BOARDS / GOVERNANCE   CALIFORNIA LAW   CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

CEB: Nonprofit Law: Hot Topics – Livecast on Thu, 2/26, at noon

Hot Topics Letterpress

Erin and I will be presenting a program on Nonprofit Law: Hot Topics for Continuing Education of the Bar (CEB) – State Bar of California livecast on Thursday, February 26 from noon to 1 p.m. The following description of our program is on the CEB website.

Providing counsel to nonprofits requires knowledge and understanding of corporate and tax laws that are often not intuitive or easy to research, and that often differ from the laws applicable to for-profits. In this program, we’ll explore considerations in the nonprofit formation process, potential alternatives to formation of a new nonprofit entity, the legal implications of nonprofits engaging in commercial activities and for-profit social enterprises pursuing charitable goals, common governance mistakes, and recent changes in the laws impacting nonprofits. We will use relevant examples to illustrate how these concepts might apply to your clients.

Program Highlights:

  • New Form 1023-EZ, the short-form federal exemption application
  • Fiscal sponsorship, an often appropriate alternative to a startup
  • Recent changes to the Nonprofit Corporations Law affecting governance and bylaws
  • Earned revenues and application of the unrelated business income tax
  • Prohibited private benefits and application to nonprofits affiliated with businesses
  • Introduction to alternative entities, including the benefit corporation and social purpose corporation
CURRENT AFFAIRS & OPINION   FINANCIAL MANAGEMENT

Important OMB Guidance on Reimbursement of Indirect Costs

 

Investment

In 2013, the White House Office of Management and Budget (OMB) issued historic guidance regarding the policies and procedures of federal grants. Applicable to all new written agreements (contracts and grants) signed after December 26, 2014, government agencies and departments that hire a nonprofit using federal funds must reimburse the organization for its reasonable indirect costs, also referred to as overhead or administrative costs. The Interim Final Rule, updating the regulations of all federal departments and agencies required to follow the OMB Uniform Guidance, closed for public comment on February 17, 2015.

Nonprofits can seek reimbursement of their indirect costs by electing to use their already federally approved indirect cost rate (if one exists), negotiating a new rate, or utilizing the default minimum rate of 10% of the modified total direct costs. The Guidance applies not only to federal government agencies, but also pass-through entities such as those state and local governments that carry out part of a federal program.  This is a significant change, as many pass-through entities previously did not pay indirect costs, even if the nonprofit had a negotiated indirect cost rate established.

While the Guidance does not require a government agency to use the new overhead reimbursement standards for existing contracts or a basic renewal of an existing contract, any substantial changes made to the contract could require that the higher overhead rules apply. For nonprofits that already receive or plan to receive federal funding, it is important to understand the new guidelines and accurately identify and track overhead costs in order to benefit from these changes. It may be necessary to contact the government or pass-through entity associated with the contract in order to elect or negotiate an indirect cost rate and reimbursement. Furthermore, nonprofits should be prepared in the case that those state or local agencies that issues their award are not up to speed about the new requirements. The National Council of Nonprofits advises:

In connection with government grants and contracts, the [OMB] Uniform Guidance provides only the promise of improved treatment; it is incumbent upon each organization to (1) take action to own its own costs, (2) learn its responsibilities and rights under the new rules, and (3) protect those rights through advocacy, both on its own behalf with each grant and contract, as well as by engaging in efforts with the broader nonprofit community.

Lastly, nonprofits should take note that while the guidance requires these agencies to pay for indirect costs, it does not provide additional funding to do so.

Additional Tips from CalNonprofit’s Webinar, “What Nonprofits Need to Know About the New OMB Guidelines:”

Further Reading:

National Council of Nonprofits: New OMB Guidance on Indirect Costs: What It Does and Why It Matters; Know Your Rights … and How to Protect Them

Nonprofit Quarterly: The Word for Today is “Overhead”: OMB Uniform Guidance Takes Effect

CURRENT AFFAIRS & OPINION   SOCIAL ENTERPRISE

A Prediction for the Nonprofit Sector in 2015

 

2015 what lies ahead

Predictions for the new year – love ‘em or hate ‘em – they’re difficult to do well. Good prognosticators have to go beyond stating obvious trends but without being careless. I’ve tried this once before (see 2008: Policy & Random Predictions by Gene Takagi, Esq.), and it’s instructive to look back. So, for 2015, I’ll note just one obvious, but often dismissed, trend and leave the more sophisticated predictions to others.

