oversight

Action Being Taken to Prevent Refundable Payments of Social Security and Federal Unemployment Taxes by Charitable Organizations

Published by the Government Accountability Office on 1977-02-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          DOCUMENT RESUME
 00279 - [A0751137]
 Action Being Taken to Prevent Refundable Payments of Social
 Security and Federal Unemployment Taxes by Charitable
 organizations. GGD-76-102; B-137762. February 1, 1977. 28 pp.

 Report to Sen. Russell B. Long, Chairman, Jcint Committee on
 Internal Revenue Taxation; Rep. Al Ullman, Vice Chairman; by
 Elmer B. Staats, Comptroller General.
Issue Area: Tax Administration (2700).
Contact: General Government Div.
.udget Function: General Government: Other General Government
    (806).
organization Concerned: Department of the Treasury; Internal
    Revenue Service.
Congressional Relevance: House Committee on Vays and Means;
    senate Committee on Finance; Joint Committee on Internal
    Revenue taxation.
Authority: P.L. 94-563. 26 U.S.C. 501(c)(3). 26 U.S.C.
    3306(c) (8).

          Many charitable organizations are exempt by law from
paying social security and unemployment taxes. Hcwever, the
exemption frca social security taxes can be waived if a written
request or waiver is filed with the Internal Revenue Service. If
a waiver was not filed and payments were made, the organization
could withdraw any payments accepted over the 'ast 3 years.
Transcripts of the emoloyment tax payments of 1,000 randomly
selected charitable organizations were examined and waiver
certificate files were reviewed. Taxpayer case files, pertinent
statutes, and regulations were also examined.
Findings/Conclusions: In 1975 about 12,700 to 20,200
organizations which had not waived their exemption paid social
security taxes ranging from $118 to $369 million. Because of
Internal Revenue Service administrative errcrs, these amounts
were all refundable. Legislation signed in October 1976 designed
to correct the problem stated that if charitable organizations
have made social security payments for three consecutive
calendar quarters, they could not withdraw their money whether
or not they failed to file a waiver. Pursuant to the law, the
Internal Revenue Service is taking actions which will also
correct the lesser problem of improper unemployment tar
collections. Recommendations: The Commissioner of Internal
Hevenue should make sure that all charitable organizations are
identified properly and that their waiver statuses are recorded
properly. Present procedures should he revised sc charitable
organizations are identified at the time they officially receive
tax-exempt status. (Author/SC)
r,.
                         REPORT TO THE JOINT COMMITT7'EE
                         ON INTERNAL REVENUE TAXA TION
                         CONGRESS OF THE UNITED STATES
        - ^i~            BY TIHE COMPTROLLER GENERAL
      "YI: ^,'ad-;
        '( ( I !I   \
                         OF THE UNITED STATES



                        Action Being Taken To Prevent
                        Refundable Payments Of
                        Social Security And
                        Federal Unemployment Taxes
                        By Charitable Organizations
                        interrnal Revenue Service
                        Many -haritable organizations are exempt by
                        law from paying social security and unem-
                        ploynrent taxes. However, the exemption
                        from social security taxes can be waived if a
                        written :equest or waiver is filed with IRS. If
                        a waiver was not filed and payments were
                        made, the orgrnization could withdraw any
                        payments accepted by I RS over the last 3
                        years.

                        In 1975 about 12,700 to 20,200 organiza-
                        tions which had not waived their exemption
                        paid social security taxes ranging from $118
                        to $369 million. Because of IRS administra-
                        tive errors, these amounts all were refundable.

                        Legislation was signed in October 1976 to
                        correct the problem. Public Law 94.563 states
                        that if charitable organizations have made
                        social security payments for three consecutive
                        calendar quarters, they cannot withdraw their
                        money whether or not they failed to file a
                        waiver. Pursuant to the law, IRS is taking
                        actions which will also correct the lesser r-o
                        bleni of improper unemployment tax coilec-
                        tions.
                        GGD-76-102                                        FEB.   11 9 7 7
                COMPTROLLER   LGENERAL OF THE UNITED STATES
                          WAoMIN"TON, D.C.   WU.




6-137762




To tne Chairman and Vice Chairman
Joint Committee on Internal Revenue
  Taxation
Congress of tnp United States

     This report, one of a series in response to your
Committee's February 28, 1975, request, addresses the cause
and effect of certain procedural deficiencies with respect
to the Internal Revenue Service's acceptance of employment
tax payments from tax-exemt charitable organizations.

     Copies of this report are being sent to the Director,
Office of Management and Budget; the Secretary of   e Treas-
ury; and the Commissioner of Internal Revenue.




                                 Comptroller General
                                 of the United States
                          C o n t e n t s
                                                          PageContents
 DIGEST                                                        i
CHAPTER

       1    INTRODUCTION                                   1
                Social security coverage--an option
                  for certain organizations                1
                Federal unemployment taxes not re-
                  quired of charitable organizations       3
                Scope of review                            4
       2   MILLIONS IN REFUNDABLE EMPLOYMENT TAX
             PAYMENTS MADE TO IRS                          5
               How organizations could obtain refunds
                 and what happened if they did             7
      3    IRS EPFORTS TO CURB ACCEPTANCE OF REFUNDABLE
             SOCIAL SECURITY AND FEDERArL UNEMPLOYMENT
             TAX PAYMENTS                                 11
               Identification of charitable
                 organizations--a subjective technique    11
               Need for better identification of
                 charitable organizations recognized
                 by IRS                                   14
      4    CONCLUSIONS AND RECOMMENDATIONS                16
               Recommendations                            17
               Agency comments and our evaluation         18
APPENDIX

      I     Statistical projections of refundable
              Federal employment tax payments             20
  II        Petter dated November 13, 1976, from the
              Commissioner of Internal Revenue            23
 III        Letter dated November 10, 1976, from the
              Assistant Secretary, Comptroller, Depart-
              ment of Health, Education, and Welfare      27
  IV        Principal Department of the Treasury
              officials responsible for administering
              activities discussed in this report         28
                           ABBREVIATIONS
GAO        General Accounting Office
IRS        Internal Revenue Service
COMPTROLLER GENERAL'.. REPORT                ACTION BEING TAKEN TO
TO THE JOINT COMMITTEE ON                    PREVENT REFUNDABLE PAYMENTS
INTERNAL REVENUE TAXATION                    OF SOCIAL SECURITY AtD
CONGRESS OF THE                              FEDERAL UNEMPLOYMENT TAXES
UNITED STATES                                BY CHARITABLE ORGANIZATIONS
                                             Internal Revenue Service

