Nonprofits Owe IRS $875 Million in Unpaid Payroll Taxes, Report Finds

A small percentage of nonprofit organizations owe the Internal Revenue Service nearly $1 billion in unpaid payroll taxes, a report from the Treasury Inspector General for Tax Administration finds.

The report, Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes (42 pages, PDF), found that more than sixty-four thousand tax-exempt organizations in the U.S., or 3.8 percent of the total, owed nearly $875 million in federal tax as of June 2012. About twelve hundred nonprofits owed more than $100,000 each, often covering multiple tax periods. While tax-exempt organizations are generally not required to pay income taxes, they are required to pay payroll and other taxes.

In reviewing twenty-five 501(c)(3) organizations that appeared to be among the worst offenders, TIGTA found that the organizations received government payments totaling more than $148 million over a three-year period, including Medicare, Medicaid, and government grants; had annual revenue of almost $167 million (including government grants); and owned assets of more than $97 million — and owed more than $25 million. An officer or director of a noncompliant tax-exempt organization can be assessed a Trust Fund Recovery Assessment, also known as a 100 percent penalty, under Section 6672 of the tax code, Forbes writes.

The Exempt Organizations unit of the IRS generally is not aware of tax delinquency situations because another IRS unit is responsible for collecting delinquent taxes, the report notes. While the Internal Revenue Code does not authorize the IRS to revoke an organization's tax-exempt status based on its failure to pay taxes, the report recommends that the director of the Exempt Organizations unit coordinate with the Small Business/Self-Employed Division to ensure timely receipt of relevant collection information; periodically conduct analyses to identify and examine groups that potentially abuse their tax-exempt status; and work with the Department of the Treasury to evaluate the need for a legislative proposal to strengthen the agency's ability to enforce payroll tax noncompliance by tax-exempt organizations. According to TIGTA, IRS management disagreed with the first two recommendations and agreed to apprise Treasury of the third.

"Tax-exempt organizations have a responsibility to remit to the IRS taxes that have been withheld from employees as well as other applicable federal taxes," said J. Russell George, Treasury Inspector General for Tax Administration. "Failure to remit these taxes is a very serious matter."

"Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes." Treasury Inspector General for Tax Administration Press Release 08/13/2014. Robert W. Wood. "Shocking Report Says Nonprofits Owe $875 Million in Taxes to IRS." Forbes 08/14/2014.