Nonprofits will increasingly recognize the importance of recognizing, understanding, and responding to the for-profit social enterprise movement.

While there has been a rise of for-profit businesses legitimately pursuing social goals, it’s still difficult for the public to determine which are the true do-gooders and which are the posers. Yet, they are intriguing and inordinately attractive. Are dollars and resources that otherwise would have gone to charity going to these efforts? Of course!

The New York Times certainly recognizes the issue. The newspaper invited experts to discuss the following issue in it its Room for Debate section on December 30, 2014: Is it better to invest money in a socially responsible business or give to a charitable group?

Nonprofits should recognize that many billions of dollars are involved. Corporations will highlight their social programs but those programs will increasingly be funding their own or other for-profit social good efforts instead of charities (e.g., Google.org). Foundations will increasingly make use of program-related investments (PRIs), opting for this still little-used vehicle in lieu of making grants. As for individuals, here are some thoughts I offered at last year’s Independent Sector Public Policy Institute:

Impact and how you evidence impact. That’s what donors and funders want to see. And more and more, individuals (particularly those of younger generations) are becoming sector agnostic. They don’t care if they are supporting nonprofits or for-profits doing good. Making a loan through Kiva (which is not a gift to a charity) or supporting a crowdfunding project (which often is not to a charity) are attractive options. Charities have to recognize this new form of competition, and not only for funds, but also for talent.

Does it matter whether funds and assets designated for social good are given to a nonprofit or for-profit?

Absolutely! 501(c)(3) nonprofit organizations are best situated and structured to advance most charitable efforts. They must be organized exclusively for charitable purposes. They must be operated primarily for charitable purposes. They are subject to restrictions against private inurement, private benefit, excess benefit transactions, self-dealing, and violations of charitable trust laws. And they are required to publicly disclose their annual filings with the IRS. But there are other important factors to consider. For example, it’s even more important to determine which specific organizations (whether nonprofit or for-profit) receive those funds and assets. Some organizations just do a better job at advancing their social missions than others. And some for-profits do a better job than many nonprofits.

How should nonprofits respond to the for-profit social enterprise movement?

Nonprofits need to recognize, more than ever, they are operating in a broadened competitive environment for funds and supporters. And they’ll need to determine how best to compete in light of the changing environment. As noted above, evidencing and framing positive impact should be a priority. But the provision of immediate goods or services, in and of itself, should not be underappreciated. Not every program needs to show a long-term impact on achieving a broader social goal. A bandage has a purpose too.

For some nonprofits, collaborations with for-profits will be a key to staying relevant and creating greater impact. There’s nothing new about looking to for-profits for funding, sponsorship, or opportunities for cause-related marketing. And we’ll continue to see growth in such areas. But we’ll also see new forms of collaboration, some of which will work well and others not so much.

Social impact bonds will continue to be experimented with and evolve. Nonprofits will increasingly use for-profit subsidiaries to operate unrelated businesses. We’ll see more joint ventures between nonprofits and for-profits, including outside of the health care and low-income housing areas. And we’ll see more formal cooperative arrangements to increase service delivery to otherwise neglected markets.

These are exciting times full of challenges and opportunities that should not be trivialized as short-term hype. It’s not just technology that’s changing the world. There’s much more going on.

CURRENT AFFAIRS & OPINION   EVENTS

Top 10 Events in 2014

Top 10

2014 was another year full of events affecting the nonprofit sector in the United States.  Nonprofits were at the forefront of movements issuing demands for reform and played a critical role in achieving successes in areas such as marriage equality and immigration.  They also helped to increase awareness of inequalities and injustices that still exist and to highlight areas in which significant progress still needs to be made, including domestic violence, civil rights, and global wealth disparities.  Nonprofit workers showed, and continue to show, tremendous courage and leadership in fighting the tragic Ebola outbreak and in providing assistance to those affected by it.  On the administrative and legislative front, the IRS eased the process of obtaining tax-exemption for many small nonprofits through the introduction of the Form 1023-EZ and the nonprofit landscape was potentially subject to significant changes due to tax reform and the midterm elections—with the full impact of each of these changes on the nonprofit sector remaining to be seen.   Here’s our list of the top ten events that had the largest impact and a sampling of a few links discussing each:

1.  The shooting of Michael Brown, the following protests, and Black Lives Matter

2.  The Ebola outbreak

3.  Ray Rice and increased attention to intimate violence in the NFL

4.  Immigration reform

5.  Midterm elections

6.  IRS released new, streamlined Form 1023-EZ

7.  The Tax Reform Act of 2014

8.  Developments in same-sex marriage laws

9.  The advance of Islamic State in Iraq and Syria (ISIS) and the CIA Torture Report

10. Thomas Piketty’s Capital in the Twenty-First Century and increased attention to global wealth inequality

CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

Final Treasury Regulations for Charitable Hospitals Released

city hospital building with reflection

The U.S. Treasury released final regulations on December 29, 2014 that provide guidance regarding the requirements for charitable hospital organizations added by the Patient Protection and Affordable Care Act of 2010.