              DIGEST
              By its failure to effectively monitor the
              filing of waiver certificates which indicate
              a desire for coverage, the Internal Revenue
              Service (IRS) exposed social security trust
              funds to possible withdrawals of $118 to
              $369 million of payments made by charitable
              organizations and their employees during 1975.
              Total potential withdrawals were much more
              because these organizations and their employ-
              ees also had the right to claim refunds for
              those payments accepted improperly by IRS
              during 1973 and 1974.  (See p. 5.)
              Drawing in part on information provided by GAO,
              the Congress passed legislation to prevent
              such withdrawals.   Public Law 94-563, signed by
              the President on October 19, 1976, states that
              if charitable organizations have made social
              security payments for three consecutive calen-
              dar quarters they cannot withdraw their money
              regardless of whether they failed to file a
              waiver certificate.   (See p. 1.)
             Charitable organizations--operated exclusively
             for religious, charitable, scientific, test-
             ing for public safety, literary, educational
             purposes, or preventing cruelty to children
             or animals--need not participate in the so-
             cial security program or pay Federal unemploy-
             ment taxes. They can elect to participate
             in the social security program by filing a
             waiver certificate with IRS with a list con-
             taining the signatures of all concurring em-
             ployees. The list is forwarded to the Social
             Security Administration where a permanent
             record is maintained. IRS is supposed to make
             sure that waivers are submitted by the organiza-
             tions before it accepts social security pay-
             ments.  (See pp. 2, 3, and 4.j


-TV
 MrI.        Upon rermcval, the report
cover date should e noted hereon.        i                GGD-77-102
But IRS' business master file does not
identify accurately all the charitable organi-
zations it contains nor does it contain accu-
rate information on whether organizations
filed waivers. On the basis of a random sample
of 1,000 organizations, GAO estimates that dur-
ing 1975 some 12,700 to 20,200 charitable or-
ganizations made social security payments to
IRS ranging from $118 to $369 million without
filing waiver certificates. (See pp. 4, 5,
and 13.)
Before Public Law 94-563. the Internal Revenue
Code permitted the refund of money paid into
the social security trust funds by organiza-
tions that had not filed waiver certificates.
If corrective legislation had not been passed,
many employees of these organizations may have
requested withdrawal when given the opportunity
to do so by their employers.

Some indication of possible withdrawals was
provided by the experience of IRS' Ogden Service
Center. At that center, about 65 percent of the
employees--about 7,000 out of 10,700--of 25 orga-
nizations which had made social security pay-
ments without having filed a waiver certificate,
withdrew when given the option by their employ-
ers. (See pp. 5 and 6.)
The need for legislation would have been somewhat
less had IRS administered the law adequately.
However, IRS did not act to make sure that all
charitable organizations were identified pro-
perly until 1976, although it had known it
needed to since 1973.   (See pp. 14 and 15.)
The action now begun should help IRS detect all
charitable organizations previously not identi-
fied and allow it to identify those organiza-
tions making social security payments without
having waiver certificates on file.  (See
p. 16.)

The Commissioner of Internal Revenue should
make sure that this program is completed and
that charitable organizations and their waiver
status are recorded properly. (See p. 18.)




                     ii
The Commissioner of Internal Revenue responded
that IRS is continuing to bring its business
master file up to date so charitable organiza-
tions and their waiver status can be identi-
fied. During the next 6 months the organiza-
tions affected by Public Law 94-563--those
making social security payments without a
waiver on file--will be identified and their
status recorded properly. During the foliowing
6 months all other charitable organizations
will be identified and classified.  (See pp. 13,
23, and 24.)

IRS also should make sure that only proper so-
cial security payments are accepted. Its ac-
tions to date have not assured this; many
charitable organizations are not identified as
such because IRS personnel do not have enough
data.  (See p. 12.)

The Commissioner of Internal Revenue should
revise present procedures so charitable ur-
ganizations ere identified at the time they
officially receive tax-exempt status. Thus,
they will be identified as organizations
which must file waiver certificates to make
social security payments. IRS agreed to change
its procedures. (See f. _8.)

Unemployment tax returns should not be filed
by charitable organiations. But GAO estimates
that from 1972 throt-gh 1.975 about 7,200 to
13,200 organizations made Federal unemployment
tax payments rangin' from $2.8 to $7.6 million.
These payments shou.ld not have been accepted
by IRS. The Commissioner should order the re-
fund, with interest, of all such tax payments
which IRS accepted over the last 3 years.
(See pp. 5 and 18.)

The Commissioner of Internal Revenue said that
after IRS has identified all charitable organi-
zations, those organizations which made un-
necessary Federal unemployment tax payments
would be notified and refund arrangements made.
(See pp. 19 and 25.)




~Iw~-5~LUMii
                          ChAPTER 1
                        INTRODUCTION
     Charitable organizations are not required to pay social
security taxes unless they express an intentiun to do so by
filing a waiver certificate with the Internal Revenue Service
(IRS).  If an organization paid such taxes without filing a
waiver certificate, the monies were refundable to the payer
for the 3-year period preceding detection of the payment.
However, Public Law 94-563, signed on October 19, 1976,
established provisions which made payment of social security
taxes for three consecutive calendar quarters the equivalent
of a constructive filing of a waiver certificate. This ef-
fectively prevented charitable organizations which had been
making social security tax payments without filing a waiver
from obtaining a refund. It also negated a potentially
severe drain on the social security trust funds.

     Sponsors of this legislation used the findings pre-
sented in a draft of this report to support their position
that corrective action was necessary. 1/ This report
discusses conditions which pointed up the need for such
legislation.

     As stated, charitable organizations are not required
to make social security tax payments. Neither are they
required to pay Federal unemployment taxes. Our review
was made to answer such questions as:

     -- To what extent are charitable organizations making
        unnecessary social security and Federal unemploy-
        ment tax payments?

     -- Why does this problem exist?

    -- WILat is IRS doing to ctrrect this situation?
SOCIAL SECURITY COVERAGE--AN OPTION
FOR CERTAIN ORGANIZATIONS

     Social security taxes are collected by IRS and deposited
in various trust funds to be used by the Social Security



l/The Joint Committee on Internal Revenue Taxation released
  the draft report on September 21, 1976, so our findings
  could be used during legislative consideration of H.R. 15571.


                               1
Administration to pay retirement, survivor, disability, and
medical benefits.  Generally, employers are required to
withaold for social security purposes 5.85 percent of the
f rst $15,300 ($16,500 in 1977) earned by an employee.  The
employer is also required to match the employee's contribu-
tion and file a tax return with IRS on a quarterly basis.

      While social security coverage is mandatory for most
employco.,  there are two notable exceptions: employees of
Federal, State, and local governmnents and employees of
certain charitable organizations.   The charitable organiza-
tions are cited in 26 U.S.C. 501(c)(3) and include:

     "Corporations, and any community chest, fund, or
     foundation, organized and operated exclusively for
     religious, charitaLe3,  scientific, testing for pub-
     lic safety, literary, or educational purposes, or
     for the prevention of cruelty to children or ani-
     mals, no pait of the net earninjs of which inures
     to the benefit c.f any private shareholder or in-
     dividual, no substantial part of the activities of
     which is carrying on propaganda, or otherwise at-
     tempting, to influence legislation, and which does
     not participate in, or intervene in (including the
     publishing or distributing of statements), any poli-
     tical campaign on behalf of any candidate for
     public office."

     About one-third of the approximately 750,000 active tax-
exempt organizations in IRS files are classified as chari-
table, and they employ an estimated 4 million persons.  In
addition, a large group of charitable-type organizations,
such as churches, are not required to apply to IRS for tax-
exempt status.  As a result, IRS does not have reliable data
on the total number of such organizations.

