Payroll Tax Responsibilities - A Gentle Reminder

A recent Tax Court memo decision serves as a good reminder that an organization is ultimately responsible for payroll tax deposits and filings even if the duties are delegated to an outside provider. In McNair Eye Center, Inc. v. Commissioner, TC Memo 2010-81, the owner of the eye center was held to be ultimately responsible for the timely deposit of payroll taxes despite the fact he hired an outside CPA to take on those responsibilities. The CPA filed the 2005 Forms 941 in February of 2006 and failed to pay the 2005 payroll taxes. The IRS determined, and the Court agreed, that the ultimate responsibility for the payment of the payroll taxes was the owner of the eye center. Therefore, there was not a reasonable cause to abate the penalties related to the late payment of the payroll taxes and the late filing of Forms 941.

While this case involves a for profit entity, the rules are the same for nonprofit organizations. Organizations should take seriously all responsibilities surrounding payroll. The ultimate responsibility for the payment of the payroll taxes is often attributed to the board of directors of the nonprofit or the officers of the nonprofit. This is true even if the organization has hired someone to handle all of the payroll functions of the organization and even if the organization uses an outside payroll service to process its payroll.

Not only are the related penalties a concern for an organization, but anyone deemed to be a "responsible person" can be held personally liable for unpaid payroll taxes. Therefore, it is in everyone's best interest to institute procedures to confirm the organization's compliance in regards to its payroll tax deposits and its payroll tax filings.

New Resource For Nonprofits

Thomson Reuters/PPC has just published a brand new guide for nonprofits entitled Nonprofit Tax and Governance Guide: Helping Organizations Comply. Unlike other PPC materials that are published for the professional practitioner, this guide is published specifically for the nonprofit organization, its board members, and its staff. It covers various areas of governance, fundraising, compensation, and contributions. My husband, Frank Sommerville, and I were honored with the opportunity to assist in the writing of this new resource, so we are especially excited about its publication. The guide is full of helpful information as well as examples of policies, procedures, and other practical tools to assist you in operating a nonprofit organization. Any organization interested in more information about the publication can contact PPC at 1-800-431-9025.

HIRE Act of 2010 - The Tax Man Giveth

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act better known as the HIRE Act of 2010. (Do you wonder how many people it took, or how long it took them, to come up with the name for this legislation that would create the acronym HIRE?) This act relieves employers from paying the social security portion or OASDI portion of the employment taxes on wages paid during 2010 to qualified workers.

CAUTION: There is no relief from the employer portion of Medicare taxes or any of the taxes that are withheld from the employee.

The OASDI portion of the employment tax is the 6.2% of the FICA taxes assessed on wages up to $106,800 during 2010. The maximum OASDI tax an employer must pay on any worker is $6,621.60. In essence, an employer will not have to pay this tax on wages paid between March 19, 2010 and December 31, 2010 to a qualified worker.

A qualified worker is one that is:

• Employed after February 3, 2010;
• Provides a signed affidavit that he has not been employed for more than 40 hours during the past 60 days;
• Isn't employed to replace another employee unless the other employee separated from employment either voluntarily or for cause (i.e., you can't fire the entire staff and then hire new ones simply to benefit from this new law); and
• Isn't related to the employer.

The tax relief that is attributable to the first quarter of 2010 will not be refunded, but will be applied to pay other payroll taxes that are due for the second quarter. After that, the employer will simply not have to remit the taxes. (This gives the IRS enough time to draft the new Form 941. There simply isn't time before Form 941 is due for the first quarter of 2010.)

Lack of Required Statement Kills Charitable Contribution

Friedman, TC Memo 2010-45
In a recent Tax Court decision, a taxpayer forfeited his charitable contribution for several reasons but one of the reasons was due to an insufficient charitable contribution receipt. The receipt issued to the taxpayer failed to contain the statement that there were no goods or services provided to the donor in exchange for the contribution.

Background
In 1995 Congress enacted IRC Section 170(f)(8)requiring a donor to obtain a qualifying charitable contribution receipt to claim a deduction for a contribution of $250 or more. A qualifying receipt must meet the following criteria:

1. The receipt must contain the amount of cash or a description of the property contributed.
2. The receipt must state whether or not the donee organization provided any goods or services in consideration, in whole or in part, for the contribution.
3. The receipt must contain a description and a good faith estimate of the value of any goods or services referred to in (2) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
4. The receipt must be addressed to the donor and obtained by the donor by the earlier of the date the donor files his tax return or the due date of the return (including extensions).

Additionally, legislation in 2006 added to the above requirements the need for the receipt to reflect the dates of the donations as well as the individual amounts of the donations.

