Exempt Organizations and the “Tax Gap”

The GAO is conducting a series of investigations into the causes of the “tax gap” — the difference between the amount of taxes that should legally be paid to the federal government and the amount actually paid under the voluntary reporting and payment system.  In a recent report, the GAO found that recipients of federal grants owe nearly $1 billion in taxes while still receiving federal grants.  It is almost certain that exempt organizations are not responsible for the approximately $300 billion tax gap.  Still, the report cites several instances of exempt organizations/grant recipients failing to pay withholding taxes and thus contributing to the tax gap.  Here is one example:

Case 10:

This not-for-profit grant recipient stopped making payroll tax deposits for several years beginning mid-2000s, accumulating unpaid payroll taxes totaling several hundreds of thousands of dollars. IRS filed liens against grantee assets and assessed the exempt organization with payroll tax violation penalties and interest totaling tens of thousands of dollars. A key grant recipient officer had a prior conviction for tax evasion and was again investigated for improperly using grant funds to purchase expensive clothing, a luxury vehicle, and lavish vacations and to pay taxes assessed from a prior tax evasion conviction. A key grantee officer had numerous individual income tax delinquencies.

These “bad apple” cases unfairly taint the entire sector, of course, while also fueling calls for more government regulation (translated as fewer charitable dollars spent on charitable beneficiaries).  For everything you ever wanted to know about applying for and administering federal grants to nonprofit organizations see OMB Circular No. A-110.

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