Nonprofit Organizations: Basic Requirements

Nonprofit Organizations (other than churches) must file for federal tax exemption under the provisions of IRC § 501(a).  Many of the organizations that desire to qualify as charities file for exemption and attempt to qualify under the provisions of IRC § 501(c)(3).  A § 501(c)(3) organization must be both (1) organized and (2) operated in accordance with its exempt purpose.  To meet (1), a complex organizational process must be followed which will include the filing of a form 1023 with its associated schedules and disclosures.  Once the § 501(c)(3) has been successfully organized, it must be continually (2) operated in accordance with its exempt purpose.  

Are you withholding too much (or too little) income tax?

The IRS has handy withholding calculator that can be used by employees to help determine how much they should be withholding from every paycheck.  I recommend this tool for clients that find out that they are either over-withholding or under-withholding and want to more accurately plan their withholding amount.  

Trust Fund Recovery Penalty: Does it apply to me as a volunteer director of a Nonprofit?

There is an exception to the TFRP general rules of IRC § 6672 for unpaid volunteer directors or trustees of nonprofit organizations as long as the director is serving solely in an honorary capacity, does not participate in the day-to-day financial operations of the organizations, and does not have knowledge of the failure to file.  See IRC § 6672(e).  

Trust Fund Recovery Penalty: I am not a “responsible person,” I just work here.

Under the TFRP rules and case law, almost any officer, director, shareholder, member, manager or other owner can be found liable for TFRP.  In investigation, the IRS looks to factors such as a person’s ability to hire and fire employees, exercise authority over which creditors get paid and when, control of payroll and control of the Corporation’s voting stock.  IRM 5.7.3.3.1(4)  In many instances, the primary factor to determine whether or not a “responsible person” designation is made whether or not that person had the decision making ability (either by themselves or with others) to pay other creditors before the IRS.  If the answer is yes, then it is likely that the TFRP will apply.  

Trust Fund Recovery Penalty: Who is at Risk?

The TFRP applies to “any person” that is required to withhold and pay over any tax.  See IRC § 6672.  In a Corporation a “person” includes any officer or employee of the corporation as well as its directors and shareholders.  In a partnership or LLC, any member or employee can be a responsible person.  The key is, that the responsible person has the duty to collect, account for and pay withheld trust fund taxes.  See § 6671(b).  This definition has been expanded to include employees such as controllers, office managers and general managers.  Although Courts look to the facts of each situation to determine who was responsible to withhold and pay over taxes, every officer, director, member, shareholder and key employee of a business should be aware of their potential responsibility.  In most instances, numerous parties can be held responsible for a TFRP.  If you have questions about your status, or the status of your business, please do not hesitate to contact me.