Federal Rules Make Reform of Charity Campaign Difficult
Last year, the U.S. government collected $268 million from federal employees and distributed the donations to charities, including more than 1,280 nonprofits that owed a total of $36 million in federal taxes.
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Auditors at the Government Accountability Office (GAO) uncovered the tax delinquency issues during an investigation ordered by Congress and published the results in a July report. 
Since then, the Office of Personnel Management (OPM), which oversees the annual Combined Federal Campaign (CFC), has put stopgap measures in place to try to ensure that charities comply with the tax laws. However, officials acknowledge that they are thwarted by a law that bars managers of the CFC fund from even checking whether charities have a history of tax delinquency or fraud, MSNBC.com reported.
Gregory Kutz, the GAO's Managing Director for Forensic Audits and Special Investigations, told MSNBC.com: "In the short term, that's a problem that can't be fixed. It would require a change in the law."
Charities do not pay federal taxes on their income. GAO said most of the unpaid taxes came from failing to collect payroll taxes from their employees or failing to pass the taxes they did collect on to the government. GAO also found shortages in payments to Social Security, Medicare, employer matching contributions to Medicare, state and local income taxes.
GAO found “abusive and potentially criminal activity” in 15 charities. One unnamed mental health clinic, for example, owed more than $1.5 million, with the director diverting payroll tax money to pay his own and other salaries. Also, a drug and alcohol rehabilitation center bought a boat for its executive director's use, even though it owned more than $70,000 in taxes.
The GAO report said: "Until a governmentwide policy is developed that addresses availability of federally sponsored benefits to entities that fail to pay their federal tax obligations, tax delinquent CFC charities may continue to benefit by participating in CFC and potentially receiving donations. Further, unless OPM centralizes charity information and validates whether applicants are legitimate 501(c)(3) organizations, the campaign will also be vulnerable to entities that fraudulently purport to be charities.”
Stephen Ellis, vice-president for programs at Taxpayers for Common Sense, told MSNBC.com: “It shakes your faith in charities and in how your contributions are handled. It's not unlike what happened when the United Way had its scandals. It has a negative impact across the whole range of charities.”
While assigned to Coast Guard headquarters in the mid-1990s, Ellis was the office coordinator for the CFC campaign. “I always looked closely at the lists of charities to see how much of their spending went toward overhead, and how much to program.”
OPM has been screening out charities that spend more than 25 percent of their budgets on overhead costs, but next year that rule will change. Under the new rule, the Federal Times reported, charities can take part in the campaign if they exceed the 25 percent threshold, but they must certify their expenses are reasonable and have plans to lower them.