Exempt Organizations and Payroll Taxes
When you assume representation of an exempt organization, consider suggesting that you perform a tax audit of the organization for all open years. When the representative of the exempt organization replies that the organization does not pay income tax, you'll reply ‘generally no’ (questions of UBIT aside) but that your main concern is payroll taxes. In a report by the Treasury Inspector General for Tax Administration (TIGTA), TIGTA reported that for the period of the report (not particularly relevant here), more than 64,000 tax-exempt organizations owed $875 million in federal tax debt as of 2012. Twenty-five of the 64,000 tax-exempt organizations were examined more closely, revealing particularly bad violations of the payroll tax laws. For example, the officers of some of these organizations did not file 1040s. Well, no withholding, no W-2; no W-2, and you’re off the radar screen. Other organizations received government grants, but there was no payment of payroll taxes.
Here’s the rub. According to TIGTA, when the IRS made attempts to collect taxes from the offending 25, the seizure of property or levy actions might have resulted in the closing of a given organization and the end of the services that such organization provided to the community. NO seizures were ultimately attempted on the offending 25.
Here’s an additional rub. The IRS cannot typically revoke an organization’s tax-exempt status for failure to pay payroll taxes, but seizures of property, effecting closings, have the same result.
There was the usual sniping between the IRS and TIGTA (according to the IRS, 17 of the 25 closely examined entities fully paid their tax debt), but you should expect more examinations by the IRS of compliance with payroll tax laws by tax-exempt organizations (questions of budgetary constraints aside). More examinations will keep payroll tax debt down (thus avoiding the issue of seizures) and will stop more salvos from TIGTA.
Of course, if the representative of the tax-exempt organization does not authorize a tax audit, you cannot be criticized.