Thousands of Tax-Exempt Firms Owe $1B in Taxes

Almost 55,000 tax-exempt organizations had almost $1 billion in federal unpaid taxes at the end of September 2006, according to a new government report (pdf).

While this report covers tax-exempt businesses of all sizes, it should give small business owners pause because you can be sure lawmakers will step in and do something about this. Charitable organizations are the largest bloc of tax-exempt groups, but small groups like recreational clubs, credit unions, labor organizations and civic and business leagues also fall into this camp.

The majority of the debt represented payroll taxes, according to the new Government Accountability Office study released Wednesday. Not paying payroll taxes is a felony. The report also said the whopping $1 billion figure is likely understated because "some exempt organizations have understated tax liabilities or did not file tax returns.

The GAO investigated 25 exempt organizations and found abuses and possible criminal activity, including failures to remit payroll taxes withheld from employees. Some of the top dogs at these companies diverted money to themselves, which led to million-dollar homes and luxury vehicles.

"Despite repeatedly abusing the federal tax system, these entities continued to retain their exempt status," the report said.

The GAO conducted the study to review whether tax exempt organizations, which don't have to pay federal income taxes, were legitimately remitting amounts withheld from employees' wages for federal income tax, Social Security and Medicare.

In a letter to Rep. Jim Ramstad (R-Minn.), who requested the study and is a member of the House Ways and Means Oversight Subcommittee, the GAO said the success of the nation's tax system depends on the "public's perception of its fairness... unfortunately the tax gap undermines the credibility of the tax system and costs the federal government billions of dollars in lost revenue."

The GAO cites IRS data as putting the tax gap - the difference between what taxpayers should pay on a timely basis and what the IRS collects through voluntary compliance and enforcement -- at $290 billion.

By Sharon McLoone |  July 25, 2007; 4:52 PM ET How Do I...
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