According to a recently released report from the Treasury Inspector General for Tax Administration (TIGTA), although most exempt organizations pay their federal taxes, more than 64,200 of the nearly 1.7 million organizations recognized as exempt (or 3.8%) had nearly $875 million of federal tax debt as of June, 2012. This included payroll taxes, unrelated business income taxes, excise taxes, penalties and interest.
Most of the exempt organizations owed less than $10,000 each. But about 1,500 exempt organizations owed more than $100,000 each, with some owing more than $10 million each.
Unpaid payroll taxes and related penalties and interest constituted almost $600 million of the amount owed (about 69%). TIGTA recommended that the IRS Exempt Organizations (EO) Division help detect those exempt organizations that fail to pay payroll taxes, but the EO Division rejected the recommendation. After all, the EO Division has enough to worry about.
What does this mean for your exempt organization? Remember that even if your organization is exempt from paying federal income taxes, it is not exempt from paying payroll taxes and other federal and state taxes. Check with your accountant or tax professional to make sure your organization is complying with all applicable tax regulations.
The federal government is on the lookout for noncompliance, even if the EO Division wants no part of it. The IRS isn’t authorized to revoke tax-exemption based on an organization’s failure to pay payroll taxes, but the IRS could decide to base future audits on an organization’s failure to pay payroll taxes.
And this is not limited to the IRS. State payroll tax agencies, such as California’s Employment Development Department, also are targeting exempt organizations for failure to pay payroll taxes. At the state level, individual officers and employees sometimes can be held personally liable for an exempt organization’s failure to make payroll withholding payments.