Tax-Delinquent, and Even
Charities Pass CFC Screens
- published in the August 2006
issue of the Charity Rating Guide & Watchdog Report
For many donors, an easy, convenient way to donate
to charity is through the United Way, the Combined Federal Campaign
(CFC), or other workplace giving campaign that allows employees
to have money deducted directly from their paychecks for charity.
For U.S. federal employees, including civil servants, postal workers,
and military personnel, the CFC is the only charity solicitation
campaign permitted by law in the workplace. The money raised is
later distributed to the more than 22,000 CFC charities and charity
federations participating in the program based on causes of the
donor's choosing. The U.S. Office of Personnel Management (OPM),
the governmental department in charge of the CFC, reported another
record year of pledges in 2005, amounting to $268.5 million.
With so much money flowing through the CFC, and with
the government in charge of setting guidelines for charity participation
in the program, many donors may have been surprised by recent news
that about 1,280 CFC charities are currently more than $36 million
in aggregate debt for back payroll and other federal taxes. Failure
to pay taxes or other bills is a serious issue, as it may be a signal
that a charity's dire financial situation will force it to shut
down. This could result in donations to the charity being used for
tax-related or other administrative expenses, rather than for programs
the donor intended to support. Interestingly, this tax debt did
not stop 170 of these charities from receiving about $1.6 billion
in federal grants in 2005, according to U.S. Government Accountability
Office (GAO) testimony before the House Committee on Ways and Means.
When AIP contacted the GAO to obtain the names of the charities
listed in their report, we were told, "The names of the charities
have not been released, are not available to the public," and
they "have no plans to [release the names]."
Millions in tax debt is not the only problem the GAO
found with the CFC. Other problems the GAO cites in its testimony
include the OPM not verifying charity applicants' exempt organization
status, and lack of controls to prevent fake charities from enrolling
in the CFC program. The OPM states on its web site that it is accountable
for insuring that "all charitable organizations listed in the
CFC have met strict eligibility requirements on an annual basis,"
and that "charities that apply to receive funds through the
CFC are required to submit to extensive review of their financial
and governance practices prior to acceptance." Despite these
claims, the GAO was able to apply to three local campaigns with
a fictitious charity using fake documents and an erroneous tax payer
I.D. number. "In all three campaigns, our application for participation
in the 2006 CFC was accepted, said the GAO in its report."
The OPM confirmed that "the GAO expressed concerns
about OPM's ability to ensure that charities participating in the
CFC are legitimate 501(c)(3) entities," then added that they
"have taken steps to assure participants in the 2006 CFC have
current, valid tax exempt status." "It's a fluid situation.
The office is in the process of working on it," said Michael
Orenstein, Spokesperson for the OPM, when asked what their office
would do to prevent future problems with the approval process.
Unfortunately, even if the money collected in the
CFC is distributed to legitimate charities, it does not guarantee
that donations will be used efficiently. CFC guidelines require
that charities have administrative and fundraising expenses of no
more than 25% of total support. The CFC guidelines make an exception
for charities that exceed the percentage limit by allowing them
to participate in the campaign if they certify that their actual
expenses are reasonable and provide to the CFC an explanation and
plan to reduce overhead expenses below 25%.
AIP worries that the 25% overhead limit, computed
using self-reported figures from a charity's tax form, may leave
potential room for charities to skew their reporting to meet this
guideline. Other guidelines do require that discrepancies between
the audit and the tax form be reconciled by the CPA completing the
audit. Still, AIP questions the adequacy of this part of the screening
process which allows many charities poorly rated by AIP to meet
the requirements. For example, Feed the Children, a charity
rated F by AIP for spending only 19% of cash expenses on program,
and spending $66.00 to raise $100, participates in the CFC.
The GAO referred 15 of the charities that engaged
in abusive and potentially criminal tax-related activity to the
IRS for consideration of additional collection or criminal investigation.
When AIP contacted the OPM to find out if the charities involved
in the report, specifically these 15, would still be allowed to
participate in the CFC program, we were told "If any of those
charities apply and otherwise meet eligibility and public accountability
requirements, they will be able to participate."
AIP strongly believes that the government's refusal
to release the names of the charities involved is a disservice to
donors, who have a right to know if the charities they are funding
or considering donating to are tax cheats. Many charities use their
participation in the CFC in their advertising and other promotional
materials as a means of generating support from the public. Some
donors may be hesitant to donate through the CFC without knowing
which bad apples are spoiling the barrel.