DATELINE: February 24, 2009, Chicago
In one article, Stephanie Strom nicely confirmed what we’ve been hearing for several months. The recession has hit the nonprofit world. Strom’s article, Charities Seek Bankruptcy Protection, appeared in last Friday’s New York Times (Feb. 19, 2009). Strom, with her meticulous eye for detail, points to one bankruptcy and one liquidation after another to paint a bleak picture. Many nonprofit executives, wading through Strom’s mini obituaries, may miss...
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the two most important lines in the article. Toward the middle of the article, Strom wrote:
Brockton Family and Community Services, a nonprofit group in Brockton, Mass., that deals with domestic violence, filed for Chapter 11 protection in 2007, after the Internal Revenue Service threatened to seize a building it owned because it had not paid payroll taxes.
According to Strom, Brockton Family survived, emerging from bankruptcy last November. Of course, our eyes zeroed in on the unpaid employment taxes. We assume those taxes have been cleared up.
Now, let's return to the first line of the article where Strom tells us about the decision by Glass Youth and Family Services of Los Angeles to file bankruptcy last Tuesday. The organization is headed by someone who appears to be a nice person (D). Strom quickly moves on to other charities in financial trouble, but she is not finished with D, who reappears in the final lines of the article. Strom reports that the IRS wants D’s house because Glass Youth failed to pay what are referred to as payroll taxes.
That will come as a shock to many nonprofit executive directors and CFOs. It shouldn’t. D's plight serves as another warning to nonprofit insiders. If your organization fails to remit to the IRS trust fund taxes which your organization collected, there is a good chance that the IRS will argue that you are a responsible person and, as such, are liable for the unpaid trust fund taxes. Trust fund taxes include income taxes withheld from the employee wages and the employee share of FICA and Medicare taxes. We suspect that the reference to the payroll taxes in Strom's story is to the trust fund taxes given the context, but we can't be 100% sure.
A responsible person is a person (or group of people) who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be an officer or an employee of a corporation, a corporate director, a member of a board of trustees of a nonprofit organization, and any other person with authority and control over funds to direct their disbursement. The failure must be willful. For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required). Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
Be forewarned. The IRS does not mess around when it comes to trust fund taxes. They pursue responsible persons and will collect the money. For D’s sake, we hope Glass Youth has enough money to pay the trust fund taxes or that D can establish that she is not a responsible person, assuming the taxes in question were trust fund taxes. Others should learn from D’s experience. As much as you believe in the mission or sympathize with the organization’s clients, you are putting your own assets at risk if you “borrow” the trust fund taxes to pay other creditors so that the agency can stay in business a little bit longer. The road to hell is paved with good intentions. When you ignore the IRS you are headed down what is often a very hot road.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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