     Prior to 1950, charitable organizations and their employ-
ees were excluded from the social security program.   However,
with enactment of amendments to the Social Security Act in
1950, individuals and organizations wanting coverage were
given an opportunity to obtain it on a strictly voluntary
basis.  Compulsory participation was not instituted due to
congressional fear that such a requirement might endanger
the tax-exempt status of these organizations.   As a result,
the law requires an organization desiring social security
coverage to file a certificate with IRS waiving its exemp-
tion from social security taxation.   Employees of the or-
ganization at the .time the waiver certificate is filed are
given the option of participating and, if they decide to do
so, must sign a form accompanying the certificate which has
the effect of waiving their statutory right of exemption.

                             2
     The option to obtain social security coverage applies
to employees on an organization's payroll during the calen-
dar quarter the waiver certificate is filed with IRS and
former employees who had been on the payroll at any time
between the effective coverage date of the certificate and
the date it was actually filed. Employees hired after the
calendar quarter in which the certificate is filed are auto-
matically covered and must participate in the program. Once
a waiver certificate and its addendum, a list of those who
wish to participate, is approved by IRS, the addendum is
sent to the Social Security Administration for its files.
The list of participants may be amended up to 2 years after
the calendar quarter in which the waiver certificate is
filed to include eligible former employees, individuals who
originally chose not to elect coverage but later reversed
the decision, and employees hired in the calendar quarter
the certificate was filed but after the actual filing.

     After a waiver certificate has been in effect for 8
years, an organization can initiate action to terminate it
with or without employee concurrence. However, IRS must be
given a 2-year advance notice. The resultant 10-year period--
either by coincidence or design--provides employees who have
been with the organization since inception of the program the
40 quarters of coverage which is the maximum amount needed
by employees to obtain minimum social security retirement
benefits. But, once an organization terminates its waiver
certificate, the organization can never again secure cover-
age for its employees by filing another waiver certificate.

     To provide charitable organizations maximum opportunity
and incentive to participate An the social security program,
provisions have also been enacted which allow an organization
to obtain retroactive coverage. Under these provisions an
organization filing a waiver certificate can elect to have
social security coverage retroactively effective up to 5
years before the calendar quarter in which the waiver was
filed.  If the retroactive payments are made by the due date
of the first return after the waiver certificate is filed,
IRS does not assess any interest charges.
FEDERAL UNEMPLOYMENT TAXES NOT
REQUIRED OF CHARITABLE ORGANIZATIONS

     Federal uinmployment taxes are collected by IRS and
deposited in the Unemployment Trust Fund for use by the De-
partment of Labor to pay administrative costs of State un-
employment programs. Generally employers must pay 3.2 per-
cent of the first $4,200 of wages paid each employee during



                             3
tne calendar year; but this can be reduced by a credit of up
to 2.7 percent for contributions paid into State unemploy-
ment programs. Charitable organizations represent an excep-
tion to this. They are exempt from Federal unemployment taxes
(26 U.S.C. 3306(c)(8)) and are liable only for contributions
to the States. Where States have unemployment programs, State
collections are used to pay benefits, and if employees of
charitaDle organizations are covered, they are eligible for
them.

SCOPE OF REVIEW

     Our review of the employment tax payment practices of
charitable organizations was made at the IRS national office,
Washington, D.C.; the Chicago District Office; the Kansas
City and Ogden Service Centers; and the Social Security Ad-
ministration, B-ltimore, Maryland. We examined transcripts
of the employment tax payments of 1,000 randomly selected
charitable organizations and reviewed waiver certificate
files.  we also examined taxpayer case files, pertinent stat-
utes, and regulations, and we interviewed IRS district, serv-
ice center, and national office personnel.

     The random sample of 1,000 was drawn by IRS and included
charitable organizations from States throughout the Nation.
From the data collected in this sample, we made numerical and
dollar projections considered to be statistically reliable--
at a 95-percent confidence level--of the approximately 242,000
active charitable organizations on the exempt organization
master file as of June 1975.




                             4
                          CHAPTER 2

              MILLIONS IN REFUNDABLE EMPLOYMENT

                  TAX PAYMENTS MADE TO IRS
     During calendar year 1975, an estimated 12,679 to 20,233
charitable organizations made from $118.4 to $368.8 million in
social security payments to the Internal Revenue Service with-
out having filed a waiver certificate. 1/ Also, during the
period 1972-75, an estimated 7,156 to 13,174 charitable orga-
nizations paid from $2.8 to $7.6 million in unnecessary unem-
ployment tax payments which has not been refunded. It is also
conceivable that churches or other nonprofit organizations
that are not required to apply to IRS for tax-exempt status
were making unnecessary social security and Federal unemploy-
ment tax payments. If so, it is unlikely that these organiza-
tions--which are statutorily exempt from such payments--will
get a refund because IRS cannot readily Adentify them.

      Prior to tne signing of Public Law 94-563, if a chari-
tatle organization made social security payments but failed
to file a waiver certificate disclaiming its exempt status
under applicable provisions of the Internal Revenue Code, it
was potentially detrimental to both the social security trust
funds and to the organization's employees.   If the waiver was
not filed, the organization and its employees were entitled
to a full refund of any payments accepted by the Service over
the prior 3-year period--even though these payments were made
with the expectation of coverage. This period represented
the applicable statute of limitations for refunds of overpay-
ments under the Internal Revenue Code. Moreover, the Social
Security Administration could have refused to credit the em-
ployee's account for benefit purposes during the 3-year period,
thus leaving the employee only the right to obtain a refund of
his payments, plus interest, during that time. Taking the re-
fund potential into consideration, if every one of the afore-
mentioned organizations which had made payments but had not
filed a waiver certificate decided to withdraw from the sys-
tem, the monetary drain could have been approximately three
times the $118 million to $369 million paid into the fund in
1975.


1/These projections are based on a random sample described in
  appendix I and are stated at a 95-percent confidence level.
  It excludes one charitable organization--making large pay-
  ments--because of the effect its inclusion would have cn
  our dollar projections. If included, the dollar amount
  cited would increase from a range of $118 million to
  $369 million to $506.6 million with a sampling error of
  +$444.8 million.
                              5
     It is unrealistic to assume that every employee or or-
ganization which was eligible to leave the program would have
done so. However, a substantial number of withdrawals from the
program was more than just a theoretical possibility--it was a
real probability. This was demonstrated in a series of events
which culminated with IRS' closing of a tax loophole in 1976
which not only had been costly to the Government but, more
importantly, revealed the willingness of employees of charit-
able organizations to divest themselves of any ties to the
social security program.

     During the period 1973-75, a number of charitable or-
ganizations took advantage of conflicting provisions in the
tax law that allowed an organization which had been making
social security payments, but had not filed a waiver certi-
ficate, co withdraw money paid over a 3-year period with in-
terest. The principal could then be reinvested into the
trust funds to obtain retroactive coverage for those employ-
ees wishing to continue in the program. The law did not
require repayment of the interest, and those organizations
which took advantage of these provisions made windfall in-
terest profits. Regulations requiring organizations to pay
back all interest received on any amounts reinvested for
employees requesting retroactive coverage closed this loop-
hole. However, 65 percent of the employees of organizations
which claimed refunds through the Ogden Service Center left
the social security program.

