A small percentage of tax-exempt organizations have a substantial amount of delinquent payroll taxes, according to a new government report.
The report, by the Treasury Inspector General for Tax Administration, acknowledged that the majority of tax-exempt organizations pay federal payroll taxes. While tax-exempt organizations are generally not required to pay income taxes, they are required to remit payroll taxes, such as for Social Security and Medicare.
TIGTA determined that more than 64,200 tax-exempt organizations (or 3.8 percent) had nearly $875 million of federal tax debt as of June 16, 2012. While some organizations owed minor amounts, approximately 1,200 tax-exempt organizations owed more than $100,000 each. Unpaid taxes were often associated with multiple tax periods. For example, nine organizations each had federal tax debt spanning 10 or more years that collectively totaled more than $5.5 million.
“Tax-exempt organizations have a responsibility to remit to the IRS taxes that have been withheld from employees as well as other applicable federal taxes,” said TIGTA Inspector General J. Russell George in a statement. “Failure to remit these taxes is a very serious matter.”
TIGTA reviewed 25 tax-exempt organizations—all of which qualified under Section 501(c)(3) of the Tax Code, which pertains to charitable organizations—that appeared to be among the worst examples involving unpaid federal tax (but not representative of the population of all tax-exempt organizations with unpaid tax). TIGTA determined that these organizations generally received government payments over a three-year period of $148 million, including Medicare, Medicaid and government grants; had annual revenue of almost $167 million; and owned assets of more than $97 million—but continued to not remit payroll and other taxes, including penalties and interest, totaling more than $25 million.
The Tax Code does not authorize the IRS to revoke tax-exempt status based on an organization’s failure to pay payroll taxes, and most of the organizations that TIGTA reviewed were still recognized by the IRS as tax-exempt as of May 2013. The Exempt Organizations function had completed several examinations but was generally not aware of the behavior of the organizations because another IRS business unit is responsible for collecting the delinquent tax debts.
TIGTA recommended that the director of the IRS’s Exempt Organizations unit coordinate with management of the IRS’s Small Business/Self-Employed Division to receive relevant collection information, periodically complete analyses to identify tax-exempt organizations that potentially abuse their tax-exempt status for examination (if necessary), and work with the Treasury Department to evaluate whether a legislative proposal is warranted to strengthen the IRS’s ability to enforce payroll tax noncompliance by tax-exempt organizations. The former director of the Exempt Organizations unit was Lois Lerner, who lost her job last year after she revealed ahead of the release of a TIGTA report that her unit had used inappropriate terms such as “Tea Party” and “Patriot” to review applications for tax-exempt status under Section 501(c)4 of the Tax Code, which pertains to social welfare organizations.
In response to the report, IRS management disagreed with the first two recommendations and agreed to notify the Treasury of TIGTA’s third recommendation. TIGTA believes the IRS should follow through on all of the report’s recommendations to ensure these organizations properly remit all payroll taxes.
“We would like to note that the report paints an incomplete picture about IRS enforcement efforts on employment tax, particularly in regard to these 25 tax-exempt organizations,” wrote Donna Hansberry, deputy commissioner of the Tax-Exempt and Government Entities Division, in response to the report. “Our efforts reflect that our tax administration and enforcement efforts are working. For example, the IRS opened collection cases on all 25 organizations. In all, 17 of these cases have been closed and our work continues on the eight remaining groups. Additionally, the report discusses a judgmental sample’ of 52 officials from the 25 organizations. Of these 52, the IRS has imposed current assessments against 20 for the applicable payroll tax penalty; collected the penalty in full from 4; determined that 22 were not liable for the penalty; continued open investigations of 4; and proceeded with appeals of who have chosen to exercise those rights.”
Hansberry also pointed that reductions in the IRS budget have stretched enforcement resources across the agency. In fiscal 2014, the IRS budget was reduced by nearly $850 million compared to fiscal 2010. During the same time period, the IRS has seen the number of key enforcement personnel drop by 3,000 positions. She also noted that under current law, the IRS is not authorized to revoke an organization’s tax-exempt status based on the organization's failure to pay payroll taxes.
"However, it should be noted that even if exempt status were revoked, payroll tax law would still apply," the IRS added in an emailed statement.