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Federal fund gives millions to charity tax cheats

When the U.S. government's version of the United Way handed out hundreds of millions of dollars to charities last year, its largesse extended to more than 1,280 nonprofit organizations that collectively owe $36 million in taxes dating back as far as 1988.

When the U.S. government's version of the United Way handed out hundreds of millions of dollars to charities last year, its largesse extended to more than 1,280 nonprofit organizations that collectively owe $36 million in taxes dating back as far as 1988.

At the same time, other federal agencies gave $1.6 billion in grants to at least 170 of the delinquent charities, which account for nearly 6 percent of the approximately 22,700 charities funded by the Combined Federal Campaign.

And every one of 15 charities that underwent a detailed audit by investigators at the Government Accountability Office was found to be engaged in “abusive and potentially criminal activity,” according to a report on the investigation.

The GAO referred the charities to the Internal Revenue Service, for criminal investigation and collection.

Among them was a mental health clinic that owed more than $1.5 million and has a track record of failure to remit payroll taxes stretching back for 15 years. The director of the clinic, the report said, diverted the tax money to pay his own salary and that of some employees.

Meanwhile, a drug and alcohol rehab center that owed more than $70,000 in taxes managed to find money to buy a boat for its executive director's use.

“Rather than fulfill their role as trustees … the directors and senior officers diverted the money for charity-related expenses, including their own salaries, some of which were in excess of $100,000,” according to the GAO report, which drew little notice when it was released in July.

‘It shakes your faith’
“It shakes your faith in charities and in how your contributions are handled,” said Stephen Ellis, vice-president for programs at Taxpayers for Common Sense. “It’s not unlike what happened when the United Way had its scandals. It has a negative impact across the whole range of charities.”

About 1.3 million federal employees, postal workers and others contribute annually to the Combined Federal Campaign and can choose to earmark contributions for specific charities. Like the United Way, the CFC collects and distributes the money it collects, which last year totaled more than $268 million. The U.S. Office of Personnel Management establishes guidelines for eligible charities and monitors the program.

The current fund-raising campaign began in September and ends on Dec. 15. OPM officials say they have established some stopgap measures to try to ensure that donors are giving their money to charities that comply with the tax laws.

But Ellis said he doubts that short-term fixes will work.

“Nobody is really taking charge of it,” he said. “I applaud the (House Ways and Means) committee for looking into it, but it’s well into the CFC contribution season, and without some big changes it’s almost certain they’re going to have some of the same problems. The only way it’s going to get fixed is if the public starts paying attention.”

Ellis brings an informed perspective to the situation. He was office coordinator for the CFC campaign while assigned to Coast Guard headquarters in the mid-1990s. “I’ve given money to CFC,” he said. “I always looked closely at the lists of charities to see how much of their spending went toward overhead, and how much to program.”

Now, as an official in a nonprofit organization himself, Ellis said he sees up-close how money is managed and activities are scrutinized by outside parties.

“When I hear something like this, I feel like a sucker,” Ellis said, “not only as a taxpayer, but as a contributor to NGOs (non-governmental organizations) and someone who works in the nonprofit world.”

Efforts to reform system
The people responsible for vetting the CFC charities and managing the money that federal employees contribute every year have been scrambling to reform the system since the congressionally ordered investigation uncovered the delinquent tax problems. But the effort has run into roadblocks, including a law that prohibits managers of the CFC fund from even checking whether charities that get its money might be committing tax fraud.

The charities are exempt from paying federal taxes on their income, but are still responsible for collecting payroll taxes from their employees and passing it on to the government. Most of the back tax debt comes from income taxes they failed to collect or diverted to day-to-day expenses, as well as interest and penalties on those taxes. But the GAO also found shortages in payments to Social Security, Medicare, employer matching contributions to Medicare, state and local income taxes.

Among the charities that benefit from federal employee contributions are health providers, zoos, museums, advocacy groups and think tanks.

The 15 non-profits that GAO referred to the IRS include a health service provider that owed more than $400,000 in back taxes but nonetheless collected more than $2 million in federal grants from the Department of Health and Human Services, the report said.

And auditors say they have not identified all of the problem charities, which were not identified by name in the report.

Agency can't check tax records
Gregory Kutz, the GAO's Managing Director for Forensic Audits and Special Investigations, said that that the number of CFC-participating charities that are delinquent on their taxes is almost certainly higher than the 1,280 identified by his agency because it didn't count charities that underreport their income or fail to file returns.

A short-term solution to the problem would be to identify charities that have a history of tax delinquency or fraud. But OPM is prohibited from doing that. It cannot even check to see if charities that receive money from the federal employees’ fund have filed routine tax returns required of every tax-exempt organization.

"In the short term, that's a problem that can't be fixed," Kutz told  "It would require a change in the law."

What's more troubling, Kutz said, is that the CFC's minimal screening process opened the door wide for a fake charity to con its way on to the authorized list. Kutz said the GAO actually created a fake charity itself -- and then applied to three local CFC campaigns for money, all of which sent checks.

"We were three for three," he says.  "In one case, we had to answer a few questions on the phone, but then it was fine."

Karin Hope, legislative director for U.S. Rep. Jim Ramstad, R-Minn., who was chairman of the Ways and Means Committee when it called for the investigation, said the committee was tipped to the problem by a charity employee who noticed there was no deduction on his pay stub for payroll taxes. (The Government Accountability Office, which was assigned to sort it out, is an independent investigative arm of Congress).

Charities' tax-exempt status reviewed
OPM Director Linda M. Springer said last week that her agency launched an immediate review of the CFC charities after the report was issued. Working with IRS data, she said, the agency has determined that all the charities receiving money from the CFC were legitimately tax-exempt, except for 132 that have not yet proven their nonprofit status. No federal employee contributions will be given to those organizations until her staff is confident they are legitimate non-profits, she said.

“We rely on the IRS status as our benchmark,” Springer said. “We’re comfortable in relying on them.” Ultimately, however, she said her agency has to make sure the CFC runs smoothly and donors can be confident their dollars are going to the right places.

“The responsibility is with OPM,” she said.

An IRS spokesperson declined to say whether the tax-collection agency is investigating the 15 charities GAO referred to it for collection and criminal investigation, citing taxpayer confidentiality. The spokesperson responded to other questions about the GAO findings by referring to the IRS written comments in the report.

In those comments, the IRS said it would work with the OPM “to implement a program to verify the tax-exempt status of CFC charities,” and is reviewing the 15 referred cases “and will take further action if warranted.”