      Specifically, our review showed that 13 large charitable
organizations filing returns at IRS' Ogden Service Center used
these provisions to obtain refunds of about $17 million plus
interest of $1.7 million. These organizations reinvested
$6.2 million of the social security refunds for those employ-
ees who wished to continue in the program and kept approxi-
mately $600,000 in interest paid by IRS on this amount. The
remaining $11 million represented matched employee/employer
funds which was withdrawn ior individuals who chose to ter-
minate their participation in the program. 1/ Data from these
13 organizations plus 12 other charitable organizations which
filed for refunds of social security payments at this Service
Center showed that 6,991 of the 10,735 employees involved in
refund claims opted for termination when given the opportunity
by their employers.



1/If these employees subsequently worked for an organization
  that was required to pay social security taxes, they would
  automatically be required to participate.



                             6
     Termination is rarely in the best interest of the em-
ployee. Even though an individual may be fully insured for
retirement, survivor, disability, and health benefits, it is
generally advantageous to remain in the program because dis-
aoility benefits for a worker and his family are lost after
5 years without coverage. Moreover, the amount of retirement
and survivor benefits will usually be substantially less be-
cause they are based on covered earnings over a worker's
lifetime. But the law provided that such an employee had the
right to make such a decision when given the opportunity by
nis employer. More questionable is whether the employee's
rights were adequately protected by the provisions that al-
lowed a charitable organization to (1) unilaterally withdraw
from the social security program if a waiver had not been
filed and (2) withdraw from the program after making social
security payments for 10 years. The law, however, was writ-
ten primarily to protect the tax-exempt status of the orga-
nizations, not the interests of the e ployees relative to
social security coverage. Thus, any c..ange in emphasis would
require action by the Congress.

     Public Law 94-563 overcomes one aspect of this problem
oy preventing organizations from unilaterally withdrawing from
the program if they failed to file a waiver certificate. It
provides that if a charitable organization has paid social
security taxes for three consecutive calendar quarters, it
is deemed to have constructively filed a waiver certificate
and is not entitled to a refund. Conversely, if an organiza-
tion has already received a refund and has paid social security
taxes for three consecutive calendar quarters, it has 180 days
in which to file a waiver certificate for the period(s) of the
refund and any subsequent quarters. During this period, the
organization can request its employees to pay back any money
refunded to them. If.the organization does not file a waiver
certificate in tnis period, on the 181st day it is liable for
the repayment of both the employer's and employee's share of
the social security taxes previously refunded by IRS. 1/

HOW ORGANIZATIONS COULD OBTAIN REFUNDS
AND WHAT HAPPENED IF THEY DID

     In the cases we examined, individual employees--not
organizations--chose to withdraw when given the opportunity.



l/The law does not require organizations to meet this provi-
  sion if they either stopped payment before the end of or
  received a refund for services rendered prior to the
  earliest calendar quarter falling wholly or partly within
  3 years, 3 months, and 15 days prior to enactment of law.
                              7
However, before the change in law, the possibility existed
that an organization in need of ready cash could take the
initiative to remove itself and its employees from the programa.

     An organization that had not filed a waiver was able to
request a refund of social security taxes paid to IRS during
the last 3 years. The organization could unilaterally with-
draw from the prog-am, giving its employees no option to par-
ticipate further, or it could remain in and allow its indivi-
dual employees to decide whether they want continued social
security coverage. Under the latter procedure, the organiza-
tion would continue its social security tax payments for
those employees who opted to stay in the program.

      When an organization decided to obtain a refund, two
courses of action were available. The organization could reim-
burse the employees the full amount paid by them over the
period covered by the refund claim before it submitted the
claim to IRS--a highly unlikely probability because of the
amount of money the charitable organization would have to
pay out of its funds before being reimbursed. In this case,
the organization would obtain a written receipt from the em-
ployees and certify to IRS that the employees' share of the
funds being claimed had already been repaid.   If the organi-
zation did not reimburse the employees before submitting a
claim--the most likely procedure--it would secure the written
consent of the employees to allow IRS to make the refund to
the employer and state to IRS that such concurrence had been
received.   In either case, the employee had to furnish
a written statement to his employer that he had not claimed,
and would not claim, a refund or credit of excess social se-
curity tax payments on his income tax return. Also, the
employer had to provide its own identification number, the
name and account number of each employee, the period covered
by the claim, and the amount of wages earned and reported
to IRS for each employee.

     This procedure apparently would not have resulted in much
problem for those employees working for the employer at the
time IRS made the refund. The employer should readily know
where the employees live and easily be able to contact them.
But what about those people who worked for the employer some-
time during the past 3 years but no longer did so? How would
they get their refund or be given the option to sign a waiver
addendum to assure coverage for the period in which they
worked for the organization?

     The answer was relatively simple. Social Security Admin-
istration officials advised us that they would not have pre-
cluded a former employee who could not be located from obtain-
ing social security coverage if the social security taxes were
                             8
paid  the organization filed a waiver certificate; and no
refunds were paid to such employee. But, if the employer had
not filee a waiver certificate, even thog~h he had not
obtained (1) the former employee's written consent to allow
IRS to make the refund to the employe; or (2) the employee's
statement that he or she had not already been paid a refund,
the employee would not have recei ed social security cover-
age.  However, this wouid not havoe been cc.rsistent with a
1968 Federal District Court decision, which ordered the
Social Security Administration to credit the accounts of
employees of a charitable organization when social security
taxes had been paid but the Administration had no record
of a waiver certificaticn having been 'iilsd. ,/

     An employer would not be refunded eirner the former
employee's share of taxes paid 'n or the employer's share
of matching social security taxes paid for an indiviJual who
could not be located.. Obviously, sich an employce would not
be aware of his or her option to request a refund or sign a
waiver addendum, but we considered this the lesser of two
evils since the employee was under the assumption that he or
she was participating in thf. social security program while
working for the employer.

     Could an organization request a refund for a past em-
ployee which it cannot locate? An organization willing to
commit fraud could do so.   As with all tax laws, the refund
system depends on voluntary compliance and integrity.   If an
organization certified that it had prepaid its employees, the
only way IRS could assure itself that this had actually oc-
curred would be to locate the employees and ask them if they
received their refunds.   It is also conceivable that an em-
ployer could prepare false documentation containing the ap-
proval of past employees to withdraw from the program when,
in fact, they had not given such approval.

     We ar. not aware of any instances when employers did
not pay refunds they received from IRS to all of the appro-
priate present and past employees.  But, in this unique
situation, large sums of money were involved for both the
employer and employee.  Current procedures were not adequate
to protect the interests of employees if an unscrupulous em-
ployer decided to withdraw from the program and not make all
appropriate payments.

     The potential for such abuses could easily have been
overcome by having IRS make refunds directly to employees and


1/Methodist Home and Hotel Corp. v. United States, 291 F.
  Stlpp. 595 (S.D. Tex. 1968).

                              9
pay the employer for only his associated share.  To accom-
plish this, certain changes in procedure would have been
required.  The changes would have applied only to charitable
organizations which had not filed a waiver certificate and
which decided to apply for a refund of part or all of the
money invested over the previous 3 years.

