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Tax-Exempt Nonprofits Owe Millions in Payroll Taxes

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Some tax-exempt organizations are seriously delinquent in remitting payroll taxes, but the IRS doesn’t appear too eager to go after them, according to a recent report.

Tax-exempt organizations are generally not required to pay income taxes, but they are required to pay other taxes, such as payroll taxes.

Not doing so results in millions of dollars in lost tax revenue.

In a study released last week, the Treasury Inspector General for Tax Administration (TIGTA) determined that some 64,200 tax-exempt organizations — 3.8% of them — owed nearly $875 million of federal tax as of June 16, 2012.

Some organizations had small tax debts, but approximately 1,200 tax-exempt organizations owed more than $100,000 each.

Unpaid taxes were often associated with multiple tax periods. TIGTA identified nine organizations that each had federal tax debt spanning a decade or more, collectively totaling more than $5.5 million.

“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,” J. Russell George, treasury inspector general, said in a statement. “Failure to remit these taxes is a very serious matter.”

TIGTA was established in 1998 to provide independent oversight of IRS activities. It said its review aimed to determine whether, and to what extent, tax-exempt organizations had federal tax debt, and to identify actions the IRS’ exempt organizations function had taken to address known noncompliance.

The inspector general reviewed 25 tax-exempt organizations that appeared to be among the worst examples involving unpaid federal tax. These, it said, were not representative of the population of all tax-exempt organizations with unpaid tax.

Tigta determined that the 25 organizations — all falling under Internal Revenue Code 501(c)(3) — generally had received $148 million in government payments over a three-year period, including Medicare, Medicaid and government grants; had annual revenue of some $167 million; and owned assets of more than $97 million.

All 25 groups continued not to remit payroll and other taxes, including penalties and interest, totaling upward of $25 million.

Passing the — uh — Buck

The Internal Revenue Code does not authorize the IRS to revoke tax-exempt status based on failure to pay payroll taxes, TIGTA’s statement noted.

As of May 2013, it said, most of the organizations that it had reviewed were still recognized by the IRS as tax exempt.

It said the IRS’ exempt organizations function had completed several examinations, but was generally unaware of the behavior of those organizations because another IRS business unit was responsible for collecting the delinquent tax debt.

TIGTA recommended that the director of exempt organizations do three things:

  • Coordinate with Small Business/Self-Employed Division management to receive relevant collection information
  • Periodically complete analyses to identify for examination (if necessary) organizations that potentially abuse their tax-exempt status
  • Work with the Department of the Treasury to evaluate whether a legislative proposal was warranted to strengthen the IRS’ ability to enforce payroll tax noncompliance by tax-exempt organizations

IRS management’s response was cool, TIGTA said.

It disagreed with the first two recommendations, but agreed to inform Treasury of TIGTA’s third recommendation.

TIGTA said the IRS should follow through on all of the report’s recommendations to ensure these organizations properly remit all payroll taxes.

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