The IRS was denied summary judgment to impose the trust fund recovery penalty against a volunteer board member. David Bibler was a volunteer treasurer for Excel Academy, a tax-exempt private school. He had no responsibility for day to day operations nor any responsibility to determine what bills to pay. The school’s CEO bore held these responsibilities. Mr. Bibler’s role was confined to participating in board meetings and signing or co-signing checks that were prepared by the CEO’s office.
The board was informed that the school was behind on its payroll taxes and promptly instructed the CEO to pay the delinquent funds. Mr. Bibler was under the impression that the CEO was in control of the situation, talking with the IRS and making payments on this liability.
Nonetheless, the IRS sought to impose the trust fund recovery penalty against Mr. Bibler. Although he was aware that taxes were delinquent, he continued to sign checks payable to other vendors and creditors instead of to the IRS.
The trust fund recovery penalty under IRC 6672 holds any person personally liable for payroll tax withholdings if that person acted willfully to not pay over the tax and is responsible for paying over the tax. There is an exception for those who volunteer for board positions on tax-exempt organizations. To qualify for this exception, all three elements of the following test must be met, which are listed below verbatim:
- [The board member] is solely serving in an honorary capacity;
- Does not participate in the day-to-day or financial operations of the organization; and
- Does not have actual knowledge of the failure on which such penalty is imposed.
The District Court denied summary judgment not because the court believed that Mr. Bibler was not liable, but because the dispute as to whether he was a responsible person was a material fact, that has to be decided by trial.
The lesson here is that a volunteer position does not mean that it is a risk-free position. Mr. Bibler could have protected himself by either refusing to sign any checks subsequent to his learning about the tax delinquency until such time as proof of payment is given or resigning from the board position.
For questions about this or any other tax matter, please contact Larry Rubin or one of our tax advisors at 301.231.6200.