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Tax-Exempt Organizations Owe Nearly $875 Million in Unpaid Payroll and Other Taxes


8/28/14

Synopsis
 
A report from the U.S. Treasury Inspector General for Tax Administration (TIGTA) states that more than 64,200 tax-exempt organizations had nearly $875 million of federal tax debt outstanding as of June 16, 2012.
 
Issue

 
The federal tax debt owed by these organizations is composed of payroll taxes and related penalties and interest (69%), unrelated business income, excise and other types of taxes (27%), and annual reporting penalties (4%). Approximately 1,200 tax-exempt organizations owed more than $100,000 each, and unpaid taxes were often associated with multiple tax periods.
 
TIGTA selected 25 organizations for review that appeared to be among the worst examples involving unpaid federal taxes. All of the selected organizations are tax-exempt under section 501(c)(3) of the Internal Revenue Code. Factors used by TIGTA in selecting these organizations for review included failure to pay payroll or other taxes for five or more tax periods, receipt of funding from Medicare, Medicaid, and government grants to finance operations, and payment of large salaries to executives and officers. TIGTA also reviewed the personal tax returns of several of the organizations’ executives and officers.
 
The organizations had more than $25 million in unpaid federal taxes – mainly payroll taxes and related penalties and interest dating as far back as 2001. The IRS opened collection cases on all 25 organizations and tax delinquency inquiries on executives and officers who are not current on their individual income tax filings.
 
The IRS imposed the Trust Fund Recovery Penalty (TFRP) on several of the organizations’ officers. The TFRP may be assessed against any person who is responsible (“responsible person”) for collecting or paying withheld income and employment taxes (“trust fund taxes”) and who willfully fails to collect or pay them. The TFRP equals 100% of the amount of unpaid trust fund taxes. There is an exception for any unpaid, volunteer member of a board of trustees or directors of a tax-exempt organization who is solely serving in an honorary capacity, does not participate in the day-to-day or financial operations of the organization, and does not have actual knowledge of the failure to pay over the trust fund taxes. However, this exception does not apply if it results in no person being liable for the TFRP.
 
The report includes TIGTA’s recommendations to the IRS about ways to identify tax-exempt organizations with significant unpaid payroll and other federal taxes and working with Treasury to evaluate whether legislation is needed to strengthen the IRS’s ability to enforce payroll tax compliance by tax-exempt organizations.
 
What Does CohnReznick Think?
Tax-exempt organizations may want to consider undergoing a review to determine whether they are current on their tax obligations. Officers, directors, trustees, and others associated with a tax-exempt organization may want to evaluate whether they may be a “responsible person” for purposes of the unpaid trust fund tax penalty.

Contact

For more information, please contact Phil Royalty, Director, at 916-930-5222, or Tom Lanning, Partner, at 646-834-4108.
 
To learn more about CohnReznick’s Not-for-Profit and Education Industry Practice, please visit our webpage.


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This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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