Church & Clergy Tax Guide

The United States Supreme Court has ruled that the First Amendment guaranty of religious freedom is not violated by subjecting ministers to the federal income tax. Murdock v. Pennsylvania, 319 U.S. 105 (1943).

The courts have rejected every attempt by ministers (some with mail-order credentials) to claim exemption from income taxes. Examples of arguments that have been rejected by the courts include the following:

All of these claims, and many like them, are treated as frivolous by the IRS and the courts. Often such ministers are required to pay substantial penalties in addition to back taxes and interest.

Example A federal court rejected a couple’s claim that they were entitled to an exemption from federal income tax because they “labor for the ministry.” The court concluded, “Income received by ministers whether from the church itself or from other private employers or sources is not exempt from income tax. The income received by taxpayers must be included in gross income required to be reported for income tax purposes according to the Internal Revenue Code.” The court acknowledged that ministers’ income (from the exercise of ministry) is exempt from federal income tax withholding but noted that “while certain income of ministers may be exempt from withholding of income tax, the income received by ministers, even from religious activities . . . ​is not exempt from payment of income tax.” Further, “the fact that a church itself may be exempt from payment of income taxes does not mean that the income received by ministers is exempt.” Pomeroy v. Commissioner, 2003-2 USTC 50,568 (D. Nev. 2003).

Tax protestors

Some tax protestors use religion in a futile attempt to excuse the nonpayment of taxes. Some argue that payment of income taxes violates their constitutional right to freely exercise their religion, and many have attempted to escape taxes through the creation of “mail-order churches.” Unfortunately, such cases, along with celebrated televangelist scandals and excesses, have encouraged a governmental cynicism toward churches and ministers.

Here are some tax positions the IRS and courts consider frivolous:

Example A minister paid no taxes and filed no tax returns from 2003 through 2016 because he was not a “federal employee or one engaged in any government privileged activity that would give rise to any federal tax liability.” The IRS determined that he owed $250,000 in back taxes plus penalties of an additional $70,000. The Tax Court agreed, noting that the minister “advanced a common tax protester argument . . . ​that private sector employees are not subject to Federal income tax.” Clarkson v. Commissioner, T.C. Memo. 2024-92.

Tax protestors are active in promoting their views on websites and in seminars, and they often appear convincing to the uninformed.

Congress has enacted legislation designed to discourage the use of tax protestor arguments. Besides the normal penalties for failure to pay taxes (including potential criminal penalties for willfully evading taxes or refusing to file a return), tax protestors face an array of additional penalties, including a $5,000 penalty for claiming a “frivolous” position on a tax return and a $25,000 penalty for maintaining a frivolous tax position (or a position designed solely for delay) before the Tax Court. IRC 6702, 6673.

Corporations sole

Some persons are promoting the use of “corporations sole” by churches and church members as a lawful way to avoid all government laws and regulations, including income taxes and payroll taxes. Church leaders are informed that by structuring their church as a corporation sole, they will become an “ecclesiastical” entity beyond the jurisdiction of the government. Individuals are told that by becoming a corporation sole, they can avoid paying income taxes. The promoters, who often use email and the Internet, make it all sound believable with numerous references to legal dictionaries, judges, and ancient cases. As this section will demonstrate, such claims are false. Any material you receive promoting the corporation sole scam should be discarded.

What is a corporation sole?

A corporation sole is a type of corporation that allows the incorporation of a religious office, such as the office of bishop. One court described such corporations sole as follows:

A corporation sole enables a bona fide religious leader, such as a bishop or other authorized church or other religious official, to incorporate under state law, in his capacity as a religious official. One purpose of the corporation sole is to ensure the continuation of ownership of property dedicated to the benefit of a religious organization which may be held in the name of its chief officer. A corporation sole may own property and enter into contracts as a natural person, but only for the purposes of the religious entity and not for the individual office holder’s personal benefit. Title to property that vests in the office holder as a corporation sole passes not to the office holder’s heirs, but to the successors to the office by operation of law. A legitimate corporation sole is designed to ensure continuity of ownership of property dedicated to the benefit of a legitimate religious organization.

Corporations sole are recognized only in a minority of states. If your church is not in one of these states, it cannot form a corporation sole, and you should ignore any information you receive to the contrary.

