Although U.S. taxpayers contribute billions of dollars annually to support charitable causes, many of those very same charities are dipping deeper into the pockets of Americans by chiseling on their own taxes, government investigators charged.Auditors at the Government Accountability Office told lawmakers that charities and other tax-exempt organizations are shortchanging the Treasury to the tune of nearly $1 billion by neglecting to make payroll tax payments or pay other taxes required by the government.

Although charities and other entities designated as exempt organizations by the Internal Revenue Service are excused from federal income tax liability, they are still required to remit amounts withheld from employees' wages for federal income tax, Social Security and Medicare, as well as other taxes.

But GAO investigators were able to identify tens of thousands of EOs that are abusing the federal tax system by failing to make the required tax payments. Fully 85 percent of those tax-delinquent EOs were charitable organizations, including 1,500 with more than $100,000 in federal tax debt and a number with multi-million-dollar outstanding tax liabilities.

Although Congress has been concerned about tax non-compliance by exempt organizations for some time, the new GAO findings suggested that the problem of tax-delinquent charities is far more widespread than previously believed.

During hearings by the House Ways and Means Oversight Subcommittee last year, the GAO released the results of an earlier, more limited investigation that identified 1,280 charities that had racked up $27 million in unpaid employment taxes, with some of the debt dating back to the 1980s.

However, the new investigation identified an astounding 55,000 exempt organizations that have neglected to make payroll tax payments on behalf of their employees - a violation that often leads to prosecution and bankruptcy for private-sector employers. But while willful failure to remit payroll taxes is a felony under U.S. tax law, federal authorities said that EOs rarely suffer consequences as a result of their non-compliance.

In addition to finding the problem of tax non-compliance by EOs to be far more widespread than earlier reported, the new investigation also revealed other disturbing details about the growing number of charity deadbeats.

EXEMPT FROM THE LAW?

The GAO's new probe uncovered even more troubling issues, including abusive and potentially criminal activity by charities and their financial executives.

In addition to what was termed "repeated failure to remit payroll taxes withheld from employees," officials at the charities studied by the GAO "diverted the money to fund their operations, including paying themselves salaries ranging from hundreds of thousands of dollars to over $1 million," Gregory D. Kutz, managing director of the agency's forensic audits and special investigations unit, testified before Congress.

"Many of the officials accumulated substantial assets, such as multi-million-dollar homes and luxury vehicles," and "key officials and employees at four entities were engaged in criminal activities, including attempted bribery of an IRS official and illegal gambling," he said.

Another wrinkle uncovered by the GAO's latest investigation suggested that many of the deadbeat charities with huge tax delinquencies are continuing to rake in billions of dollars in federal grants from government agencies.

According to Kutz, "More than 1,200 of the exempt organizations with over $72 million in tax debt received over $14 billion in direct federal grants in fiscal years 2005 and 2006."

Worse yet, the GAO's investigation found that many of the delinquent charities that scored lucrative federal grants did so by cheating on their grant applications.

After performing detailed case studies on 25 exempt organizations that had incurred significant tax debt, the GAO identified half a dozen that had secured additional federal grant money without paying their outstanding taxes. "Our limited audit of grant applications submitted by these six case-study entities found that five of the six appeared to have violated the False Statement Act by not disclosing their tax debts in their applications, even though they were required to do so," Kutz told Congress at a new round of Ways and Means Oversight hearings.

Although these fraudulent grant applications should have been detected and denied, "The strict taxpayer privacy statute poses a significant challenge to federal granting agencies in determining the accuracy of representations made by organizations seeking grants," he explained. "Specifically, federal granting agencies cannot verify an applicant's tax status with IRS unless the taxpayer specifically authorizes such disclosure."

Despite repeatedly abusing the federal tax system, however, deadbeat charities continue to retain their tax-exempt status. As Kutz explained: "[The] IRS does not have the authority to revoke an organization's exempt status because of unpaid federal taxes."

However, the disturbing findings outlined to Congress by the GAO were downplayed by other witnesses at the House hearings, including Steven Miller, the commissioner of the IRS's Tax Exempt and Government Entities Division.

"On the whole, the charitable sector is very compliant with the Tax Code," he told the subcommittee, adding that despite the GAO's new disclosures, tax non-compliance by charities is "not widespread."

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