     Specifically, under revised procedures charitable
organizations which had not filed a waiver certificate
would not be allowed to prepay employees for prior overpay-
ments of social security taxes and then claim a refund from
IRS.  Nor wculd such organizations be allowed to act as inter-
mediaries between IRS and the employee by accepting the refund
and then making distribution to the affected employees.   If
an organization or certain of its employees  decided to with-
draw from the program, the organization would be required to
provide IRS its identification number and the name, social
security number, last known address, social security payments
made over the claim period, and wages paid each individual
during this period.   IRS world then verify the data, check
the addresses aaainst its own files, calculate the interest
due, and mail refund checks directly to the employer and
to all employees for their appropriate shares of the refund.
Employees would also have received a form letter explaining
the reason for the refund and informing the individual that
social security coverage had been lost for that period.

     In the draft of this report which was provided to IRS
and the Joint Committee on Internal Revenue Taxation--prior
to the signing of Public Law 94-563 on Octcber 19, 1976--
we recommended that the Commissioner of Internal Revenue
revise regulations so that refund payments would be cal-
culated by IRS and made directly to employees by IRS, with
the employer receiving only his proportionate share. With
passage of Public Law 94-563 this recommendation became
unnecessary since no refunds would be made to any organi-
zation which had paid social security taxes for three con-
secutive calendar quarters.  Payments made Dy organizations
for less than three consecutive calendar quarters, and there-
fore refundable, would be so small that a change in proce-
dures to cover such situations would be unwarranted.




                              10
                           CHAPTER 3
      IRS EFFORTS TO CURB ACCEPTANCE OF REFUNDABLE SOCIAL

         SECURITY AND FEDERAL UNEMPLOYMENT TAX PAYMENTS
     According to Internal Revenue Service officials, controls
to detect refundable social security payments by charitable
organizations have been in effect since at least 1966 but IRS
was not aware until 1973 that the system was not working prop-
erly. Even then IRS did not take prompt corrective action be-
cause the significance of the problem was not generally recog-
nized. However, in 1976 IRS took steps to properly identify
charitable organizations on the business master file and to
determine the extent to which these organizations were making
social security payments without a waiver certificate on file.
This action should also identify organizations making unneces-
sary unemployment tax payments.

     These procedures are needed--despite passage of Public
Law 94-563--because the law still requires charitable organi-
zations to declare their in   .t to participate in the social
security program by filing a waiver certificate. Because
of this requirement, IRS must be able to differentiate these
organizations, and their waiver status, from all other en-
tities on the business master file.   If this is not done and
an organization makes payments for less than three quarters,
receives no refund, and does not file a waiver certificate,
its employees could ultimately find themselves in a confron-
tation with the Social Security Administration over their
eligibility for benefits for this period.

IDENTIFICATION OF CHARITABLE ORGANIZATIONS--
A SUBJECTIVE TECHNIQUE

     IRS maintains a computer tape file containing tax data
on all business taxpayers. This is termed the business master
file and individual organizations contained therein are iden-
tified by an identification number assigned by IRS upon ap-
plication by the taxpayer.  Most organizations exempt from
Federal taxation are also included on this file. Because
charitable organizations have the option to pay social secu-
rity taxes, IRS attempts to distinguish them from other busi-
nesses on this file to assure that their tax status is prop-
erly recorded.
     When applying to IRS for an identification number,
every organization must state its name and the nature of its
business on the application form. In the case of a poten-
tially exempt organization, IRS personnel review this data
to determine whether the organization should be classified

                              11
as charitable.  When the data submitted is inconclusive, the
organization is requested to send additional data.   If IRS
personnel deem the organization to be charitable, it is given
a special employment code on the business master fit.    In the
final analysis, the success of this system of identification
depends on accurate decisionmaking by the IRS representative
based on his or her interpretation of the data on the appli-
cation form. Further, when employer identification numbers
are assigned, the organization usually has not received an
official IRS determination on its tax-exempt status; even if
it had, it is not ieguired to snow this information on the
application for an identification number.   Thus, the data
available to the IRS perscnr    :ho must make the decision is
somewhat limited and errorc     easily occur.

     When a charitable organization is properly identified
and recorded on the business master file, any changes to its
tax-exempt status will be readily detected.  For example,
if the organization files a certificate with IRS waiving its
exemption from social security taxes, the employment code
on the business master file is changed to reflect the organ-
ization's change in tax status.  Social security payments
not covered by a waiver certificate or an apparent unneces-
sary Federal unemployment tax payment by an organization
which is identified as charitable on the business master file
will be detected by the computer when it records the payment
in the taxpayer's account.  This will precipitate a computer
printout which is forwarded to the appropriate service center
for followup action.

     Service center personnel research available information
within IRS to make sure the organization is exempt from the
tax and to see if a waiver certificate is on file.  If it is
determined that the organization is not charitable, has filed
a waiver certificate, or is otherwise improperly identified on
the business master file, the payment is accepted and the em-
ployment code on the file Is corrected.  However, if the
service center finds the payment to be in error, remedial
action is taken.

     --Federal unemployment tax payments are abated and
       the mon< - refunded.

     -- Charitable organizations making refundable social
        security payments are informed of the requirement
        to file a waiver certificate if social security




                             12
       coverage is desired and of the refund procedures
       if coverage is not elected. 1/


     The degree of IRS' success in identifying refundable
employment tax payments hinges directly on the proper iden-
tification of charitable organizations on the business master
file at tne time they request identifying numbers. Our review
showed that, when IRS properly identifies such organizations,
refundable social security and unemployment tax payments are
detected.

     Specifically, 6 charitable organizations, or 3 percent
of the 183 organizations in our sample which were naking so-
cial security payments in 1975, were recorded by IRS on its
business master file-as not having filed a waiver certificate
as of December 12, 1975. Our followup on four of these or-
ganizations which were located in areas covered by the two
service centers we visited--Kansas City and Ogden--showed
that in three cases the organizations had filed waiver cer-
tificates which were being processed by IRS. The fourth
case was referred to the Omaha District Office, because the
organization failed to respond to the service center's fol-
lowup letter, and was still open on July 16, 1976. Of the
30 organizations in our sample which IRS had properly iden-
tified as charitable on the business master file and which
had made unnecessary Federal unemployment tax payments, 25,
or 83 percent, received refunds.

      IRS did not detect refundable social security payments
by 69 charitable organizations (7 percent of our sample) which
had not filed a waiver certificate as of November 1, 1975,
because its business master file either did not accurately
identify these organizations as charitable or did not accu-
rately reflect their waiver status. The inability to iden-
tify a charitable organization also results in IRS' accept-
ance of unnecessary unemployment tax payments. We found 35
organizations (3.5 percent of our sample) which were not
identified as charitable on the business master file (al-
though so identified on the exempt organization master file)
making unemployment tax payments during the period 1972-75.
Only nine, or 26 percent, had received refunds.



l/Tne organization will no longer be notified of refund pro-
  cedures if payments have been made for more than three
  consecutive calendar quarters since payments over such a
  duration are considered a constructive filing of a waiver
  certificate under Public Law 94-563.

                             13
     An IRS official surmised that the nine organizations
must have learned of the error on their own rather than
through IRS detection. This is plausible since IRS tries
to inform charitable organizations of their exemption through
annual publications which are available to the public.