A typical example of a corporation sole statute is section 10002 of the California Corporations Code (enacted in 1878), which provides: “A corporation sole may be formed under this part by the bishop, chief priest, presiding elder, or other presiding officer of any religious denomination, society, or church, for the purpose of administering and managing the affairs, property, and temporalities thereof.”

Section 10008 specifies that “every corporation sole has perpetual existence and also has continuity of existence, notwithstanding vacancies in the incumbency thereof.”

These sections in the California Corporations Code illustrate the purpose of the corporation sole—to provide for the incorporation of an ecclesiastical office so that it is not affected by changes in the persons who occupy that office. The corporation sole is designed for use by an individual ecclesiastical officer and not by churches or other religious organizations.

Are corporations sole exempt from government laws?

Absolutely not. Consider the following two points. First, a church cannot incorporate as a corporation sole. Only the presiding officer of a religious organization can do so. A church officer’s decision to incorporate as a corporation sole has no effect on the relationship of the church with the government.

Second, not one word in any corporation sole statute suggests that a corporation sole is an “ecclesiastical corporation” no longer subject to the laws or jurisdiction of the government. In fact, most corporation sole statutes clarify that such corporations are subject to all governmental laws and regulations. A good example is the California Corporations Code, which specifies that “the articles of incorporation may state any desired provision for the regulation of the affairs of the corporation in a manner not in conflict with law” (emphasis added).

Similarly, the Oregon corporations sole statute specifies that such corporations differ from other corporations “only in that they shall have no board of directors, need not have officers and shall be managed by a single director who shall be the individual constituting the corporation and its incorporator or the successor of the incorporator.” This is hardly a license to avoid compliance with tax or reporting obligations. Nothing in the corporation sole statutes of any state would remotely suggest such a conclusion.

In summary, a church officer who incorporates as a corporation sole will not exempt his or her church from having to withhold taxes from employees’ wages, issue Forms W-2 and Forms 1099-NEC, file quarterly Forms 941 with the IRS, or comply with any other law or regulation. Further, an officer who incorporates as a corporation sole will not insulate his or her church from legal liability.

Can individuals avoid taxes by forming a corporation sole?

No. In fact, the IRS has issued a warning to persons who promote or succumb to such scams. See Revenue Ruling 2004-27. The IRS noted that participants in these scams are provided with a state identification number that can be used to open financial accounts. They claim that their income is exempt from federal and state taxation because this income belongs to the corporation sole, a tax-exempt organization. Participants may further claim that, because their assets are held by the corporation sole, they are not subject to collection actions for the payment of federal or state income taxes or for the payment of other obligations, such as child support.

The IRS has noted that promoters, including return preparers, are recommending that taxpayers take frivolous positions based on this argument. Some promoters are marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments. The IRS concluded:

A taxpayer cannot avoid income tax or other financial responsibilities by purporting to be a religious leader and forming a corporation sole for tax avoidance purposes. The claims that such a corporation sole is described in section 501(c)(3) and that assignment of income and transfer of assets to such an entity will exempt an individual from income tax are meritless. Courts repeatedly have rejected similar arguments as frivolous, imposed penalties for making such arguments, and upheld criminal tax evasion convictions against those making or promoting the use of such arguments.

Example The Tax Court has observed that while corporations sole cannot be used by individuals to evade taxes, they are a legitimate legal entity when used for their intended purpose. It defined a corporation sole as “a corporate form authorized under certain state laws to enable bona fide religious leaders to hold property and conduct business for the benefit of the religious entity” and noted that the corporation sole “originated in the common law of England, where it was used to ensure that property dedicated to the church would remain so, rather than passing to the heirs of the bishop or other church leader. The corporation sole operates to ensure that property held in the name of the church’s titular head passes, by operation of law, to his successors in office.” The court concluded that a pastor’s establishment of a bona fide church as a corporation sole was not evidence of a scheme to evade taxes: “Because we have concluded that the church was a legitimate church, we reject [the IRS’s] contention that [the pastor’s] choice to organize it as a corporation sole suggests that he fraudulently intended to evade taxes.” The court stressed that churches, whether formed as corporations sole or not, are exempt from federal income taxes, so organizing a legitimate church as a corporation sole could not be characterized as tax evasion. 101 T.C.M. 1550 (2011).

