The Worst Nonprofit Financial Choice in the Face of Stress: One More Example

February 4, 2018; New Hampshire Union-Leader

In Manchester, New Hampshire, a drug abuse treatment center named Serenity Place, central to the city’s fight against the terrible ravages of the opioid crisis, is in receivership and considering bankruptcy. Tom Donovan, who directs the Charitable Trusts Unit for the New Hampshire attorney general, acknowledges that it probably will not survive and will need to consider Chapter 7 bankruptcy to protect the board members from being held personally liable for the organization’s debts. (Yes, indeed, that does happen.) The plan now is to dismantle the organization and make sure its programs are adopted. One program, a sober house for women, has already been taken over by another local group.

Nonprofit financial whiz Kate Barr would say that this situation was flying a slew of red flags, in that the organization owed the IRS $182,600 before it went into receivership, money that was withheld from employee paychecks for taxes and Social Security. In an article in NPQ in 2013, Barr calls the neglecting of payroll taxes “the worst financial decision ever” and writes that running up an illegitimate tab with the IRS can then drive every financial decision after that.

On average, we meet with ten or twelve nonprofits every year that are trying to untangle the problems caused by unpaid payroll taxes. Every one of them wishes that they could go back in time and make different decisions. If they could, they would pay the taxes and juggle finances another way.

She calls it “the worst way to solve a cash flow problem ever” and lays out the typical course of events

Here’s how it happens—slowly and silently. Cash flow is tight and when taxes are due, the director/business manager/accountant holds off on the payment “until the grant check comes next week.” The check comes, but other obligations are due. Pretty soon, it’s time for payroll again and cash flow is still tight. By the third payroll, the unpaid taxes are starting to add up to more than can be paid all at once. Meanwhile, the landlord, vendors, and contractors are calling to remind our intrepid manager that payments are due. The IRS doesn’t call, though. This is one of the most insidious parts. People often choose to pay low priority bills before urgent obligations because of relationships, annoying phone calls, or emotions. The IRS doesn’t take action to demand payment of delinquent taxes for quite a while. When they do, the matter is immediately urgent and expensive and becomes the #1 priority for the organization.

She writes that if you still need more reasons to stay current with payroll taxes, share the article “Not Paying Your Taxes? Your Board Could Be Personally Liable” by Francis Serbaroli with your board members. Almost any other course of action that you may take in the face of financial stress, “including taking on additional debt, restructuring, downsizing, and filing for bankruptcy—is better than failing to remit withholding taxes to the government.”—Ruth McCambridge