GAO Tags Tax-Exempt Organizations as Owing Almost $1 Billion in Taxes

Another Black Eye for Congress to Consider

By Joyce Underwood, CPA

The Government Accountability Office (GAO) released its study of Tax-Exempt Organizations' Tax Compliance on July 24th at congressional hearings—and the results are quite shocking. Nearly $1 billion of payroll and other taxes are owed by tens of thousands of exempt organizations, with charities being responsible for more than 85 percent of the debt. About 1500 of these organizations had over $100,000 in federal tax debt with some owing multi-million dollar tax bills.

GAO studied 25 exempt organizations with tax debt and a significant number of periods of delinquent taxes. In all cases they found abuse, and in some, potential criminal activity. Examples cited show organizations failing to pay taxes, yet using funds to compensate key officials with salaries, multi-million dollar homes and luxury vehicles, or paying related organizations. Some organizations, while being delinquent with taxes, received substantial federal funding by illegally failing to properly disclose their tax debt when applying for federal grants. Despite this apparent abuse of the tax system, all 25 organizations retained their exempt status because existing laws do not permit IRS to revoke exemption for failure to pay taxes.

Some of GAO's statistics include:

• Nearly 55,000 exempt organizations owed nearly $1 billion in taxes as of September 30, 2006, with nearly 40,000 of these being charitable organizations owing $830 million;
• Unpaid tax: 71% payroll, 19% annual reporting penalties and 10% other; and 1,200 organizations (including 1,150 charities) with over $72 million in tax debt received over $14 billion on direct federal grants in fiscal years 2005 and 2006.

The House Committee on Ways and Means' Subcommittee on Oversight held its first of several hearings on July 24th, focusing on the broad concerns of the charitable sector. The Committee’s aim is to better understand these organizations, to help government and charities work together for the common good of our communities, and to strengthen the tax-exempt sector. Regrettably, the GAO study discussed at this meeting reflected negatively on the tax-exempt community. Understandably, further focus will continue to be made on tax-exempt organizations’ accountability and compliance.

Full text of the GAO study, GAO- 07-563 can be found on their website www.gao.gov. A direct link is http://www.gao.gov/new.items/d071090t.pdf

Joyce Underwood is a senior manager in the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. She can be reached at junderwood@bdo.com.

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