Federal charity drive in tax trouble

It's the holiday season and a time for giving. It's also time for the government's big charity drive — the Combined Federal Campaign. Federal workers gave more than $260 million last year, helping more than 20,000 charities.

But federal investigators discovered this year that 6 percent of charities receiving donations owed back payroll taxes, and 15 they audited had engaged in "abusive and potentially criminal activity," including improperly diverting money.

"What is outrageous is that we have people making contributions out of their hard-earned dollars, expecting it to go to some charitable interest, but instead it may be lining the pocket of some tax cheat," says Steve Ellis, a government spending analyst with Taxpayers for Common Sense.

Among the government's approved charities:

  • A museum that owed more than $100,000 in payroll taxes;
  • A rehab center that owed $70,000 yet bought a boat for its director;
  • A clinic that owed $1.5 million, stretching back 15 years.

To see just how lax the federal screening process was, investigators created a fake charity and filled out an application to receive donations. The fake charity was approved.

"When the federal government is recommending charities to their employees that don't actually exist, I can't imagine you could create a worse system," says Trent Stamp, president of Charity Navigator, an independent organization that evaluates charities.

The agency responsible for vetting charities — the Office of Personnel Management — says it has now begun to check whether charities are legally tax-exempt. But officials say the law "does not allow" them to  screen charities’ tax payments.

So this year's book of charities stillincludes hundreds that may owe back taxes.

"This year there will still be some donations that go to tax cheats and bad actor organizations," says Ellis.

Putting a damper on this season of giving.