Background (from the regulations):

Section 501(r) was added to the Code by the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)) (the Affordable Care Act), enacted March 23, 2010, and imposes additional requirements on charitable hospital organizations. Section 501(r)(1) provides that a hospital organization described in section 501(r)(2) will not be treated as a tax-exempt organization described in section 501(c)(3) unless the organization meets the requirements of sections 501(r)(3) through 501(r)(6). Section 501(r)(3) requires a hospital organization to conduct a community health needs assessment (CHNA) at least once every three years and to adopt an implementation strategy to meet the community health needs identified through the CHNA. Section 501(r)(4) requires a hospital organization to establish a written financial assistance policy (FAP) and a written policy relating to emergency medical care. Section 501(r)(5) requires a hospital organization to not use gross charges and to limit amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization’s FAP (FAP-eligible individuals) to not more than the amounts generally billed to individuals who have insurance covering such care (AGB). Section 501(r)(6) requires a hospital organization to make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions. Section 501(r)(2)(B) requires a hospital organization to meet each of these requirements separately with respect to each hospital facility it operates.

According to a post written by Emily Morris on the Treasury’s site, Treasury Finalizes Patient Protection Regulations for Tax-Exempt Hospitals, the final regulations provide guidance on the statutory requirements that charitable hospitals:

  • Limit charges.  Hospitals may not charge individuals eligible for financial assistance more for emergency or other medically necessary care than the amounts generally billed to patients with insurance (including Medicare, Medicaid, or private commercial insurance).

  • Establish and disclose financial assistance policies.  Each hospital must establish and widely publicize a financial assistance policy that clearly describes to patients the eligibility criteria for obtaining financial assistance and the method for applying for financial assistance.

  • Abide by reasonable billing and collection requirements.  Charitable hospitals are prohibited from engaging in certain collection methods (for example, reporting a debt to a credit agency or garnishing wages) until they make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy.

  • Perform a community health needs assessment.  Each charitable hospital must conduct and publish a community health needs assessment at least once every three years – and disclose on the tax form it files annually the steps it is taking to address the health needs identified in the assessment.

Here are some other articles and resources regarding the new regulations:

The federal government is cracking down on nonprofit hospitals under ObamaCare in an attempt to prevent harsh collection practices and steep charges for the uninsured. – The Hill

The Internal Revenue Service has released new regulations for charitable hospitals to stop harsh collection practices and make financial assistance policies more transparent to patients. – Becker’s Hospital Review

New Requirements for 501(c)(3) Hospitals Under the Affordable Care Act (IRS)

ADVOCACY & LOBBYING   BOARDS / GOVERNANCE   CALIFORNIA LAW   CURRENT AFFAIRS & OPINION   FISCAL SPONSORSHIP   IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY   SOCIAL ENTERPRISE   STARTING A NONPROFIT   UBIT / UNRELATED BUSINESS

Best of the Nonprofit Law Blog 2014

Best of 2014 - The year in reviewHere are some selected highlights from NEO Law Group over the past year that we hope you’ll find helpful. 2014 was also highlighted by an addition to Erin’s family and Michele’s graduation and passage of the bar exam! Amazing year for all of us.

Blog Posts

Governance

What Issues Should a Nonprofit Board Consider Annually?

Executive Succession: 10 Tips for Boards

Executive Committees: Why You Should Limit Their Authority

Advocacy

Nonprofit Advocacy is More Than Lobbying

Charities and Issue Advocacy: Doing it Right – Part One

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

Fiscal Sponsorship

Fiscal Sponsor Due Diligence

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees

Arts Projects: Charitable or Not?

Proposed Laws

12 Things Nonprofits Should Know About Proposed Tax Reform

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Proposed Rules Affecting California Charities – Comment Period Ends Today!

