Let’s Not Overreact to Report About Nonprofits Owing Payroll Tax Debt

Common Sense

A report issued in July by the Treasury Inspector General for Tax Administration reports that approximately 64,000 or 3.8 percent of all tax exempt organizations (numbered at 1.7 million in 2012 in this report) owed at least $875 million in unpaid taxes to the federal government as of June 2012.  Sixty-nine percent of this debt was in unpaid payroll taxes. The remainder of the debt is made up of reporting penalties (4%), excise taxes, unrelated business income and other taxes.

This has produced some fairly sensational headlines like “Tax Exempt Groups Neglect Tax Debt”, “Tax Exempt Deadbeats” and “Tax Exempt Groups Owe Millions” but the issue may be a bit overblown and it definitely should not be considered yet another indicator of inferior management among nonprofits because:

  • This dollar figure is down from that reported by GAO in 2007 when 55,000 nonprofits were reported to owe a collective Billion; that is, during and post-recession when many nonprofits were and sometimes still are in severe cash flow crunches they did not make the terrible mistake of not paying their payroll taxes; 
  • In 2007 1.6 million businesses owed $58 billion in unpaid payroll taxes, and within that number 55,000 nonprofits owed $1 billion if we figure that the proportions of the problem are similar, the dollar amount owed by the nonprofit sector is not even 2 percent of the whole. Yet, according to the Urban Institute, in 2010, nonprofits were 5.4 percent of GDP.  (Hello! Wait, does that mean we manage more responsibly than businesses?)
  • Most of the debt is owed by a relatively few organizations. In fact, $656 million is owed by only around 1200 organizations but the range of debt is large with some owing only $100,000 and five owing more than $10 million. An additional seven thousand nonprofits owe between $10,000 and $100,000 which leaves approximately 56,000 owing less than $10,000 each.

We’d like to see a headline maybe that says “Nonprofits have kept their Tax Debt Under Control and Even Reduced it Despite the Fact that Government Does not Make Cash Flow Easy” or something like that. Or how about, “The Large Majority of Nonprofits are Excellently Run, Staying Well Up to Date on their Payment of Taxes”?

But maybe that would not play into the easy dominant narrative about our sectoral incompetence!

Kate Barr of the Nonprofit Assistance Fund, who has termed the nonpayment of payroll taxes one of the worst mistakes a manager can make comments,” the report title implies a sweeping problem in the nonprofit sector. The facts and data in the report narrows to a tiny handful of serious problems that need to be handled through tax collection and enforcement processes. While the problems in the report are limited to very few nonprofits, this is a reminder to all of the obligation that nonprofit employers have to their employees and federal and state government to meet all tax filing and payment obligations.”

Yes indeed, the real takeaway may be that if you, as a nonprofit, neglect to pay your payroll taxes it places you well outside the norm of good nonprofit management – somewhere in or near the bottom 3.8 percent in fact. And if you are a nonprofit that assiduously pays taxes you can stand up proudly to shout to your media contacts – “hey wait – those headlines do not reflect our excellence! Do the story right!”