Not-for-profit board members beware: The IRS may have you in its scope

It's a growing trend for socially responsible companies to encourage employees to serve on not-for-profit boards. At the same time, the IRS is stepping up its scrutiny of private charitable corporations and in some cases, holding board members personally accountable when something goes wrong.

Here's what happened to Steve Verret, board chairman of a not-for-profit hospital in Beaumont, Texas. After the CEO of the hospital failed to pay employment taxes, the IRS held Verret responsible. According to Verret, the CEO assured him repeatedly that the taxes were being paid on a timely basis. But that wasn't enough. The IRS said he should have asked to see proof. Because he didn't, he was forced to pay nearly $409,000 in unpaid taxes and interest.

What happened to Verret can happen to others, says Steve Tatum, board chairman of the Texas Health Fort Worth Hospital and attorney with Cantey Hanger in Fort Worth. That's why he is sounding an alarm to let individuals and not-for-profits know this is a possibility – a little known possibility – that can happen to any volunteer board member.

According to Tatum, boards need to ensure the organization's bylaws make it clear that the day-to-day operations are the responsibility of employees, not the board itself. The board oversees strategic issues and major decisions, not the daily details. In addition, says Tatum, boards need to be mindful of potential conflicts of interest. For example, in Verret's case, there were several conflicts, including the fact that his wife was the Chief Operating Officer of the corporation while he was the board chairman.

Barry Silverberg, CEO of the Texas Association of Nonprofit Organizations, hopes that this increased scrutiny by the IRS will not scare people away from board service. He told reporters at the Fort Worth Star-Telegram that board members should be aware of what could happen and take measures to ensure that the corporations they serve are in compliance. At one time, volunteers may have gotten a pass by stating they had no knowledge of operations. Today, says Silverberg, they may be required to sign documents asserting that the numbers on financial statements are accurate. "This is not new." Boards of directors have "always been responsible for accountability, and now that's being enforced very strongly."

Mixing personal business with board service is always a bad idea, he adds. Board members have a duty to act with the same care they would use in their personal business. "It's really important that boards understand what their legal responsibilities are. Legally, the control of the corporation rests with the board."

Not-for-profits may be able to purchase Director & Officer insurance, though this coverage can be expensive. D&O insurance protects directors from personal responsibility for the acts of the corporation.

Also, if state law allows it, a not-for-profit might consider adding an indemnity clause to its articles of incorporation. Indemnity clauses are generally made by resolution of the board and allow the corporation to reimburse a director for losses and expenses, provided the director acted in good faith and in a manner he or she thought was best for the corporation.

Attracting talented individuals to board service has always been critical in the not-for-profit world. Now with the Obama administration seeking changes in the tax code that could drastically undercut their funding, it may be more important than ever to have strong leadership in place. Not-for-profits need to take steps that will allow those leaders to feel secure in their board roles, in case the spotlight of the IRS swings in their direction.

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