UBIT / Social Enterprises

UBIT: Advertisements vs. Qualified Sponsorship Payments

Nonprofit Limited Liability Company

Nonprofit Crowdfunding Risks

Miscellaneous

Nonprofit Laws for Human Resources Managers to Be Aware Of

Retroactive Reinstatement Procedures: Simplified

Dissolution and Transfer of Remaining Assets: An Alternative to Merger

Articles

Fair or Foul: A Review of Federal Tax Laws Governing Unfair Competition, The Nonprofit Quarterly (2014)

12 Reasons Why You Should Gracefully Resign from a Nonprofit Board, The Nonprofit Quarterly (2014)

10 Issues To Address In Your Nonprofit’s Social Media Policy, The Nonprofit Times (2014)

Videos

Tips on Starting a Nonprofit: Initial Board of Directors

Tips on Starting a Nonprofit: Fundraising Before Exemption

Tips on Starting a Nonprofit: Initial Bylaws

Nonprofit Radio

Advocacy, Net Neutrality, & The Bright Lines Project

Your Board’s Role in Executive Hiring

Fraud!

Speaking Engagements

Gene

Profit for Good: How Social Enterprise Policy Affects You, Independent Sector Public Policy Action Institute

Hot Topics in Nonprofit Law, CalNonprofits Policy Convention

Small Charities – Problems and Solutions, American Bar Association, Tax Section Mid-Year Meeting

Erin

Earned Income 101 for Nonprofits, Lawline

Understanding UBIT: What Does It Mean for Your Shared Space? Nonprofit Centers Network

Navigating Legal and Ethical Issues, New Grantmakers Institute, Northern California Grantmakers

BOARDS / GOVERNANCE   CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

Pearson Charitable Foundation to Dissolve

group of school kids writing test in classroom

A few weeks ago, the Board of Directors of Pearson Charitable Foundation, the Section 501(c)(3) organization affiliated with the educational publishing company Pearson PLC, announced that it will be closing the Foundation at the end of the year after a decade of operations.  According to the Foundation’s website, the decision to close the Foundation comes after a decision by Pearson PLC to “integrate all of its corporate responsibility activities and functions into its business as a way to maximi[z]e social impact and to no longer fund the Foundation as the primary vehicle for its philanthropic and community activities.”

The announcement comes after several years of controversy surrounding the Foundation, including an investigation by the New York Attorney General.  According the Attorney General, the Foundation was being operated in a manner that was for the benefit of Pearson PLC.  Specifically, the Attorney General found that the Foundation had engaged in activities relating to the development of educational products, including course materials, related to the Common Core State Standards (a set of academic standards that has been adopted by most states) to be sold by Pearson PLC.  The Attorney General also found that the Foundation had helped to attract clients to Pearson PLC by paying for them to attend education conferences sponsored by the Foundation and at which Pearson PLC executives were present.  Both the Foundation and Pearson PLC have denied any wrongdoing, but the Foundation agreed to pay $7.7 million to settle the Attorney General’s investigation.  $7.5 million of the settlement amount was to be paid into a fund to support the work of 100Kin10, a network of organizations focused on placing science and math teachers in U.S. schools.

The investigation, and resulting dissolution, of the Foundation serve as an important reminder of the requirement that Section 501(c)(3) exempt organizations operate to serve a public, rather than a private, interest.  This remains true even when an exempt organization is affiliated with a for-profit entity.  Such affiliated nonprofits (and all nonprofits generally) hold their assets in charitable trust for use in furtherance of their exempt purposes and are prohibited from using such assets to benefit their for-profit affiliates.

501(c)(3) exempt organizations are also prohibited from providing prohibited private benefits, permitting private inurement, or entering into excess benefit transactions.  Private foundations are also subject to strict self-dealing rules under Internal Revenue Code Section 4941 which generally prohibit foundations from engaging in transactions with certain defined disqualified persons.  See our prior posts on these topics for more information.

CALIFORNIA LAW   CURRENT AFFAIRS & OPINION

Proposed Rules Affecting California Charities – Comment Period Ends Today!