Implementation
Despite the fact that these changes in the law originated in 1995, an amazing number of charitable organizations still do not issue receipts with the wording required to make the receipt a qualifying receipt. Granted the law is not on the organization, but rather it is on the donor to have a qualifying receipt in order to claim a donation. However, donors believe that the receipts received from charitable and religious organizations will be qualifying receipts. Many discover in the course of an IRS exam that the receipt received from an organization is not qualifying and lose the corresponding deduction. There is nothing at this point that can be done for a donor. The donation is lost and the receipt cannot be corrected. At this point, an organization may lose a valuable relationship.

Despite being the law for 15 years, many organizations, including many religious organizations, are issuing receipts to their donors that are insufficient to claim a donation. Each year as my firm prepares tax returns for individuals, we see receipts that are insufficient to claim a donation and must be reissued prior to the completion of the return. Additionally, I have received calls from distraught church finance and business administrators wanting to know how to provide assistance to the member who has lost the deduction due to an insufficient receipt.

In order to make sure that an organization is not the one in the hot seat dealing with a distraught and angry donor, it should review all the contribution receipts for your organization and make sure the following wording appears on the receipt.

There were no goods or services given in exchange for the above contributions other than intangible religious benefits.

In the event the receipt does include the fair market value of the goods or services received, the the organization may include this statement:

There were no goods or services given in exchange for the above contributions other than intangible religious benefits and those goods or services so indicated on this receipt.

Haiti Earthquake Relief Contributions Deductible in 2009

On January 22nd, President Obama signed into law H.R. 4462, which allows taxpayers to claim a charitable contribution on their 2009 tax return for cash contributions given through March 1, 2010, dedicated to Haiti earthquake relief. The law does not extend to the donation of noncash items dedicated to relief efforts. The contributions may be deductible either on the 2009 tax return or on the taxpayer's 2010 tax return.

This new law will require charitable organizations to clearly indicate on donor receipts the contributions received for Haiti relief efforts. Additionally, the contributions for Haiti relief efforts will need to be separately stated on any cumulative or year end receipts issued at the close of 2010.

As a reminder, all contributions of $250 or more are required to be documented with a qualifying receipt including the following:

• the date the receipt is issued
• the name and address of the donor
• a listing of the charitable contributions
• a statement indicating that no goods or services were given in exchange for the contribuitons

Year End To Do Items

The holidays are upon us and soon it will be the end of the year. Now is a good time to turn your thought toward a couple of housekeeping items necessary to plan for 2010.

Item 1: It's time to review compensation packages and make sure they are properly designated for 2010. Review the package to make sure all components are properly stated and approved. Housing allowances should be separately stated and clearly approved by the right authority. Even if nothing is changing for 2010, restate the entire package and the housing allowance for good measure.

Item 2: Get ready for charitable contribution reporting. Review the way the software program is preparing receipts and make sure all the required items will be printed on the receipts. The IRS is giving taxpayers a lot of scrutiny in this area. Many agents are looking for receipts to be signed by someone in the organization and to be on organization letterhead. These are not requirements, but the agents are pursuing these issues as if they were requirements. If the receipts are going to be printed on plain paper, consider what can be done to make them look official. Please make sure the receipts contain the required wording, i.e., there were no goods or services given in exchange for the listed donations.

Item 3: Have the governing body approve the budget for 2010. This gives the employees the right to operate the organization during the year.

Item 4: Make sure the organization has a conflict of interest policy, a document retention policy and a whistleblower policy adopted by the end of the year.

Item 5: Get ready for payroll reporting!!!! Review all of the benefits provided to the employees and the payroll items to ensure that everything is properly reported on the Forms W-2. Remember that payroll is more than just what goes on the paycheck. The IRS is gearing up to do 6,000 payroll exams starting in 2010, so it is definitely time to get everything in order.

Item 6: Review all of the vendors and make sure they are properly marked to have the Forms 1099-Misc issued. Don't forget to key payments to LLCs as reportable on the Forms 1099-Misc. The IRS can assess a 25% backup withholding tax to the organization if it fails to issue a 1099-Misc when required.

While there are certainly many other demands on our time during this time of the year, it will be greatly beneficial to divert a little time to the above items prior to December 31st.

IRS Releases Draft of 2009 Form 990

The IRS has released the draft of the 2009 Form 990. It can be located at http://www.irs.gov/ under their Draft Forms section. A quick review of the form does not reveal any major changes in the form. One notable change is the clarification that is now allowed when the organization is a part of a consolidated certified financial audit. Questions have been added that allow an organization to indicate whether it received an individual certified financial audit or was a part of a consolidated financial audit. I have not had the opportunity to review all of the schedules to determine any changes that may have been made.

In early November, the IRS issued sets of Frequently Asked Questions (FAQ) for Schedules A and L of the Form 990. These are just a part of the FAQs that have been released this year to assist in clarifying various filing issues for 2008 returns. It is hopeful that some of this information will make it into the 2009 instructions.