A volunteer president of the board of directors of a nonprofit day care center was held personally liable for the day care’s payroll taxes and therefore was not entitled to a refund of the taxes he paid on behalf of the organization. The Seventh Circuit Court of Appeals rejected the taxpayer’s arguments that he was exempt from any obligation for the payroll tax because of his volunteer status with the organization and the government’s failure to warn him (and the public) of the potential tax liability.
Code § 6672(a) imposes a penalty on any “responsible person” who willfully evades or fails to collect, pay or account for payroll taxes. The amount of the penalty is the tax evaded or not collected, accounted for or paid to the government. A responsible person is someone who has enough control over the financial affairs of an organization to pay other debts instead of the organization’s payroll obligation. Exclusive control is not required, and delegation of the authority to remit the payroll taxes does not relieve someone of section 6672 liability. Willful conduct is a voluntary, conscious or intentional decision not to pay the taxes and includes a reckless disregard of a known risk that the taxes are not being paid. Volunteer directors are exempt from the penalty only if three conditions are all met: Their position is strictly honorary; they don’t participate in day-to-day or financial operations; and they have no knowledge of the failure that caused the penalty.
From the early 1980s until 2001, Charles E. Jefferson, an Illinois state representative, was the volunteer president of the board of directors of New Zion Day Care Center, a nonprofit organization in Rockford, Ill. As board president, Jefferson was not in charge of day-to-day operations but had the authority to obtain loans, determine financial policy and direct payment of the day care’s bills and payroll taxes. In 1998, the executive director of the United Way informed Jefferson and other board members that the day care could lose its United Way funding due to unpaid payroll taxes. Later in 1998, after losing the United Way funding, Jefferson secured a bank loan to pay those taxes. New Zion continued to have financial problems resulting in additional unpaid payroll taxes for April 2000 to June 2001. Jefferson and other board members were made aware of these problems through reports from New Zion’s director that they approved. After paying payroll taxes of $41,432 to the IRS, Jefferson filed suit for their recovery in district court, received an adverse decision and appealed to the Seventh Circuit.
The court held that Jefferson had sufficient financial control to be a responsible person, since he had negotiated loans, reviewed financial reports, hired an accounting firm to examine the day care’s financial situation, reviewed reports prepared by that firm and had directed payment of payroll taxes in the past. The court also found his conduct willful, since he knew of the organization’s past payroll tax delinquencies and had access to financial reports indicating an increasing tax liability but took no steps to ensure payment of those taxes. The court also determined Jefferson’s board position was not honorary, due to his power and responsibilities as board president.
Jefferson also argued he should be relieved of any liability since the IRS had not prepared materials, as required by P.L. 104-168, that explain situations where board members of tax-exempt organizations can be liable for unpaid payroll taxes. The court agreed the IRS had not prepared the materials but said Jefferson still needed to show he would have paid the taxes if he had had the materials. The court found no evidence of this; therefore, the absence of the materials did not automatically invalidate the penalty.
Charles E. Jefferson v. U.S., 102 AFTR2d 2008-6572
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.