Your Comment Counts Suggestion Feedback Opinion BoxUnless the Department of Justice receives persuasive feedback today by 5 p.m., California charities that are required to register with the Attorney General’s Registry of Charitable Trusts (most charities except religious organizations, hospitals, and schools) may be subject to the following regulations and penalties:

  • $100 penalty per day per violation of certain California nonprofit laws, including those regarding timely filings of annual registrations (capped at $1,000 per violation). – This is generally authorized by Gov. Code Sec. 12591.1(c) but may signal a change in policy to enforce such penalties.
  • Automatic suspension of registration for failing to pay penalties when due. – This is generally authorized by Gov. Code Sec. 12591.1(d) but may signal a change in policy to enforce such sanction.
  • Automatic suspension of registration for failing to file complete registration renewals (Forms RRF-1, attachments, and fees) for three consecutive years.
  • Automatic revocation of registration if suspended for one year.
  • Possible refusal by the Registry of Charitable Trusts to renew the registration of a charity that has failed to pay fees or file complete registration renewals for three consecutive years.
  • Need to file an accounting of all charitable assets within 30 days of any revocation of registration.
  • Prohibition applicable to all suspended or revoked charities against distributing or expending any charitable assets without the written approval of the Attorney General.
  • Board members or any person directly involved in distributing or expending charitable assets while a charity is suspended or revoked may be held personally liable.
  • The Attorney General may direct a charity whose registration has been suspended or revoked to distribute some or all of its charitable assets to another charity or into a blocked bank account.
  • Prohibition applicable to any charity whose registration is delinquent, suspended or revoked against fundraising and engaging in other charitable activities in California.

Note that it is very common for charities to be delinquent on their registration renewals, particularly for smaller charities that are volunteer-run whose address on record may be tied to a volunteer leader’s address and not a facility occupied by the charity.

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

Send your comments to:

Scott Chan, Deputy Attorney General

California Department of Justice Charitable Trusts Section

455 Golden Gate Avenue, Suite 11000

San Francisco, CA 94102

Fax: (415) 703-5480

Email: scott.chan@doj.ca.gov

Notice of Proposed Rulemaking Action (September 26, 2014)

Proposed Text of Regulations

Read our Comments to Proposed Regulations 111014 submitted together with Barbara Rosen (Evans & Rosen LLP) and endorsed by Pete Manzo (President/CEO of United Ways of California).
Please consider joining our efforts with your endorsement. Just leave your name and organizational affiliation in the comments or email me at gene @ neolawgroup.com.
Additional endorsements:*

 

* Parties endorsing our Comments include individuals and organizations that do not provide legal counsel but otherwise serve the nonprofit sector.

CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

12 Things Nonprofits Should Know About Proposed Tax Reform

change ahead

On February 26, 2014, Rep. Dave Camp (R-MI), the Chairman of the Ways and Means Committee, released a draft proposal for comprehensive tax reform. The almost 1,000 page document contains significant changes that will affect individuals, for-profit corporations, and tax-exempt entities.  Camp’s proposals will likely be debated throughout the year, but it is imperative that nonprofits stay alert to the possible ramifications of the bill’s lengthy provisions regarding charitable giving, tax exemption, and tax obligations. The discussion draft imposes the following changes:

