Even Tax-Exempt Organizations Have to Pay Payroll Taxes

What’s the first thing that comes to mind when you hear “tax-exempt?” You might think that tax-exempt means the organization does not pay any taxes. Actually, tax-exempt organizations carry the responsibility of payroll taxes.

Let’s look at some numbers from the Treasury Inspector General for Tax Administration (TIGTA). According to the TIGTA, 64,000 tax-exempt organizations have failed to pay federal taxes. In total, these missing taxes amount to almost $875 million. Many of the 64,000 organizations owe small amounts. Over 1,000 of these organizations owe more than $100,000 each. Some tax-exempt organizations have not payed for ten years.

Payroll taxes comprise 67% of federal revenue. The remaining 33% of federal tax payments come from excise tax, penalties, and other taxes. Many tax-exempt organizations perform important services in our communities. Because of this, debt collection can be difficult. Seizing property of serving levy actions could deprive communities of those organization’s services. This is not the IRS’ intention. The dilemma may result in the IRS not taking action against the organization. However, the IRS continues to improve efforts to enforce tax regulations.

TIGTA’s Recommendations for the IRS

1. Work with the Small Business/Self-Employed Division to share information about tax requirements.
2. Identify tax-exempt organizations that receive funding from government grants. Sharing information with these groups should be a priority. This also holds for tax-exempt organizations that pay large executive salaries.
3. Discuss a legislative proposal to strengthen payroll tax enforcement.

The IRS indicated that it already acts on the second recommendation. Some of tax-exempt organizations might use their status as a cover for evading taxes. The IRS uses data analytics to identify these organizations.