Tax-Exempt Organizations Owe $875 Million in Delinquent Payroll Taxes

TIGTA, or the Treasury Inspector General for Tax Administration recently found that about 4% (3.8%) of tax exempt organizations were delinquent in paying Federal payroll taxes. In fact, TIGTA found that over 64,000 tax exempt organizations owed over $875 million in Federal taxes since June 16th, 2012. Moreover, many of these 64,000 tax-exempt organizations were delinquent over many tax periods.

Although tax-exempt organizations do not have to pay Federal income taxes, they are required to pay Federal payroll taxes which includes social security and medicare taxes. What makes this report daunting, is that TIGTA reviewed 25 tax-exempt organizations over a 3-year period with delinquent payroll taxes and found that these same organizations were receiving over $148 million in government assistance such as government grants, Medicaid, and Medicare.

In the wake of the IRS scandal last year with many organizations losing tax-exempt status, nothing in the Internal Revenue code allows the IRS to revoke the tax-exempt status if an organization fails to pay payroll taxes.

What TIGTA recommended that the Director, Exempt Organizations to:

• Have the Department of the Treasury evaluate if legislation is needed to address and enforce payroll tax compliance for tax-exempt organizations
• Complete analyses repeatedly to identify tax-exempt organizations that abuse their tax-exempt status for examination
• Coordinate with Small Business/Self-Employed Division to obtain relevant collection information

The IRS disagreed with the last two recommendations but agreed with the first recommendation above.