Congressional investigators have uncovered a new breed of tax chiselers - deadbeat charities that shortchange the government and their own employees by failing to pay millions of dollars in payroll taxes.As tax-exempt organizations, or EOs, charities are excused from income tax liability, but are required to withhold and pay employment taxes for their workers. With one in 12 U.S. civilian workers now employed by exempt organizations, even a small percentage of non-compliance by charities can add up to a significant drain for federal tax collectors.

At a recent Capitol Hill hearing on the problem, auditors from the Government Accountability Office identified more than 1,280 charities that owed a total of $27 million in unpaid employment taxes, some of it dating back to 1988.

Those charities owed millions more due to unpaid annual reporting penalties, excise taxes, exempt organization business income taxes, unemployment taxes and other types of federal taxes, said GAO director of special investigations Gregory D. Kutz. He told Congress that the GAO's estimate of the non-compliance "is likely understated, because we took a conservative approach to identifying the amount of tax debt owed to the IRS."

Meanwhile, separate figures released by Internal Revenue Service's Tax Exempt and Government Entities Division indicated that collection efforts to recover back taxes were undertaken against more than 282,000 nonprofits during 2005.

Moreover, the GAO focused only on the cream of the crop: charitable organizations screened by the Office of Personnel Management for the government's Combined Federal Campaign - a program designed to facilitate charitable contributions by federal employees through payroll deductions.

To qualify for the CFC program, charities must meet government standards for "charitable purpose, transparency and public accountability." But even so, the GAO found that nearly 6 percent of the 22,000 charities approved for the federal CFC program were running up tax delinquencies - often while simultaneously collecting multi-million-dollar grants from government agencies.

GAO investigators focused in on 15 charities approved for participation in the program, and their audits uncovered a number of cases of "abusive and potentially criminal activity" by executives at those organizations.

According to Kurtz, that activity ranged from making false statements to GAO investigators, to willful diversion of payroll taxes to subsidize the six-figure salaries of top executives.

During interviews with GAO auditors, three of the 15 selected charities' executives denied owing payroll and other taxes when IRS records showed otherwise, while officials from five 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, Kurtz told Congress.

Noting that willful failure to remit payroll taxes is a felony, Kurtz added: "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."

No profits, big salaries

Among the specific examples of tax non-compliance uncovered by the GAO were:

* A museum that owed more than $100,000 in payroll tax debt dating back to the mid-1990s. (The executive director admitted to underpaying payroll taxes to fund the charity's operations.)

* A nonprofit hospital with nearly $1 million in payroll tax debt dating back several years, despite receiving $1.5 million in federal grants from the Department of Health and Human Services (non-Medicaid) and the Department of Education. (This charity paid two of its executives salaries of more than $200,000 each.)

* A mental health clinic that owes more than $1.5 million in unpaid payroll taxes that have accumulated since the early 1990s. (The executive director admitted to underpaying payroll taxes to fund the charity's operations, including the director's own $100,000-plus salary.)

* A homeless shelter that accumulated $300,000 in tax debt by failing to submit payroll tax payments for more than five tax periods over several years. (The shelter's executive director continued to draw a six-figure annual salary.)

* A general health clinic with over $700,000 in payroll tax debt stretching back more than five years. (During this time, the clinic's CEO received a salary of more than $100,000).

At the request of House Ways and Means Oversight Subcommittee chair Jim Ramstad, R-Minn., the GAO examined the OPM's process for screening charities participating in the federal employee contribution program, and discovered more disturbing information.

When undercover GAO investigators applied as a fictitious charity to three local campaigns using fake documents and an erroneous IRS taxpayer identification number, all three bogus applications were accepted into the local CFC, Kurtz testified.

"The bona-fide charities participating in the annual campaign have the most to lose when [donor] confidence is shaken because of the abuse of a minority of participating charities," he told Congress. "Until the OPM takes steps to independently validate whether applicants are legitimate [tax-exempt] organizations, the campaign is vulnerable to entities that fraudulently purport to be charities."

For his part, OPM associate general counsel James S. Green told the subcommittee that his office plans to tighten up the screenings of charities seeking to participate in the federal employee donation program.

"In light of the GAO findings, the director of OPM has already requested that staff examine options for improving the screening process, with particular emphasis on preventing charities that are not in compliance with federal tax laws from participating in the CFC," he told Ramstad.

IRS representatives at the House hearings, however, offered Congress little assurance that they would crack down on what Ramstad termed "deadbeat" charities. "Compliance with employment tax rules is not, in general, a requirement for continuing recognition as a tax-exempt organization," said Steven T. Miller, commissioner of the IRS's Tax-Exempt and Government Entities Division.

Although he said that the IRS has the authority to revoke a charity's tax-exempt status "in exceptional circumstances," in practice this is never done. "Available records do not indicate that we have revoked the tax-exempt status of any organization solely because of employment tax non-compliance," he told the subcommittee.

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