  1. AGI Percentage Limitations  Adjusted gross income (AGI) limits on charitable giving will be altered to 40% for contributions to public charities and 25% to private foundations. This lowers the percentage limit for cash contributions, but simplifies the rules by no longer making the distinction of whether the contribution is cash or capital gain property.
  2. Two-percent Floor for Charitable Giving – A two-percent floor will be imposed for charitable donations to qualify for a deduction. This means that taxpayers may only deduct the amount of their charitable giving that exceeds two percent of their AGI.  A 2011 study by the Congressional Budget Office determined that this type of two-percent floor would likely cut charitable giving by approximately $3 billion.
  3. Excise Tax on Excessive Executive Compensation – Any compensation in excess of $1 million paid to any of the five highest compensated employees of any tax-exempt organization will incur a 25% excise tax. The compensation cap includes both salary and benefits. The rationale behind this provision is to ensure resource accountability of an organization receiving tax exemption by the Federal government.
  4. Unrelated Business Income Tax – Currently under the law, tax-exempt organizations may calculate unrelated business income tax (UBIT) based on the gross income of all business activities, minus the deductions connected with carrying on those activities. Losses generated by one activity can be used to offset the gains from another. However, under the Camp legislation, organizations will have to calculate UBIT separately for each business activity. This means that the loss from one unrelated business activity will no longer be used to offset the income from another unrelated trade or business activity. Furthermore, any sale or licensing by a tax-exempt organization of its name or logo (including any related trademark or copyright) will be treated as an unrelated trade or business.
  5. Expansion of Excess Benefit Transaction Rules – Excess benefit transaction rules will be expanded to apply to both 501(c)(5) and (c)(6) organizations (e.g., unions and trade/professional associations, respectively), and a 10% tax will be imposed on an organization whenever the excess-benefit excise tax is imposed on a disqualified person of that organization. Furthermore, the safe-harbor rebuttable presumption of reasonableness will be eliminated.
  6. Expansion of Self-dealing and Simplification of Private Foundation Excise Tax  The draft legislation imposes a new excise tax of 2.5% on private foundations for each act of self-dealing discovered within the organization and eliminates the professional advice safe harbor for foundation managers.  Additionally, excises taxes on private foundation investment income will be changed to a flat 1%.
  7. Payout Requirement for Donor Advised Funds – Donor advised funds will be required to distribute all contributions within 5 years of receipt or otherwise face a 20% excise tax on the amount not distributed.
  8. Private Operating Foundations Subject to Distribution Requirements – Private operating foundations will face the same minimum distribution rules currently imposed on private non-operating foundations.
  9. Type II and Type III Supporting Organizations – Type II and III supporting organizations will be eliminated. Thus, any current Type II or III supporting organization will have to qualify as a Type I supporting organization, another classification of public charity, or a private foundation by 2016.
  10. Social Welfare Organization Changes – Section 501(c)(4) organizations will need to notify the IRS within 60 days of formation and may seek declaratory judgments in the same manner as 501(c)(3) organizations. Furthermore, social welfare organizations will be required to list on Schedule B of Form 900 each donor contributing $5,000 or more, who is either an officer, director, or one of the organization’s five highest compensated employees.
  11. Repeal of Tax-Exempt Status for Professional Sports Leagues – While amateur sports leagues may still become tax-exempt under 501(c)(6), professional sports leagues will no longer be permitted to seek exemption.
  12. Electronic Filing of Form 990-series – Most nonprofit organizations will have to file their IRS Form 990 information returns electronically.

Although it is unclear which, if any, of these provisions will be adopted into law, nonprofit organizations should continue to monitor the debate and contemplate how these proposed changes could affect them.

For additional information:

Committee on Ways and Means

–        Comprehensive Tax Reform Site

–        Discussion Draft [Full]

–        Section-by-Section Summary

Independent Sector: Tax Reform

Nonprofit Quarterly: Draft Tax Reform Act of 2014 Proposes Profound Impact on Tax-Exempt Organizations

CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

IRS Deadline: March 1, 2014 – Who is Your Responsible Party?

 

Me 

Do you know who your organization has reported to the IRS as its responsible party? Your organization should make sure the IRS has the current information by the February 28, 2014 deadline.

According to the Instructions to IRS Form 8822-B:

Beginning January 1, 2014, any entity with an EIN [Employer Identification Number] must file Form 8822-B to report the latest change to its responsible party. Form 8822-B must be filed within 60 days of the change. If the change in the identity of your responsible party occurred before 2014, and you have not previously notified the IRS of the change, file Form 8822-B before March 1, 2014, reporting only the most recent change.

For a nonprofit organization, "the “responsible party” is the person who has a level of control over … the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets." Typically, this will be the organization's executive or president.

The person who has accepted the role of being the responsible party may have greater responsibility and therefore greater exposure to personal liability for failure to pay withholding (payroll) taxes. Internal Revenue Code Section 6672(a) provides in pertinent part:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

While there is no direct reference to "responsible party" in Section 6672, it might be difficult for a person identifying herself or himself as the responsible party to claim she or he was not the party responsible for collecting, accounting for, and paying over withholding taxes. The term "person" in Section 6672 explicitly includes officers and employees, and Section 6672 does not from penalties volunteer board members unless they solely serve in an honorary capacity, do no participate in day-to-day or financial operations of the organization, and do not have actual knowledge of the failure to collect, truthfully account for, and/or pay withholding taxes, and so long as someone else can be held liable for the penalty.

It's important to note that nonprofit organizations may have identified a responsible party when it first applied for an EIN (see the organization's Form SS-4 or online filing records). If the individual listed as the responsible party has since changed, a nonprofit organization must file Form 8822-B by no later than February 28, 2014 to report such change.

Here are additional resources on withholding taxes and possible personal liability:

Not Paying Your Taxes? Your Board Could Be Personally Liable (Nonprofit Quarterly)

Yes Virginia, Nonprofit Directors Really Can be Held Liable for An Insolvent Nonprofit’s Debts (Charity Lawyer Blog)