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entitled 'CFC Charities: Responses to Posthearing Questions' which was 
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July 7, 2006: 

The Honorable Jim Ramstad:
Chairman:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives: 

Subject: CFC Charities: Responses to Posthearing Questions: 

Dear Mr. Chairman: 

This letter responds to your request for additional information related 
to the subcommittee's May 25, 2006 hearing on whether charities 
participating in the Combined Federal Campaign (CFC) are meeting their 
employment tax responsibilities. Enclosed are our responses to the 
supplemental questions you submitted. Our responses are based on work 
performed during our audit, communication with the Internal Revenue 
Service, our views of generally accepted accounting principles and 
generally accepted auditing standards, and on professional judgment. 

If you have any further questions or would like to discuss these 
responses, I can be reached at (202) 512-7455 or Kutzg@gao.gov. 

Sincerely yours, 

Signed by: 

Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 

Enclosure--1: 

Enclosure I: 

Responses to Supplemental Questions for the Record: 

Submitted by: 

Representative Jim Ramstad: 

Subcommittee on Oversight: 

Hearing on: 

Charities and Employment Taxes: Are Charities in the Combined Federal 
Campaign Meeting their Employment Tax Responsibilities? 

May 25, 2006: 

1. It is my understanding that you came across a number of CFC 
charities about which the IRS has no current information, and which 
they classify as being in "unable to locate" status. Is that correct? 
How many of these did you find participating in the CFC? 

Answer: 

We referred Combined Federal Campaign (CFC) charities with questionable 
exempt status to the Internal Revenue Service (IRS) for further review. 
Based on preliminary research, the IRS classified as "unable to locate" 
more than 40 organizations that participated in the 2005 CFC. The IRS 
also classified more than 80 other organizations as "terminated or 
merged" that participated in the 2005 campaign. According to the IRS, 
this status indicates the IRS either revoked the 501(c) (3) status or 
received notification that the charity had merged with another charity. 
In addition, the IRS identified about 70 organizations from the 2005 
CFC whose employer identification numbers (EIN) matched an EIN of a 
taxable organization with the same or similar name. Therefore, about 
200 organizations of the 22,000 charities that participated in the 2005 
CFC have questionable tax exempt status and may not be legitimate 
charities under 501(c)(3). 

2. OPM emphasizes that it requires financial audits of an organization 
for admission into the CFC. Yet there were more than 1,280 charities 
with tax debt. Wouldn't an independent audit detect any tax debt when 
reviewing an organization's finances? Can you explain if GAO discovered 
this during its examination of CFC charities? 

Answer: 

A charity's outstanding tax debt may or may not be disclosed in a 
charity's financial statements prepared in conformity with Generally 
Accepted Accounting Principles (GAAP), depending on the specific facts 
and circumstances. Several factors affect (1) management's decisions 
about whether to separately disclose liabilities for taxes, and (2) the 
ability of a financial audit to detect a situation where the financial 
statements did not conform with GAAP. For example, management may 
decide to not separately report the liability in the financial 
statements or specifically disclose it in the related footnotes if the 
amount is not material to the financial statements taken as a whole. In 
addition, if charity management assesses the probability of payment to 
be remote,[Footnote 1] an amount would not be recorded or disclosed 
under GAAP. 

Generally accepted auditing standards require an auditor to plan and 
perform an audit to obtain reasonable, but not absolute, assurance 
about whether the financial statements are free of misstatements, 
including any material misstatement of tax debt. However, it is 
possible that an audit would not in all cases detect improper recording 
or disclosure of tax debt, particularly if the amounts involved are 
immaterial to the financial statements or the risk of material 
misstatement is very low. 

As part of our audit and investigative procedures, we requested from 
CFC copies of the charities' independently audited financial 
statements. We found that 4 of the 13 charities we investigated with 
significant tax debt had financial statements that separately reported 
outstanding tax debt either in the body or the footnotes to the 
financial statements.[Footnote 2] For the remaining 9 charities, we are 
unaware of the reasons why the tax debt was not disclosed. 

(192215): 

FOOTNOTES 

[1] For example, the entity may consider the likelihood of payment 
remote because management disagrees with the amount of a tax assessment 
or there may be disputed penalties and interest charges. GAAP defines 
remote as a slight chance of a future event or events occurring. 

[2] We investigated 15 charities and requested from CFC copies of 
audited financial statements included with each of the charity's 
application packages. As of the end of our fieldwork we received 
audited financial statements for 13 of the 15 charities we 
investigated. 

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