NEED FOR BETTER IDENTIFICATION OF
CHARITABLE ORGANIZATIONS RECOGNIZED BY IRS

      An IRS internal audit report issued in June 1973 dis-
cussed the problem of social security payments made without
benefit of a waiver certificate and unnecessary Federal unem-
ployment tax payments by charitable organizations at the Og-
den Service Center. Of the 489 charitable organizations used
in IRS' sample, 44, or 9 percent, were making social security
payments without having a waiver certificate on record with
IRS. These refundable payments were not identified as such
on the business master file. The report suggested that the
exempt organization master file--which apparently has more
complete data on charitable organizations--be matched against
the business master file to identify such organizations and
to determine whether or not they had filed a waiver certifi-
cate.

     In February 1973 a similar proposal had been made to
the Director, Accounts and Data Processing, natLonal office,
by the Assistant Regional Commissioner, Accounts, Collec-
tion and Taxpayer Service, Western Region. However, the
Director concluded that the problem was not important enough
to warrant the resource commitment needed to eliminate inac-
curacies in the business master file through a matching pro-
gram. At this point in time, IRS had no indication that mass
monetary withdrawals would occur if employees were given an
option by their employer to leave the social security program.

     In December 1975 the Associate Director, Accounts and
Data Processing, national office, informed the Assistant Com-
missioner, Accounts, Collection and Taxpayer Service, that
his office was reviewing an Ogden Service Center proposal
to purify business master file employment and filing require-
ment codes. The Assistant Commissioner was informed that
there was no major problem. But because of the experiences
at the Ogden Service Center, a program was proposed to deter-
mine the extent to which the business master file accurately
identified charitable organizations and their waiver status.

        Schedules for this work were established on July 30,
1976.     The program involves two phases:
        -- Charitable organizations on IRS exempt organization
           master files are being matched against the business

                                14
       master file to assure that the files are compatible
       and tnat the business master file identifies every
       charitable organization.
     --Social Security Administration tape files containing
       the names and identification numbers of charitable
       organizations which have filed waiver certificates
       will be compared with charitable organizations iden-
       tified on the business master file.  This matching
       will determine which organizations have not been
       identified on the IRS business master file as having
       filed waiver certificates.

     This program acknowledges that the present identification
system may be less than ideal and th.at IRS' exempt organiza-
tion master file has a more complete listing of charitabie
organizations than are identified in the business master file.
The exempt organization master file lists organizations which
have been formally granted exempt status and because of this
more accurately identifies charitable organizations than does
the business master file which (1) is based upon limited in-
formation in the organizations' applications for identifica-
tion numbers and (2) is the best guess of an IRS employee and
not the final decision of IRS on the organization's exempt
status. Social Security Administration data is being used to
identify charitable organizations which have waived the so-
cial security exemption because IRS' business riaster file
records are incomplete prior to 1971.



     The employment codes on the business master file are not
completely accurate.   For 761 to 3,595 charitable organiza-
tions identified on IRS' business master file as having filed
a waiver certificate, no record of such filinig was available
at the Social Security Administration, which maintains a per-
manent microfilm record of the names of concurring employees.
Conversely, for an estimated 1,625 to 5,151 situations, IRS
had not recorded that charitable organizations had filed a
waiver certificate wnen, according to Social Security
Administration records, they had.




                             15
                           CHAPTER 4

                CONCLUSIONS AND RECOMMENDATIONS
     As noted in chapter 2, 12,679 to 20,233 charitable or-
ganizations were making social security payments without a
waiver certificate on file and had not been identified as
such on the Internal Revenue Service business master file.
This situation was caused by an IRS procedure which requires
employees to make a judgmental decision, on the basis of
limited data, as to whether an organization is charitable and
therefore exempt from employment taxes. If a charitable
organization is not properly identified at the time it re-
quests an identification number, the fact that a subsequent
payment may be refundable will not be recognized because
there is nothing to distinguish the organization from busi-
ness enterprises which are liable for such taxes. This also
affects the detection of unnecessary unemployment tax pay-
ments since the organization must be identified as charitable
before it can receive a refund of such payments.

      Public Law 94-563 takes care of problems created by
charitable organizations that have made social security pay-
ments without having filed a waiver. But it is still desir-
able that IRS improve its procedures so it can be assured
that charitable organizations follow the proper procedures
when making social security payments. The law still requires
that a waiver be filed by charitable organizations if they
want to make social security payments. If IRS procedures
are adequate, it will not accept such payments if a waiver
certificate is not filed. This will preclude any possible
misunderstandings between the Government and a charitable
organization which did not file the waiver, still made social
security payments, and ultimately became subject to the pro-
visions of Public Law 94-563. It will also preclude the
possibility of a future conflict between an organization's
employees and the Social Security Administration over the
payment of benefits.

     IRS is taking action to assure the proper identification
of charitable organizations which are already on the busi-
ness master file by comparing names on the exempt organiza-
tion master file and Social Security Administration records
to the business master file. This approach should detect
all charitable organizations which are presently not identi-
fied as such on the business master file and do not have a
waiver certificate on file.

     However, the action taken by IRS to date has not ad-
dressed the basic cause of inaccurate identificaticn of
charitable organizations on the business master file--

                             16
judgmental decisions.  We believe that the organizations
snoula be identified as charitable on the business master
file at the time they officially receive their exempt status
from IRS rather than when they apply for an identification
number.  This would permit the identification to be based on
fact rather than judgment. Although an organization gen-
erally has 15 months from the time it is created to apply
for tax-exempt status, 1/ we do not believe this will
cause many refundable payments.   It is possible that many
organizations will apply for exemption immediately; the ones
that do not, since they are just beginning operations, are
likely to have small payrolls, if they have any payroll at
all. If payments are made, they can be detected and re-
funded as soon as the organizations' exempt status is deter-
mined.

     Prior to the law change, if an employee chose to with-
draw voluntarily from the social security program--when given
the opportunity to do so by the employer--it was his or her
decision alone. However, if an organization unilaterally
withdrew it would have had a serious effect on the organiza-
tion's personnel. While some employees may have worked long
enough before leaving the program to qualify for benefits,
termination of coverage was rarely in the best interests of
the younger employees who had not had the opportunity to
gain an adequate level of protection. However, we did not
believe that tne Government had any choice but to notify
appropriate organizations of their options under the previous
law--one of which wa3 the right to refund.  It was because of
administrative inadequacies in IRS that the problem went un-
detected.

     Correctly identifying charitable organizations on the
business master file will resolve the difficulties now en-
countered in detecting unnecessary unemployment tax pay-
ments. Once a charitable organization is identified as
such, any subsequent payments which are unnecessary will
result in immediate abatement and refund.

RECOMMENDATIONS

     To assure that IRS properly identifies charitable
organizations and their employment tax filing requirements
we recommend that the Commissioner of IRS:


l/If an organization applies for exempt status within 15
  months, the exemption will be recognized retroactively to
  tne date it was organized. Otherwise, exemption will be
  recognized only for the period after the application is re-
  ceived by IRS.

                             17
     -- Continue the matching programs to assure that chari-
        table organizations are properly identified on the
        business master file and that their waiver status is
        properly recorded.
     --Revise IRS procedures so that a charitable organiza-
       tion is identified on the business master file at
       the time the organization officially receives its
       exempt status rather than at the time it applies
       for an employer identification number.

