Recently, the Internal Revenue Service, IRS, has increased its focus on Not for Profit entities. The IRS is focusing on compliance and collections. The IRS has become aware that many not for profit entities have either missing returns or taxes that have not been paid, and that could put board members in a financially liable position.
Just like any for profit corporation, a not for profit has filing deadlines. A not for profit will have to file the same general types of forms, employment tax forms and corporate income tax returns. A not for profit will generally keep good books and records. Many not for profit entities have retained outside accounting firms to audit the financial statements. When a not for profit does not file the correct forms when due, the IRS can assert penalties. The penalties can be $50 a day or more. These penalties can add up really fast.
When a not for profit has not paid taxes that are owed, the IRS has increased collections activity. The IRS has increased its assertion of trust fund recovery penalties against the board members of the not for profit entity. If the IRS asserts a trust fund recovery penalty against a member of the board, it is considered a prima facie case. The IRS has nothing to prove. There is no responsible party determination to be made. The board member is automatically a responsible party. The board member will have no defense. The IRS will automatically seek to assert the trust fund recovery penalty. The IRS can seek to collect any back taxes owed from the individual board members.
Once the penalty is asserted, the IRS can collect from any board member. The wealthiest and most liquid individual on the board will be the first to repay the liability. That board member then would have to sue the others to recover any money the other board members may owe. This places a real liability on the unsuspecting board member.
The not for profit can and should purchase an indemnity insurance policy. The not for profit should indemnify each and every member of the board to ensure that none of them are held liable. Each board member should request a copy of the insurance policy. The policy should renew every year, and every year each board member should be issued a copy. This assures the board members that if things go bad, taxes and penalties will not have to be paid by the individual board members. This kind or protection will allow the not for profit to attract qualified and more affluent board members.
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