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Unpaid Payroll Taxes Can Mean Real Problems for Nonprofit Board Members

Posted by Anne Wallestad, President & CEO, BoardSource on Aug 18, 2014 12:23:58 PM

photo (4)By Anne Wallestad, president & CEO, BoardSource

Last month, the Treasury Inspector General for Tax Administration issued a report that nonprofit organizations owe more than $875 million in unpaid taxes, including more than $600 million in unpaid payroll taxes.

Commenting on the report, Nonprofit Quarterly’s Ruth McCambridge cautioned the public — and the nonprofit sector — not to overreact to the sensationalized reporting on the topic. And, in most ways, I agree with her…except one: Board members of these organizations, or any organization that has failed to pay payroll taxes, need to react, and react big.

Why? Because unbeknown to many voluntary board members, they can be held personally liable for unpaid payroll taxes, and be forced to pay those taxes and penalties on behalf of a nonprofit organization.

That’s right — when a nonprofit organization is called onto the carpet by the IRS for unpaid payroll taxes, the IRS demands that someone be held personally liable, and be forced to pay — and that someone is the board and its members. The IRS’s Internal Revenue Manual Part 5, Chapter 17, Section 7 states:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax on the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

IRS regulations specifically identify directors as potentially liable persons: “A director who is not an officer or employee of the corporation may be responsible for the TFRP if he or she was responsible for the corporation’s failure to pay taxes that were due and owing.” States also have similar provisions.

So, what does that mean for board members? Well, first and foremost, organizations that owe payroll taxes should get them paid immediately, prior to assignment of personal liability by the IRS. More broadly, board members should — as a part of their fiduciary oversight — inquire about any unpaid taxes that the organization might have and ensure that the CEO is prioritizing those payments. An efficient way to do this is to have a tax and information filing calendar for the organization that includes federal and state filing obligations.

The fiduciary responsibilities that board members take on are real and significant. This report was a good — albeit unfortunate — reminder of that.

For more information on what board members need to know about avoiding personal liability and providing financial oversight, check out these BoardSource resources:

Legal Responsibilities of Nonprofit Boards
Financial Responsibilities of Nonprofit Boards



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