     It follows that IRS should rebate to appropriate
organizations, with interest, unnecessary unemployment tax
payments for a period up to 3 years in which such taxes were
paid, with such period to end with the date of detection by
IRS of the improper payments.

AGENCY COMMENTS AND
OUR EVALUATION

     The Commissioner of Internal Revenue stated in a
November 13, 1976, letter that action will be taken on each
of our recommendations. (See app. II.)   Specifically he
agreed to:

     -- Continue IRS efforts to purify the business master file
        so that charitable organizations and their waiver
        status can be identified. During the next 6 months
        the organizations affected by Public Law 94-563--those
        organizations making social security payments without
        a waiver certificate on file--will be identified and
        their status properly recorded. During the following
        6 months all other charitable organizations wilJ be
        identified and properly classified.

     -- Implement two procedures early in 1977 which will
        identify charitable organizations on the business
        master file at the time they receive tax-exempt status.
        Upon receipt of a charitable organization's application
        for tax exemption, IRS will notify the organization of
        the waiver requirements applicable to social security
        taxes should its request for exempt status be granted.
        When the tax-exempt status is officially approved or
        denied, IRS will again advise the organization of its
        social security and Federal unemployment tax responsi-
        bilities. Information regarding the organization's
        filing status will be made part of the business master
        file at the time the final determination of an organi-
        zation's tax-exempt status is made.



                              18
    -- Notify and make refund arrangements as appropriate to
       all charitable organizations which have made unneces-
       sary Federal unemployment tax payments for the preced-
       ing 3-year period.

     We believe that if IRS takes the above actions the
problems cited in this report will be resolved.

     The Department of Health, Education, and Welfare had
no substantive comments on this report. (See app. III.)




                             19
APPENDIX I                                        APPENDIX I
                 STATISTICAL PROJECTIONS OF

         REFUNDABLE FEDERAL EMPLOYMENT TAX PAYMENTS
     To obtain statistically reliable data on the extent to
which charitable organizations were making refundable social
security and Federal unemployment tax payments on a national
basis, IRS randomly selected 1,000 of the approximately
242,000 active organizations on its exempt organization master
file as of June 1975. 1/ Transaction data on these organiza-
tions was then drawn from the business master file to deter-
mine (1) if they were properly identified as charitable and
(2) if refundable employment taxes were being paid by them.

      Sample results showed that 814, or 81 percent, were mak-
ing no employment tax payments in calendar year 1975. Of the
remainder, 108, or 11 percent, had filed a waiver certificate;
6, or six-tenths of 1 percent, were making social security pay
ments without a waiver certificate on file but were identified
 8s charitable on the IRS business master filet 59, or 6
  ,rcent, were not identified on the IRS business master file
as being charitable organizations and were making payments
without having filed the necessary waiver certificate; and
10 organizations were identified by IRS as having filed a
waiver certificate, but no record of such filing was available
at the Social Security Administration. The remaining three
were classified as State or local government entities on the
business master file.

     Included in the 108 brganizations which had a waiver
certificate were 14 organizations which were not identified as
charitable on IRS' business master file and were not identi-
fied as having filed a waiver certificate when in fact, doc-
umentation corroborating that one had been filed is on rec-
ord with the Social Security Administration.

     With respect to unnecessary Federal unemployment tax
payments, we found that 31 charitable organizations which
were making social security payments had also made unemploy-
ment tax payments at some time during the period 1972 through
1975, for which no refund had been received.



1/Our sample was based on June 1975 numerical counts since
  no report on the number of charitable organizations was
  prepared by IRS from July through December 1975. However,
  in January 1976 there were 248,000 such organizations on
  record, and by July 1976 the number had increased to
  257,000.

                             20
APPENDIX I                                             APPENDIX I
     On the basis of this data, we have made the following
statistical projections at a 95-percent confidence level.

                                                       Employment
                                 Number of pavers     tax payments
                                         sampling           Sampling
                                  Mean    error       Mean   error
                                                         (millions)
Refundable social security
      tax payments
Charitable organizations
making social security
payments--no waiver certifi-
cate or associated documen-
tation on record with IRS
or the Social Security Ad-
ministration                     14,278     +3,534   $151.6   +$66.9
Charitable organizations
recorded by IRS as having
filed a waiver certificate
but with no record of such
filing with the Social Se-
curity Administration (note a)      2,178   +1,417     92.0    +89.3
Combined total of charitable
organizations which have
not filed a waiver certifi-
cate but are making social
security payments (Note:
means are addible whereas
sampling errors are not.)        16,456     +3,777   243.6    +125.2
Charitable organizations                             No estimate
which, according to social                           needed because
security records, had filed                          waiver infor-
waivers but were not iden-                           mation was on
tified as having filed on                            file with So-
the IRS business master                              cial Security
file                                3,388   +1,763   Administration
Unnecessary unemployment
       ax payments
Charitable organizations
which made unnecessary un-
employment tax payments and
had either not received a
refund or had received
only a partial refund            10,165     +3,009     5.2     +2.4
                               21
APPENDIX I                                         APPENDIX I
a/Excludes one charitable organization making large payments
  which, if incorporated. would have increased the numerical
  mean to 2,420 + 1,493 and the dollar mean to $355 million
  + $441.6 million.




                             22
APPENDIX      II                                                     APPENDIX   II


   Internal Revenue Service                   Department of the Treasury

   Commissioner                               Washington, DC 20224

                                                    NOV 13 1976
    b   r. Victor L. Lowe
    Director, General Government Division
    United States General Accounting Office
    Washington, D.C. 20548




   Dear Mr. Lowe:

        We have reviewed your draft report to the Joint Committee on
   Internal Revenue Taxation entitled, "Millions in Social Security and
   Federal Unemployment Tax Payments by Charitable Organizations Subject
   to Refund".

        The report suggests that we develop procedures to inform
   organizations when they are not liable for FICA/FUTA taxes. We agree
   that equitable administration of the tax laws requires notification
   to taxpayers when they pay taxes for which they are not liable. We
   strive to accomplish that. For example, a computer notice is generated
   to service center personnel when a Form 941/940 return posts to an
   account and there is an indication that the taxpayer organization is
   not liable for FICA/FUTA taxes. If service center research fails to
   resolve the issue, a letter is sent to the taxpayer requesting that
   the r-ganization either file a Form SS-15 (to waive the exemption from
   the :ax) or s'lbmit a claim for refund.

        Our commeits follow regarding specific reconmendations contained
   in the report.

           Recommendation No. 1 - Continue the current matching programs
           to assure that charitable organizations are properly identified
           on the business master file and that their waiver status is
           properly recorded.

                We are continuing Business Master File (BMF) purification
           efforts to identify IRC 501(c)(3) organizations. This is
           accomplished by matching the BMF with the Exempt Organization
           Master File (EOMF) and the SS-15a tape file from the Social
           Security Administration (SSA). The matching of files will
           identify entities carried on the BMF as exempt organizations
           which are not listed on the EOM.   It will also identify
           organizations that have fifed waivers of exemption but are




                                         23
APPENDIX II                                                         APPENDIX II



    Mr. Victor L. Lowe
    Director, General Govcrnment Division


        not listed or are incorrectly carried on the B.F, In
        addition, we will identify the exempt organizations that
        have filed Forms 941 (with FICA tax amounts) but for which
        there are no records of a Form SS-15 waiver of exemption.