Example The Tax Court has observed:

It may be argued that the pastor made a reasonable and honest mistake of law that using the corporation sole structure in conjunction with the vow of poverty would exempt him from tax on amounts the church paid on his behalf. In actuality, restructuring the church as a corporation sole on its own did nothing to shield him from tax on the amounts paid on his behalf. . . . ​His failure to avail himself of the established exemption [from self-employment tax] in favor of the tenuous corporation sole theory they espoused was not a reasonable mistake of law given all the facts and circumstances. T.C. Memo. 2013-177 (2013).

Example A married couple (the “defendants”) attended a “church leadership conference” where they heard a “tax expert” speak about a religion-related tax gimmick that they were marketing, at the core of which was a corporation sole. Central to the scheme was the proposition that persons like the defendants could assign their income to a corporation sole and deduct the amounts thus assigned as charitable donations without the need to qualify that entity under section 501(c)(3) of the tax code and would thereby transform taxable individual income into non-taxable income.

The defendants formed a corporation sole in Nevada and then signed a “vow of poverty,” which the corporation sole accepted. The corporation sole agreed to pay for all the defendants’ needs.

The defendants performed pastoral functions and conducted services. They also performed sacerdotal functions for their corporation sole. A checking account designated as a “Pastoral Expense Account” was created. Although others had signature authority on the bank account, no one except the defendants ever signed checks for it. Deposits into the Pastoral Account came from the husband’s military retirement payments and Social Security disbursements as well as from contributions for performing pastoral duties.

The defendants used the funds from the Pastoral Account to pay their personal expenses, such as purchasing and maintaining automobiles, buying food and groceries, paying for household expenses, and the like. They also used that account to pay mortgage, utility, and maintenance expenses for the corporation sole’s property, which they occupied rent-free as their residence.

The defendants’ 2007 joint federal income tax return reported Social Security and military pension benefits that had been deposited into the Pastoral Account, but it reported no income from the corporation sole. The IRS audited their tax return for 2007 and assessed an additional $20,000 in unpaid taxes and penalties for failing to report income from the Pastoral Account. The defendants appealed their case to the United States Tax Court, claiming that their deposits of income into their Pastoral Account were tax-exempt gifts and that their vows of poverty shielded their compensation for services as its agents. They also claimed that their donations to their corporation sole entitled them to deductions for charitable contributions. The IRS disagreed and asserted that the defendants’ compensation for services was taxable, even if their corporation sole was a church or other exempt organization. The IRS also claimed that, for tax purposes, the payment of the defendants’ living expenses from the Pastoral Account was taxable compensation for services.

The Tax Court agreed with the IRS, and the defendants appealed to a federal appeals court, which agreed with the Tax Court’s disposition. The court concluded: 

A member of a religious order who earns or receives income therefrom in his individual capacity cannot avoid taxation on that income merely by taking a vow of poverty and assigning the income to that religious order or institution. The same rule applies to entities organized as corporation soles. An individual has received income when he gains complete dominion and control over money or other property, thereby realizing an economic benefit. The defendants clearly had unrestricted dominion and control over the Pastoral Account. Gunkle v. Commissioner, 2015 WL 2052751 (5th Cir. 2014); Accord Gardner v. Commissioner, 845 F.3d 971 (9th Cir. 2017); Mone v. Commissioner, 774 F.2d 570 (2nd Cir. 1985).

Members of religious or apostolic associations

Ministers who are members of religious or apostolic associations having a common treasury do not have to report any income received in connection with duties required by the association if they have taken a vow of poverty and no portion of the net income of the association is distributable to them. See Revenue Procedure 72-5, IRC 501(d). If a member of an association has a share in its net income, then he or she must include such share (whether distributed or not) in gross income as a dividend received. The association must file an annual information return (Form 1065) along with a Schedule K-1 that identifies the members of the association and their portions of net income and expenses. However, such associations are not required to publicly disclose Schedule K-1.

