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Audit Finds Many Tax-Exempt Organizations Fail to Pay Payroll Tax

When most people think of tax payments, they may first think of their income tax, as it may be the largest tax they pay over the course of a year. Property tax may come next, along with sales tax. But if you own or work for a business that has employees, the tax that you should always pay attention to is your payroll tax.

And if you work for a tax-exempt entity, you should be especially concerned about payroll or employment taxes. The entity's' tax exemption does not extend to these taxes, including Social Security retirement, disability and Medicare withholdings. A report from the Treasury Inspector General for Tax Administration (TIGTA) has found that numerous tax-exempt organizations have failed to pay those taxes. Simply put, "Failure to remit these taxes is a very serious matter."

They found 1,200 tax-exempt organizations owed more than $100,000 each. This is "very serious" because if you are responsible for paying these taxes, as an officer or employee of the entity, you could be personally liable for the nonpayment and subject to the Trust Fund Recovery Penalty (TFRP).

While you have to "willfully fail" to pay the tax, in this context, the willfulness requirement does not entail any "evil intent or bad motive." All that needs to be shown is that you were aware that payroll taxes should have been paid and you were indifferent to the obligation.

The Internal Revenue Service (IRS) example of willfulness indicates that if you owe payroll taxes, the mere action of paying other creditors first is sufficient to find willful conduct. The TFRP is a penalty equal to the amount of unpaid payroll tax (or "Trust Fund" tax) owed.

For those 1,200 tax-exempt organizations, it means any "responsible person" could be looking at $200,000 or more as a penalty for the non-payment of the payroll tax.

Because an assessment of a TFRP means the IRS can proceed against your personal assets, you need to act immediately if you receive a letter from the IRS naming you as a responsible party.

Source: Treasury Inspector General for Tax Administration, "Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes," August 13, 2014

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