             The recent passage of PL 94-563 (Ottinger Bill) has
        impacted our clean-up to the extent that our efforts will be
        to first purify those organizations affected by the law, This
        effort will be oompleted within the next 6 months. We will
        maintain a record of these organizations for future deletion
        from our clean-up files. The residue will then be purified
        over the following 6 months to accomplish the complete clean-
        up effort.

        Recommendation No. 2 - Notify charitable organizations
        identified as having made umlecessary social security
        tax payments of the requirement to file a waiver if they
        want social security coverage, and of their right to
        obtain refunds for such payments made during the last
        three years.

             This recommendation has been obsoleted by PL 94-563.
        If a charitable organization has paid FICA taxes for
        three consecutive quarters, they have been deemed to
        have constructively filed an SS-15 and are no lnnger
        entitled to a refund.

             In addition, 501(c)(3) organizations who have already
        received a refund and have paid FICA taxes for three
        consecutive quarters have 180 days to file an SS-15 for
        the period(s) of the refund and any subsequent quarters.
        During these 180 days the employers mave the right to
        ask the employees to pay their share or the FICA tax.
        If the employer does not submit an SS-15, then on the
        181st day, the employer is liable for his share of FICA
        as well as the employee's share of the FICA.

            We are now in the process of identifying those organi-
       zations who have received a refund and will be mailing
       notices to them by the first of the year. The notice will
       advise them of the requirements of the law and what is neces-
       sary to resolve their account. Additionally over the next
       6 months, we will also identify those organizations who
       have not received a refund and notify then of their respon-
       sibil4 ties as required by PL 94-563.

       [See GAO note 1, p. 26.1




                                     24
APPENDIX II                                                         APPENDIX II



 Mr. Victor L. Lowe
 Director, General Government Division

      Recommendation No. 3 - Rebate to appropriate organizations,
      with interest, all unnecessary unemployment tax (FUTA)
      payments for a period up to three years, with such period to
      end with the date of detection by IRS of the improper payments.

           Our present procedures verify the filing of the FUTA
      returns against our master file records for liability to file.
      In those instances where the organization improperly files
      because of exempt status we so notify the organization and
      arrange for appropriate refund including any accrued interest.

           Upon completion of our clean-up action of the master
      file we will notify any such remaining exempt organizations
      and arrange for refunds as appropriate.

      Recommendation No. 4 - Revise IRS procedures so that the
      identification of charitable organizations on the business
      master file is made at the time the organization officially
      receives its exempt status rather than at the time an organi-
      zation applies for an employer identification number.

           In addition to our regular procedures and the purifica-
      tion efforts described above, we will implement two
      additional precautionary procedures beginning early in
      1977. Upon receip, of an application for exemption from
      tax, we will notify the sender of the waiver requirements
      applicable to FICA taxes should an exemption be granted.
      When the application is approved or denied, we will again
      advise the organization of its FICA and FUTA responsibilities
      (depending upon whether it is or is not exempt). Information
      regarding the organization's filing status will be made
      part of the business master file at the same time.

      Recommendation No. 5 - IRS should be charged with the
      responsibility of making refunds to employers and employees
      of their respective shares of taxes paid. It is also
      recommended that IRS match these employees against Service
      records.

           The general rule with respect to refunds (IRC 6402)
      requires that they be made to the person (in this case,
      the IRC 501(c)(3) organization) making the overpayment.
      Thus, legislative action would be required to revise
      Section 6402. The pertinent regulations (31.6402(a)-2(a))
      elaborate on the general rule and require the organization
      to obtain from all affected employees appropriate statements
      regarding the overpayment being claimed by the organization.

      [See GAO note 1, p. 26.]1




                                         25
APPENDIX II                                                     APPENDIX II



      Mr. Victor L. Lowe
      Director, General Government Division

           It is only after these actions are taken that an individual
           claim for refund may be filed when the employee is not given
           his or her share of the FICA tax paid (see Regulations
           31.6402(a)-2(b)). The individual claims must be accompanied
           by supporting statements. Again, substantial changes would
           be required in the regulations to effect this recoimendation.

                Aside from the legislative and regulatory changes
           required, we believe that implementation of this recoamenda-
           tion would significantly add to the administrative burden.
           For example, we would have to require for each individual
           the name, address, SSN, identification of amount due from
           the employer, and certification from each employee that
           the amount had been received and would not be claimed, as
           a credit on an individual income tax return. After this
           information was rece. Bed, separate certifications of
           overpayments would have to be prepared, separate allow-
           able interest computations made, and finally, separate
           refund checks issued (with related postage and handling
           costs).

           For these reasons, we believe the existing rules governing refunds
      are adequate. However, if an employee believes an exempt organization
      has received a refund of FICA taxes but has not returned the eaployee's
      share, he or she may refer the matter to the Service. We will check
      our records, contact the organization (if necessary) and advise the
      employee of our findings.


                      [See GAO note 2, p.     26.]



           With kind regards,

                                       Sincerely,




                                       Comissioner

     GAO note 1:    Recommendations 2 and 5 were negated with the
                    signing of Public Law 94-563 and were deleted
                    from the body of the final report.  They have
                    been retained in this appendix as a matter of
                    public record.

     uAU note 2:    IhS comment deleted because it was not directly
                    pertinent to our findings, conclusions, or rec-
                    ommendations.


                                     26
APPENDIX III                                             APPENDIX III




               DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
                           OFFICE OF THE SECRETARY
                             WASHINGTON, D.C. 2as




                              NOV 10 1976




      Mr. Gregory J.Ahart
      Director, Human Resources Division
      United States General Accounting
        Office
      Washington, D.C. 20548
      Dear Mr. Ahart:
      The Secretary asked that I respond to your request for our comments
      on your draft report, "Millions in Social Security and Federal
      Unemployment Tax Payments by Charitable Organizations Subject to
      Refund."
      Responsible officials have reviewed this report and discussed a
      number of changes with your staff to clarify or correct various
      statements. Since your staff agreed to incorporate these changes
      in the final version of the report, we have no further comments.
      We appreciate the opportunity to comment on this draft report be-
      fore its publication.
                                      Sincerely yours,


                                     J hn D. Yoiu '
                                     A sistant Secretary, Comptroller




                                27
APPENDIX IV                                          APPENDIX IV
              PRINCIPAL DEPARTMENT OF THE TREASURY

                      OFFICIALS RESPONSIBLE

                   FOR ADMINISTERING ACTIVITIES

                     DISCUSSED IN THIS REPORT

                                             Tenure of office
                                             From          To
SECRETARY OF THE TREASURY:
    William E. Simon                  Apr.    1974   Present
    George P. Shultz                  June    1972   Apr.  1974
COMMISSIONER OF INTERNAL REVENUE:
    Donald C. Alexander               May     1973   Present
    Raymond F. Harless (acting)       May     1973   May   1973
    Johnnie M. Walters                Aug.    1971   Apr.  1973
ASSIST,.NJT COMMISSIONER (ACCOUNTS,
   COLLECTION AND TAXPAYER
   SERVICE):
     James I. Owens                   July    1976   Present
     Robert H. Terry                  Aug.    1973   July 1976
     Dean J. Barron                   July    1971   Aug.  1973




                              28