Minister Gets Hits Hard With Trust Fund Recovery Penalty
By Raul Rivera
There is a law in the books that places pastors and church treasurers/financial secretaries at risk of incurring high personal tax penalties, commonly known as the Trust Fund Recovery Penalty. Though it has been in the books for a long time, many churches are not aware of how severe the penalty is and just how one can fall into its trap.
IRS assesses penalty against a minister
It happened to Apostle Corletta J. Vaughn*. On October 17th, 2011, a United States bankruptcy court ordered her to pay $85,814.69 in taxes plus penalties and interest because the court agreed with the IRS that she was considered a responsible party for the purposes of the Trust Fund Recovery Penalty. Section 6672 states that any person required to collect, truthfully account for, and pay over any tax . . ." or " . . . fails to collect such tax, or truthfully account for and pay over such tax, . . . shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over." Furthermore, IRS Policy Statement 5-14 states that the "penalty may be asserted against those determined to have been responsible and willful in failing to pay over the tax."
How it happened
When a new employee was hired to take over accounting, she discovered that the previous employee at the church was not properly remitting the employment taxes to the IRS. She immediately informed Apostle Corletta about the problem. It became clear that this problem had existed for a few years. Her ministry made some efforts to pay the taxes plus the penalties and interest. Soon after entering into a payment plan with the IRS, the ministry suffered some financial setbacks, as all ministries do from time to time. However, her husband became very ill and it required her to focus much of her time on caring for him. The ministry could no longer keep up with the payments to the IRS. This forced the IRS' hand to move against her, using the power of Section 6672, and to declare a responsible party. As you will see later, once the IRS declares you a responsible party, the burden of proof falls on you to prove that you are not.
Two common ways churches and board members fall into the trap
In my experience with thousands of churches over the past several years, the most common way a church falls in this trap is by not properly filing 941 forms and paying the proper payroll taxes. The second most common way is the way they treat musicians, nursery workers, and other individuals doing small tasks at the church. The vast majority of churches treat these individuals as self-employed and either give them a 1099-misc form, or they do not give them anything at all. This error will add up over a period of time. The IRS can very easily reclassify these individuals as employees, charge the church back taxes, and hold the responsible party personally liable for tax. This often times ends up being the pastor and/or treasurer or financial secretary.
Why the pastor and church treasurer are most at risk
In a court case, Verret v. U.S., 542 F.Supp.2d 526 (2008), the court ruled that Stephen K. Verret was a responsible party and was ordered to pay the penalty of $408,918.66. The court noted the following points that contribute to one being a responsible party:
1. Someone who is an officer or member of the board of directors;
2. Someone who runs day to day operations;
3. Someone who makes decisions as to the disbursement of funds and payment of creditors: and
4. Someone who possesses the authority to sign checks.
The court also noted that one might be considered a responsible party even if he/she does not have knowledge that he/she has such a duty or authority for collecting, accounting for, or paying over employee withholding taxes. Just having significant decision-making power over the disbursement of funds is enough to be considered responsible.
Burden of proof
Once the IRS determines whom the responsible party is, the burden of proof falls on the taxpayer to prove that he/she is not the responsible party. In the Verret case the court cited Barnett, 988 F.2d at 1453 by noting that "Once the government offers an assessment into evidence, the burden of proof is on the tax-payer to disprove his responsible-person status . . ."
Ways to avoid the section 6672 penalties
There are numerous ways in which a church and its board members can avoid falling into this type of tax trouble. I am only going to briefly mention them because the details of each are separate conversations and teachings altogether. We continually cover these topics at our conferences and also detail them in our conference manual.
1. Opt the church out: I am sure you have heard about ministers opting out of self-employment tax. But you may not have heard about a church opting out. However, the law allows a church to file form 8274 and simply opt out of having to be responsible for collecting payroll taxes.
2. Properly classify workers in the church: All staff, such as musicians (even if they play only once a week on Sundays), nursery workers, staff preachers, teachers, cleaners, volunteers who get occasional love offerings, church secretaries, or any persons doing any work for the church where the church pays them on a regular basis and in which the church has some say so or control as to where and when the work is done, are legally employees and must have FICA and Medicare taxes withheld and paid to the IRS using the EFTPS system.
3. Avoid the 28% and 30% penalty: Many churches have guest speakers and lamentably, many do not give them form W-9 if they are U.S. Citizens or a W-8 with form 8233 if they are foreign nationals. The law provides that when you fail to make them fill out the form and turn it in to you before you make a payment for services they render, you may be assessed a 28% penalty in the case of a U.S. citizen or a 30% penalty if they are a foreign national. Both of these are assessed with penalties and interest for lack of compliance.
Create a system for success
These law requirements may sound burdensome. I am convinced that if you take some time to work ON your ministry and not just IN the ministry, you can create infrastructure that makes everything I just mentioned automatic. One day at our conference and I assure you, your ministry will never be the same.
*The information I shared about Apostle Corletta J. Vaughn is in no way intended to bring negative exposure to her or her ministry. The information is available through public records (re Gilbert Vaughn, Corletta J. Vaughn, Debtors, U.S. Bankruptcy Ct. (E.D.N.C., 2011)]. With that said, we hope that it helps pastors and church officers to invest the time needed to learn how to steer their ministries in such a way that they avoid tax trouble.