IRS hears 'Actively Involved,' thinks 'Responsible'

A case brought before a federal district court this month once again demonstrated the perils faced by anyone who becomes involved in running a financially distressed company.

The court concluded that the volunteer chairman of the board of a tax-exempt organization was personally liable for the penalty imposed on a responsible person who fails to cause an employer to pay federal withholding taxes (Bunch v. U.S., 109 AFTR 2d 2012-572, March 8, 2012).

The fact that a company is a tax-exempt entity will not shield people who fail to exercise their duties carefully to make sure the company pays employment taxes to the IRS.

The tax law may provide relief in certain cases. It provides that unpaid volunteer board members of tax-exempt organizations are exempt from the penalty if they:

  • Are solely serving in an honorary capacity,
  • Are not involved in day-to-day financial activities, and
  • Do not know about the penalized failure.

If the volunteers meet all of these provisions, they are exempt - unless that exemption results in no one being liable for the penalty.

In this case, Don Bunch was actively involved in the organization's affairs. In various documents, he was listed as chairman of the board, president, CFO, principal and registered agent. When Bunch learned that the third quarter 2006 withholding taxes were unpaid, he lent the organization money to pay the taxes.

The court agreed with the IRS that Bunch was a responsible person for purposes of the 100 percent penalty for failure to pay withholding taxes.

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