Section 501(c) of the I.R.C. grants an exemption from federal income taxes to organizations that meet certain requirements. Exempt organization data provided by IRS indicated that nearly 1.8 million organizations in various classifications are currently recognized as being tax exempt. Charitable organizations (I.R.C. § 501(c)3) constitute the largest classification, accounting for over 60 percent of all exempt organizations as of September 30, 2006. Other classifications of exempt organization include civic and business leagues, labor organizations, recreational clubs, domestic fraternal societies, and credit unions. Differences between the various classifications include whether donations to the exempt organization are tax deductible and whether the exempt organization has to submit an application to IRS for specific recognition of its tax exempt status. Specifically, donations to certain exempt organizations, such as charitable and religious organizations, certain veteran’s organizations, and certain cemetery companies, are deductible on the donor’s individual tax return. Donations to other organizations not specifically recognized as such are not deductible. Organizations that are qualified to receive deductible donations, with the exception of churches, are required to apply to IRS and receive a formal determination of their exempt status. Generally, each exempt organization is required to file an annual informational return that provides IRS with information about the organization and its operations, officers and directors, and whether it is required to obtain specific IRS recognition of its exempt status. An exempt organization’s annual information return (Form 990) also provides the public with the primary or sole source of information about the organization. The determination of exempt status and monitoring of exempt organizations is the responsibility of the Tax Exempt and Government Entities Division (TE/GE) of IRS. The division’s responsibilities include accepting applications for and determining whether organizations qualify as exempt under the I.R.C., monitoring exempt organizations for continued compliance with the I.R.C., and when appropriate, revoking the exempt status of an organization that no longer meets requirements for exemption. Like all other employers, exempt organizations with employees are required to pay payroll taxes that they withhold from employees’ wages “in trust” for the federal government, as well as other applicable federal taxes. Payroll taxes withheld from employees consist of income taxes; Old Age, Survivors, and Disability Insurance (OASDI), commonly referred to as Social Security; and Medicare. OASDI is taxed at 6.2 percent on the first $94,200 of an employee’s salary, and Medicare is taxed at 1.45 percent with no income cap. The employer is also taxed, at the same rate, for OASDI and Medicare on employee wages. To the extent that payroll taxes are withheld and not forwarded to IRS, individuals within the business (e.g., exempt organization officials) may be held personally liable for the withheld amounts not forwarded, and they can be assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Willful failure to remit payroll taxes is a felony under U.S. law punishable by a fine, imprisonment, or both, and the failure to properly segregate payroll taxes can be a criminal misdemeanor offense. Within TE/GE, the Exempt Organization (EO) Examinations Office is charged with promoting compliance with the I.R.C. The EO Examinations Office’s activities include analyzing the operational and financial activities of exempt organizations and developing other processes to identify areas of noncompliance, developing corrective strategies, and assisting other exempt organization functions in implementing these strategies. In the process of performing the analysis, the EO Examinations Office may assess exempt organizations’ payroll or other taxes. If the EO Examinations Office assesses taxes and the taxpayer does not make payment, the matter is referred to IRS’s Small Business / Self-Employed (SB/SE) Collections Office. SB/SE Collections Office becomes responsible for collecting the delinquent debt and may use means such as federal tax liens, levies, and seizures, and may assess a TFRP against an organization’s officials. A federal grant is an award of financial assistance from a federal agency to an organization to carry out an agreed-upon public purpose. As such, federal grants are not used for the direct acquisition of goods or services for the federal government. Based on our analysis of fiscal year 2004 and 2005 data from FAADS, federal agencies collectively awarded grants of approximately $300 billion annually. Further analysis of the FAADS data indicates that approximately 80 percent of all federal grants are pass- through grants, that is, they are federal grants provided to the state and local governments, which, in turn, disburse the grants to the ultimate recipients. Consequently, only about 20 percent of grants are provided directly from the federal government to the organization that ultimately spends the money. Grant applicants that apply directly to the federal government are required to complete