ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WILL THE IRS ASSESS A MEMBER OF THE BOARD OF DIRECTORS FOR UNPAID CORPORATE PAYROLL TAXES?
By Robert S. Schriebman
Will the IRS assess a member of the board of directors for unpaid corporate payroll taxes? Periodically I get calls from concerned individuals who are affiliated with a non-profit corporation that has fallen behind on its payroll tax compliance. Should the non-payment of these payroll taxes be of personal concern to a voluntary member of the board of directors of a charity or other non-profit? The other side of the coin poses the same question to a member of a board of directors of a for-profit entity. THE ANSWER: Yes. A member of a board of directors, whether a tax-exempt or for-profit corporation faces personal exposure.
By all economic indicators we are headed into uncertain economic times. We now have the highest inflation in 40 years, and those in the know are predicting a recession soon. Economic downturns generate economic woes on all types of organizations. These woes are soon manifest when it comes to withholding and paying over employment taxes to both the IRS and the EDD. The collection manpower at the IRS is at the lowest point in many years. Currently, there are not enough Revenue Officers to go around. However, this is about to change, and the IRS has been given the green light to hire and train more collectors. More collectors mean more attention to companies and organizations that fail in their payroll tax compliance. Translated – more Trust Fund Recovery Penalty (TFRP) assessments by the IRS and more, CUIC § 1735 assessments by the EDD.
Years ago, the IRS followed the policy of not assessing volunteer members of the board of directors of non-profits. The EDD had no such policy. This said, the recent case of K. Moland (DC, ORE, 2022) is a clear indication that the gloves are off when it comes to non-profit noncompliance. Moland was held to be a responsible person for the TFRP. He served on the boards of directors of three athletic clubs. He was aware that the clubs could not meet their payroll tax obligations. Moland was more active in these clubs than just being a director. He served as president for one quarter; he signed the clubs’ quarterly payroll tax returns; and he had signatory authority over the clubs’ bank accounts. He exercised control over the clubs’ banking arrangements. He also held a 50% ownership interest in these clubs. For the IRS, assessing Moland the TFRP was a no-brainer.
There is a lesson here for anyone serving on the board of a club or other recognized charity. Board members chose officers. It is the job of the officers to run the day-to-day fiscal affairs of the organization. If a board member crosses the line and functions in the capacity of an officer, there is exposure to both the IRS and the EDD for unpaid payroll taxes. This is a clear warning by the US District Court that once the line is crossed, there may be no place to hide. As we head into a recession, the line separating the functions of a director vis-à-vis officer, must be observed and followed.
It is naïve to assume that a voluntary member of a board of directors of a non-profit is totally insulated from personal exposure for unpaid payroll taxes. Yes, the IRS still attempts to avoid the TRFP assessment against volunteer members. But this insulation only goes so far. If a board member crosses the line and participates in the day -to-day fiscal affairs of the organization such as signing checks, signing EDD an IRS quarterly and annual payroll tax returns, and controls banking, the IRS and the EDD will offer him/her no protection.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 663