The Tax Charities Cannot Ignore: Not Paying Payroll Taxes Threatens Nonprofit’s Survival

The Detroit Free Press reports that the Whitmore Lake Health Clinic is on the financial ropes in significant part because it failed to pay $85,000 in payroll taxes two years ago.  The 38-year old clinic serves approximately 1,300 low and moderate-income patients in communities west of Detroit.  The amount it owes the IRS has now increased to $110,000 with interest and penalties, and the IRS has placed a lien on the clinic’s property, which led to that property entering foreclosure.  The clinic’s pro bono attorney also noted that the clinic did not help its case when it published the name and phone number of the IRS agent involve in its newsletter.

This story illustrates that even for tax-exempt charities such as the Clinic, there is one tax they cannot ignore: payroll (i.e., Social Security, Medicare, and withheld income) taxes for their employees.  It can be very tempting for a financially struggling nonprofit to tap into these taxes, especially since for small organizations those taxes can accumulate for weeks before having to be paid over to the IRS.  As the Clinic’s story illustrates this is a recipe for financial disaster, as the IRS will come looking for this money and the dollar amounts grow very quickly.  For example, according to the Clinic’s 2005 Form 990 on Guidestar it’s total annual budget was only approximately $400,000 yet it now owes the IRS over a quarter of that amount. 

LHM