Unpaid Nonprofit Board Members and the Trust Fund Recovery Penalty

Nonprofits have employees. Employees get paychecks. Paychecks come with withheld income tax and the employee share of Social Security and Medicare taxes. When a struggling charity, church school or community organization stops depositing those taxes, the Trust Fund Recovery Penalty enters the picture, just as it would for a for-profit company.

The people around a nonprofit board table are often volunteers. They meet monthly, approve budgets, and trust the executive director and treasurer to run things. Congress recognized that those volunteers should not face personal liability for taxes they never controlled and never knew about. The result is IRC 6672(e).

The Statute

Section 6672(e) says no penalty shall be imposed under section 6672(a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if the member:

1. is solely serving in an honorary capacity;
2. does not participate in the day-to-day or financial operations of the organization; and
3. does not have actual knowledge of the failure on which the penalty is imposed.

Then comes the exception: the protection does not apply if it results in no person being liable for the penalty.

Congress added subsection (e) in 1996, in Public Law 104-168. The same law directed the Treasury to develop materials explaining when board members of tax-exempt organizations, including voluntary and honorary members, may be subject to the penalty, and to clarify instructions to IRS employees on applying the penalty to voluntary board members. Congress was paying attention to this problem.

Condition by Condition

Unpaid and volunteer

The statute protects an "unpaid, volunteer member" of the board. A board member who is compensated for board service is outside the text. A board member who is also a paid employee, such as an executive director with a board seat, is in a very different position.

Solely serving in an honorary capacity

"Solely" is a strong word. A board member who lends their name and attends meetings is one thing. A board member who also serves as treasurer and reviews bank statements is something else.

No participation in day-to-day or financial operations

This is often the deciding condition. Approving an annual budget is a governance function. Signing checks, approving payroll, choosing which vendors get paid this week, or negotiating with lenders is participation in financial operations. The IRS will look for exactly the indicators it uses for any responsibility determination: signature authority, control over disbursements, authority over which creditors get paid. IRM 5.7.3.4.1 lists them.

No actual knowledge of the failure

The statute requires actual knowledge. That is different from the ordinary willfulness standard, which IRM 5.7.3.4.2 describes as knowing or having reason to know. IRM 5.7.3.4.2 specifically notes that when a volunteer director serves solely in an honorary capacity, the IRS may need to show the person's actual knowledge of the failure to collect or pay over trust fund taxes. For a board member who was never told, that is a meaningful difference.

The flip side is serious. Board minutes that discuss the unpaid payroll taxes, emails from the treasurer about IRS notices, or a finance committee report that mentions the delinquency can establish actual knowledge. If the board was told and kept meeting without acting, the protection may be gone.

The Exception: Someone Has to Be Liable

The last sentence of section 6672(e) says the exemption does not apply if it results in no person being liable for the penalty. IRM 5.7.3.4.1.1 repeats it: the volunteer protection does not apply if it would result in there being no person responsible for the TFRP.

In practice, that means the IRS will first look at the paid staff: the executive director, the business manager, the bookkeeper with real authority, and any officers who actually ran the finances. If one or more of them is responsible and willful, the volunteer exemption can work as written. If the organization was effectively run by its board, with no responsible staff, the exception may pull a volunteer board member back in.

Board Members Who Are Not Honorary

Not every unpaid board member fits the exemption. IRS guidance describes the line. IRM 5.17.7.2.2 notes that a voluntary board member of a tax-exempt organization who is intimately involved in the organization's financial decisions may be a responsible person. The IRM describes a long-serving, unpaid board president who had check-signing authority and control of financial affairs and was aware the trust fund taxes were not being paid, and who was found to be responsible and willful.

So the question is not whether you were unpaid. It is whether you were honorary, uninvolved in operations, and unaware. All three.

If the Exemption Does Not Fit

Failing section 6672(e) does not make you liable. It just means you are analyzed like anyone else. The IRS still must prove responsibility and willfulness under section 6672(a). Board members who held officer titles but delegated the work, or who learned of the problem late and acted promptly, may have strong defenses under the general rules. See our guides on willfulness and on people who did not control the money.

What a Revenue Officer Will Ask a Board Member

A board member who is interviewed should expect the same core questions any potentially responsible person gets, drawn from the responsibility indicators in IRM 5.7.3.4.1. Who hired and fired staff? Who signed checks and had online banking access? Who decided which creditors were paid? Who signed and filed the Forms 941? Who made federal tax deposits?

For a true honorary member, the honest answers are usually "the executive director" or "the treasurer," and "not me." The Revenue Officer will then test those answers against signature cards, bank records and board minutes. If the minutes show the board debating which bills to pay, that cuts against the honorary capacity and no-participation conditions. If they show only budget approvals and program reports, that supports them. Read your minutes before the interview.

Practical Steps for Nonprofit Board Members

If the organization is current:

• Ask for a standing report that payroll tax deposits were made, with the payroll provider's confirmation or the IRS's electronic deposit records.
• Keep the line between governance and operations clear. If you sign checks, you are in operations.
• If the treasurer reports a problem, put the response in the minutes: who will fix it, by when, and how the board will verify it.

If the organization is already behind:

• Do not ignore it. Once you have actual knowledge, the third condition of section 6672(e) is no longer satisfied for later failures.
• Make sure current deposits are made going forward. The IRS treats continued accrual of new payroll tax debt, which it calls pyramiding, as a serious compliance problem. See our pyramiding guide.
• Prepare for a Form 4180 interview and gather documents showing your role: board minutes, committee assignments, signature cards that do not include you, and communications showing who ran the finances.
• If you receive Letter 1153, raise section 6672(e) in a timely protest. Our Letter 1153 guide explains the 60-day deadline.

Why the Paid Staff Should Pay Attention Too

Because the exemption depends on someone else being liable, the executive director and finance staff of a nonprofit should understand that the volunteer board's protection may shift the focus to them. Tax-exempt status under the income tax does not, by itself, relieve an organization of its role as an employer that withholds and pays over trust fund taxes. The very existence of section 6672(e) reflects that.

For a broader overview of the firm's payroll tax work, see the main site's payroll tax page.

Volunteers make nonprofits work. The law protects them, on conditions. Make sure your facts meet all three. If they do not, you still have defenses. Call (813) 229-7100 and let's talk.