debt

Appendix III

Comments from the Internal Revenue Service ApendxiI
Appendix III

Comments from the Internal Revenue Service

Page 42 GAO-06-887 Tax Debt
Page 43 GAO-06-887 Tax Debt

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Michael C Zola (202) 512-3867, zolam@gao.gov

Acknowledgments Key contributors to this report include Beverly Burke, Ray Bush, Joonho 

Choi, William Cordrey, Paul Desaulniers, Steve Donahue, Dennis Fauber, 

Jessica Gray, Mary Ann Hardy, Ken Hill, Aaron Holling, Jason Kelly, John 

Kelly, Rick Kusman, Jenny Li, Renee McElveen, John Mingus, John Ryan, 

Matt Valenta, Ting-Ting Wu, and Michael Zola. 

(192213)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go to 

www.gao.gov and select “Subscribe to Updates.”

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to:

U.S. Government Accountability Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548