Standard Form (SF) 424. The SF 424 requires grant applicants to certify whether they are delinquent on any federal debt, including federal tax debt. As of September 2006, nearly 55,000 exempt organizations had nearly $1 billion in unpaid payroll and other federal taxes. The amount of taxes owed by exempt organizations ranged from $101 to $16 million, and the number of delinquent tax periods ranged from a single period to more than 80 tax periods. However, the dollar amount of federal taxes owed by exempt organizations is understated because some organizations underreport their tax liability or fail to file returns altogether. Further, we excluded certain classifications of exempt organizations, tax debts for current periods, and disputed tax debts. As shown in figure 1, about 71 percent of the nearly $1 billion in unpaid federal taxes comprised payroll taxes and related penalties and interest. About 19 percent, or over $180 million, related to annual reporting penalties. IRS imposes reporting penalties on entities that fail to file annual returns at all or in a timely manner or that file inaccurate returns. The remaining 10 percent of the nearly $1 billion in delinquent taxes consisted of unrelated business income, excise, and other types of taxes. A significant amount of the unpaid federal taxes by exempt organizations has been outstanding for several years. As reflected in figure 2, while the majority of the nearly $1 billion in unpaid federal taxes was from tax periods 2001 through 2005, over a quarter of the unpaid taxes are for tax periods prior to 2001. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amount owed decreases. This is, in part, because of the continued accrual of interest and penalties on the outstanding tax debt. Similarly, tax problems such as the tax gap are aggravated over time if not addressed early on. Our analysis of IRS data found that nearly 1,500 of the almost 55,000 delinquent exempt organizations owed in total over $600 million of the nearly $1 billion in unpaid federal taxes of exempt organizations we identified. All of these nearly 1,500 exempt organizations owed over $100,000 each, with some owing more than $10 million. Another 8,400 owed from $10,000 to $100,000 each. Although the largest group—nearly 45,000—owed less than $10,000 in delinquent taxes, the majority of the debt in this group of exempt organizations is related to payroll taxes withheld from employees and not remitted to the federal government and annual reporting penalties. Further, many exempt organizations in this group repeatedly failed to remit taxes in multiple tax periods. Although the nearly $1 billion in unpaid federal taxes we identified that were owed by exempt organizations as of September 30, 2006, is a significant amount, it understates the full extent of unpaid taxes. This amount does not include amounts due IRS from exempt organizations that did not file payroll taxes (nonfilers) or underreported payroll tax liability (underreporters). Also, we did not include exempt organization tax debt from 2006 tax periods, tax debt for entities owing $100 or less, or tax debt for certain entities listed in IRS’s database of exempt organizations. Limiting our ability to more fully estimate the extent of exempt organizations with unpaid federal taxes is the fact that IRS’s tax database reflects only the amount of unpaid taxes reported by the exempt organization on a tax return or assessed by IRS through various enforcement programs. IRS’s tax database does not reflect amounts owed by exempt organizations that have not filed tax returns and for which IRS has not assessed tax amounts due. Additionally, our analysis did not account for exempt organizations that underreported payroll taxes and had not been identified by IRS. As reported previously and as indicated in our case study investigations, some exempt organizations underreported payroll taxes or failed to file returns. IRS estimates that underreporting accounts for more than 80 percent of the gross tax gap. We also took a number of steps in determining the amount of tax debt owed by exempt organizations to avoid overestimation. For example, some recently assessed tax debts that appear as unpaid taxes through a matching of IRS unpaid tax and exempt organization records may involve matters that are routinely resolved between the exempt organization and IRS, with the taxes paid, abated, or both within a short period. We eliminated these types of debt by including only unpaid federal taxes for tax periods prior to calendar year 2006. Further, we did not include exempt organizations with tax debt of $100 or less because these small debts likely do not represent abusive behavior. We also eliminated all tax debt IRS identified as not agreed to by the exempt organization. Further, the amount of exempt organization tax debt excludes amounts owed by exempt organizations for which the statutory collection period expired. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if exempt organizations owe federal taxes beyond the 10- year statutory collection period, the older tax debt may have been removed from IRS’s records. We were unable to determine the amount of tax debt that had been removed.