“Section 508(c)(1)(A)” churches

A federal court in California rejected as “frivolous” a religious ministry’s claim that it was exempt from all taxes and regulation because it was a “section 508(c)(1)(A)” church. The IRS issued a subpoena to a Christian ministry in California as part of its investigation into the activities of the ministry. The ministry attempted to quash the subpoena on the ground that the IRS has no authority to investigate an “unregistered Private Ministry/Church,” which it claimed was exempt not only from filing requirements and taxation but also from IRS scrutiny or inquiry. In support of its position, the ministry referenced section 508(c)(1)(A) of the federal tax code, which it claimed prevents the IRS from inquiring into its finances.

A federal district court summarily rejected the ministry’s position. It noted that section 508(c)(1)(A) of the federal tax code “merely exempts churches and certain other religious bodies from the necessity of applying for recognition of their exempt status under § 501(c)(3) and from requirements that they file tax returns. Nothing in [the] statute suggests that a bank’s financial records concerning the financial activity of a religious organization are exempt from investigation.” The court concluded: “The IRS has broad investigative authority, including the authority to examine records or witnesses in order to determine whether tax liability exists or to make a return where none has been made. In short, [the ministry’s] arguments have no basis in law, and are frivolous” (emphasis added).

Some people are claiming that churches can avoid any taxes, regulation, or liability by reclassifying themselves as “section 508(c)(1)(A)” churches. This is a flawed interpretation of federal tax law. The fact is, churches are automatically 501(c)(3) organizations. There is nothing they need to do to acquire this status. Therefore, it is not clear how they could renounce their 501(c)(3) status. A church theoretically could become a for-profit entity, but this would have very deleterious consequences, including the loss of any charitable contribution deduction for church members and exposure of the church to federal income taxation.

Clearly, any activity that jeopardizes a church’s exemption from federal income taxation is something that must be taken seriously. Churches should not pursue the dubious “section 508(c)(1)(A)” church status, which the federal court in this case considered “frivolous,” without the counsel of an experienced tax attorney or CPA. Steeves v. IRS, 2020 WL 5943543 (S.D.C. 2020).

Not everyone is required to file an individual federal income tax return (Form 1040). For 2024, a federal income tax return (with appropriate schedules) must be filed only if your gross income exceeds your applicable standard deduction. See the IRS website for details.

Example Pastor L is 67 years of age. His spouse is 66. Pastor L filed an application for exemption from Social Security coverage that was approved by the IRS in 1999. Pastor L and his spouse file a joint return for 2024. Their standard deduction for 2024 is $32,300 ($29,200 basic standard deduction plus an additional $1,550 for each spouse because each is at least 65 years of age). Pastor L and his spouse need not file a return for 2024 unless their income exceeds $32,300.

The standard filing requirements are subject to an important exception—any taxpayer who has net earnings from self-employment of $400 or more must file an income tax return even if his or her gross income is less than the minimum amounts discussed above. This exception can apply to ministers in either of two ways:

Ministers who report their income taxes as employees

Ministers are treated as self-employed as regards Social Security with respect to services performed in the exercise of their ministry, even if they report their federal income taxes as employees. As a result, ministers who report their income taxes as employees must file a tax return for 2024 if they had net ministerial (or other self-employment) compensation of $400 or more.

However, ministers who report their income taxes as employees and who have applied for and received IRS recognition of exemption from self-employment (Social Security) taxes are subject to the higher filing requirements discussed above unless they have net self-employment earnings of $400 or more from some other source. Such sources can include secular self-employment activities, guest speaking appearances in other churches, or fees received directly from church members for performing personal services such as funerals, weddings, and baptisms. For details regarding the exemption from self-employment taxes, see “Exemption of Ministers from Social Security Coverage” on page .

Ministers who report their income taxes as self-employed persons

Ministers who report their federal income taxes as self-employed persons and who receive net earnings of at least $400 from the performance of ministerial (or secular) work must file a federal tax return regardless of whether they are exempt from Social Security coverage.

Example Pastor T has never exempted himself from Social Security coverage. He is unmarried, works part time as an associate pastor of a church, and received $10,000 in compensation from the church in 2024. He has no other income. Pastor T must file an income tax return. While unmarried persons ordinarily are not required to file a return (for 2024) if they earn less than $14,600, they must file if they have net earnings from self-employment of $400 or more. Since Pastor T is self-employed for Social Security purposes with respect to services performed in the exercise of his ministry, he must file a return if he has net earnings of $400 or more.

