Personal Liability of Directors of Not-for-Profit Corporations

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When payroll tax withheld from employees has not been paid to the government by a corporation or other entity, Internal Revenue Code [section] 6672 provides a method assessment for the entire unpaid tax is made against a responsible individual. In the case of a not-for-profit corporation, often the person assessed is a volunteer member of the Board of Directors.

This article contains research results of an original survey of not-for-profit organizations, with focus upon the Board of Directors. The information gathered from the survey allows an analysis of the operations of not-for-profit entities for determination of possible personal exposure to Internal Revenue Code [section] 6672 penalties by directors.

According to the Internal Revenue Service (IRS), a member of the board of a not-for-profit corporation is as liable for the penalty as is a board member of a for-profit entity. However, the Internal Revenue position is not directly addressed in the text of the statutes.

The IRS position is subject to rulings of various courts in varied jurisdictions. Consequently, there is still a question as to the propriety of the IRS assessing such a penalty against a not-for-profit board member.

The general climate surrounding the issues of Internal Revenue Code [section] 6672 can be provided by the District Court in a more recent court case, Lee vs. United States:(1)

Internal Revenue Code Sections 3102 and 3402 require an employer to deduct, withhold, and pay over to the government federal income and social security taxes from the wages of its employees. Internal Revenue Code Section 7501 provides that such taxes are to be held in a "special fund in trust for the United States" prior to payment. Internal Revenue Code Section 6672, in turn, imposes a 100% penalty on persons responsible for the nonpayment of corporate payroll taxes:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat such tax or the payment thereof, shall in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Internal Revenue Code Section 6671(b) defines the "person" in section 6672 as "an officer or employee of a corporation . . . under a duty to perform the act in respect of which the violation occurs." To be liable, the employee or officer need not be in a position to perform all of the enumerated functions. Thus, one who willfully fails to either collect, account for, or pay over the taxes will be liable.

There are two requirements for liability under Internal Revenue Code Section 6672. The officer or employee must be found to be a "responsible party," and the failure to collect, account for and pay over the taxes must be "willful." More than one person within the corporation can be found "responsible" and liable under Section 6672. When more than one person is liable under Section 6672 for the assessment penalty, the liability is joint and several.

The test for determining whether a person in responsible under Section 6672 is essentially a functional one, focusing upon the degree of influence and control which the person exercised over the financial affairs of the corporation and, specifically, disbursements of funds and the priority of payments. This control over corporate funds is required because Section 6672 was designed to cut through the shield of organizational form and impose liability upon those actually responsible for an employer's failure to withhold and pay over the tax."

Plainly stated, the term "responsible person" means one who has the final word on which bill should or should not be paid. The word "final" in this context means "significant," not exclusive control over such matters ...

... Withholding taxes are to be paid on a quarterly basis. As the employer withholds taxes from its employees, however, a contingent liability is created. The person who is responsible for paying over the withholding taxes to the government is also contingently liable at that point in time.

An individual who ceases to be a responsible person during a quarter is liable for the amount of taxes withheld while he or she was still responsible (when control over the finances of a company switches from one person to another during a quarter, both can be held liable for the entire quarter). The assessment of the penalty under Section 6672 is presumptively correct. Through this presumption, the government may establish a prima facie case of liability, and the amount of the penalty by offering into evidence a certified copy of the assessment. Once the assessment is admitted into evidence, the burden of proof shifts to the taxpayer to establish by a preponderance of evidence that he or she was not a responsible employee or officer, or that the failure to collect, account for or pay the withholding tax was not willful.

IRS's Official Declaration of Imposition of Penalty on Members of a Board of Trustees

In 1984, the Internal Revenue Service issued a ruling(2) on the Service's opinion on whether the [section] 6672 penalty could be assessed against a member of the board of directors of a not-for profit organization. This ruling reads in part:

Failure to pay over tax; responsible persons. A volunteer member of a board of trustees of a charitable organization may be liable for unpaid employment and withholding taxes in certain circumstances under section 6672 of …