|
|
|
|
|
|
|
This example illustrates a true crisis for a nonprofit. How should it be handled? How can it be avoided? What other issues may be present? Some of the issues are reviewed at Discussion. Jim is the president of the nonprofit; Barbara is the executive director. |
Jim: What did you need to see me about?
Barbara: Well, as the president I thought I better tell you first.
Jim: Tell me what?
Barbara: The State grant fell through. The Governor vetoed all of the social service monies. We're not going to be getting any money at all from the State.
Jim: Ouch. That's going to hit the programs pretty hard.
Barbara: Actually, it's worse than that. I was sure the grant monies were going to come through. I kept the personnel at full staff so that the programs would keep continuity.
Jim: Yes, I remember you telling the board you were going to do that.
Barbara: But now there's no money to pay them.
Jim: Oh.
Barbara: The State Wage and Hour Division called. They're sending an investigator over tomorrow to review our files. I guess they're going to file a complaint.
Jim: What?
Barbara: But that's not the worst part. The quarterly withholding tax payment was due to the IRS on December 31. I was counting on the grant to make that payment. Now I don't know where we'll get the money.
Jim: How much are we talking about here?
Barbara: $54,000.
Jim: We can't pay it.
Barbara: That's what I told the IRS guy. He said that they can always get it from the board of directors.
Are the officers and directors of the nonprofit corporation liable for the unpaid withholding taxes?
In some cases, yes. Particularly in the case of officers or directors who had check-signing authority. Strictly speaking, they are not liable for the taxes, but rather for a penalty amounting to 100% of the unpaid taxes. See the discussion at statutory liability.
What about the unpaid wages - are directors or officers liable for those?
Probably not. The nonprofit corporation faces some stiff penalties, though, and if the employees produced anything tangible, there could be claims against those "hot goods." See the discussion at employment law. Unpaid employment security contributions - ESC - is treated much the same way as withholding taxes.
How do you handle these risks?
It depends which risks you are talking about. If you mean the risk that directors and officers will have to pay the 100% penalty for unpaid withholding taxes, the answer is never to use the government's money for any purpose but paying withholding taxes. The IRS is just too expensive a lender.If you mean the risk that funds will disappear for a program, it should be obvious there are better places to borrow money than the IRS. The ideal solution is forward funding or operating with an appropriate reserve. If the terms of grants don't permit that, discuss with the granting source how to handle program interruptions from funding failures.
Note that the nonprofit in this example saw the potential problem; it just didn't handle it correctly.
|
|
|
|
|
