A group of individuals volunteer for a non-profit Board. They have monthly meetings and work diligently to further the mission and objectives of the organization. They are periodically presented with some informal reports regarding the organization’s finances but never see formal financial statements or tax returns. One day, the Board members receive a letter from the IRS indicating that they are personally liable for taxes owed by the non-profit organization to the U.S. government.
How can this be accurate? It is.Members of the Board and the executive team are personally liable, like owners of for profit companies, for trust fund taxes due and owing. Trust Fund taxes are those taxes withheld from employee paychecks to be sent to the federal or state taxing authorities. These are funds that belong to the employee and are paid on that employee’s behalf. They do not belong to the company, cannot be used by the company or non-profit for any purpose and must be sent directly to the taxing authority. The same type of liability attaches for employee retirement and pension contributions.Lessons LearnedBoard service, whether paid or unpaid, is a noble endeavor and an honor. But don’t take it lightly. Be assertive about requiring financial statements, ask questions about taxes and be aware that there might be some truth in the old adage “no good deed goes unpunished.” If you find that the executive team is not presenting financial statements or that they don’t make sense, you have to ask yourself whether the liability exposure is worth it, especially if you are volunteering. While the organization’s leadership may have simply been re-purposing those trust fund monies to keep the entity afloat, the personal liability attaches nonetheless. A part of your responsibility in board service is to expect, receive, review and understand financial statements and to ask the difficult questions when necessary. Don’t be a passive observer, it only devalues your service. The organization demands active and informed service from you and you must be prepared to provide that before agreeing to join a board.