When it comes to payroll taxes, nonprofit organizations have obligations just like any other company. When a nonprofit fails to fulfill these responsibilities, substantial penalties may apply. The IRS can file federal tax liens and levies and seize money or property to recover the unpaid debt. In addition, the Trust Fund Recovery Penalty can be applied in an amount equal to 100% of the total amount of taxes that the nonprofit employer failed to withhold and pay to the IRS. Clearly, this amount—in conjunction with the actual unpaid tax owed—can quickly add up to a substantial sum.
How Volunteer Directors Can Potentially Avoid Personal Liability for Nonprofit Payroll Tax Problems
Perhaps even more stressful for those involved with a nonprofit facing payroll tax problems is the fact that any responsible person can be held personally liable if payroll taxes are not paid. A “responsible person” is someone who exercises significant control over the nonprofit’s finances. This may include even volunteer directors or board members who were not directly involved in paying payroll taxes.
Fortunately for these volunteer directors, however, there is a limited exception that may apply to avoid personal liability. To be eligible, the following criteria must all be met:
- The volunteer director serves only in an honorary capacity.
- The volunteer director does not participate in the day-to-day or financial operations of the nonprofit organization.
- The volunteer director does not have actual knowledge of the failure to pay payroll taxes.
- The volunteer director has no personal involvement with the nonprofit’s operations.
It is important to note, however, that this exception is not available if no other person can be held liable for the trust fund recovery penalty.
Facing a payroll tax problem with the IRS is a frightening experience. The good news is that there may be alternative solutions available to you. We encourage you to contact us today for more information at (800) 721-7054.