Tax-Exempt Groups Owe Millions in Tax Debt: Report
More than 64,200 tax-exempt organizations owed nearly $875 million in back taxes to the federal government as of June 16, 2012, according to a report released on Wednesday by the Treasury Inspector General for Tax Administration (TIGTA).
Sixty-nine percent of that $875 million tax debt was comprised of payroll taxes and related penalties and interest, according to IRS records.
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 owed payroll taxes, including related penalties and interest, spanning 10 or more years that collectively totaled more than $5.5 million.
Tax-exempt organizations, such as charities and labor groups, are generally not required to pay income taxes, but they are required to pay other taxes, such as payroll taxes that are withheld from employees’ wages. Failure to remit payroll taxes is a felony under US law, punishable by a fine, imprisonment, or both. Failure to segregate payroll taxes can be a criminal misdemeanor offense.
“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,” Treasury Inspector General J. Russell George said in a written statement. “Failure to remit these taxes is a very serious matter.”
TIGTA conducted the audit to determine if, and to what extent, these groups have federal tax debt and to identify actions the IRS Exempt Organizations division has taken to address noncompliance.
Twenty-five tax-exempt organizations – all of which qualified under Section 501(c)(3) of the Internal Revenue Code and 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) – were reviewed by Treasury inspector general’s office investigators.
TIGTA determined that these organizations generally received government payments over a three-year period of $148 million, including Medicare, Medicaid, and government grants. The tax-exempt groups 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.
Also, TIGTA examined 52 officers of the 25 tax-exempt groups and found that 22 officers engaged in abusive activity:
- Fourteen officers did not voluntarily file Form 1040 personal tax returns to report almost $2.7 million in salaries for the three years under review.
- Seven officers underreported their wages on their tax returns by nearly $350,000.
- Four officers also received Form W-2 wages from three other tax-exempt organizations. Collectively, tax-exempt organizations related to the four officers had federal tax debt of nearly $3 million.
The US 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 IRS Exempt Organizations division 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 debt, according to TIGTA.
IRS: Report ‘Paints an Incomplete Picture’
In its report, TIGTA recommended that the director of the Exempt Organizations division coordinate with IRS Small Business/Self-Employed division management to receive relevant collection information. It also instructed the Exempt Organizations division to periodically complete analyses to identify tax-exempt organizations that potentially abuse their exempt stats for examination. Finally, TIGTA wanted the division to work with the US 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.
In its response to the report, IRS management disagreed with the first two recommendations, but agreed to apprise the Treasury of TIGTA’s third recommendation.
“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,” Donna Hansberry, deputy commissioner of the IRS Tax Exempt and Government Entities division, wrote on behalf of the agency. “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 four, determined that 22 were not liable for the penalty, continued open investigations of four, and proceeded with appeals of *** one *** who have chosen to exercise those rights.”
She also noted that reductions in the IRS’s budget have stretched enforcement resources across the agency. In fiscal year 2014, the IRS’s budget was reduced by nearly $850 million less compared to FY 2010. During that same time period, the agency saw the number of key enforcement personnel drop by 3,000 positions.