The 2024 Form 1040 is substantially similar to the 2023 version. Certain items are reported on schedules and then carried over to lines in Form 1040. For example:

Most taxpayers use e-file to file their tax returns, which lets them electronically file an accurate tax return or get an extension of time to file without sending any paper to the IRS. The IRS expects four out of five individual 2024 tax returns to be filed electronically. An increasing number of taxpayers file electronically for one or more of the following reasons:

E-filing with a tax professional

Many tax professionals electronically file tax returns for their clients. You may personally enter your PIN or complete Form 8879, IRS e-file Signature Authorization, to authorize the tax professional to enter your PIN on your return. Tax professionals may charge a fee for IRS e-file. Fees can vary depending on the professional and the specific services rendered.

E-filing using a personal computer

You can file your tax return using your personal computer. A computer with Internet access and tax preparation software are all you need. Best of all, you can e-file from the comfort of your home 24 hours a day, seven days a week. IRS-approved tax preparation software is available for online use on the Internet, for download from the Internet, and in retail stores. For information, visit the IRS website.

Free File

Another option for filing your tax return is Free File. This program stemmed from negotiations between the government and the commercial tax software industry on ways to provide free tax software and free e-filing services to taxpayers with modest incomes. The private sector agreed to provide the free services to at least 60 percent of the nation’s taxpayers as part of the initial contract. In return the IRS agreed to not create its own tax preparation software. Members of the tax software industry (Free File Alliance) provide these free tax preparation and electronic filing services, not the IRS. Once you choose a particular company, you will be sent directly to the company’s commercial website. A list of companies is provided on the IRS website.

The Free File program is limited to taxpayers with an adjusted gross income (AGI) of $79,000 (2023) or less. Taxpayers who used Free File in past filing seasons might not qualify for the free services for the 2024 filing season. Each participating software company sets its own eligibility requirements. After choosing a company, click on the company’s title, which sends you directly to the company’s website. You may then begin the preparation of your tax return. The company’s software prepares and e-files your income tax returns using proprietary processes and systems. Electronically filed returns are transmitted by the company to the IRS using the established e-file system, which uses secure telephone lines. An acknowledgment file, notifying you that the return has been either accepted or rejected, is sent via email from the company.

If you do not qualify for the selected company’s free offer, you may want to check other Free File company offers by accessing the IRS Free File web page. If you do not qualify for the company’s free offer but continue with the preparation and e-filing process with this company, please be aware that you will be charged a fee for preparing and e-filing your federal tax return.

Taxpayers can make credit- and debit-card payments whether they file electronically or file a paper return. Payments can be submitted via tax software when filing electronically. Credit- and debit-card payments can also be made over the telephone or online.

The IRS does not set or collect any fee for card payments. However, the IRS authorizes private companies processing the payments to charge a convenience fee. The taxes paid and convenience fee are listed separately on your statement.

Some tax-software developers offer integrated e-file and e-pay combinations for those who choose to use a credit or debit card to pay a balance due. The software accepts both the electronic tax return and the card information. The tax return and tax payment data are forwarded to the IRS, and the card data is forwarded to the payment processor.

For the current filing season, the IRS has contracted with three companies to accept credit- and debit-card payments from both electronic and paper filers. Each company offers both phone and Internet payment services, and each charges a convenience fee for the service. Fees are based on the amount of the tax payment and may vary between companies. See the IRS website for additional information on payment options.

Anyone may use these services to charge taxes to credit cards including American Express, Discover, MasterCard, or Visa. Taxpayers also can pay taxes electronically by authorizing an e-pay option, such as an electronic funds withdrawal from a checking or savings account.

Individuals can use any of these options to (1) pay taxes owed on an income tax return, (2) pay projected tax due when requesting an automatic extension of time to file, (3) pay quarterly estimated taxes, or (4) make a credit-card payment for past-due tax.

Employers, including churches, do not use a credit card, debit card, or electronic funds withdrawal (EFW) to pay taxes that were required to be deposited. For more information on electronic payment options, visit the IRS website at IRS.gov/payments.

You must keep records so that you can prepare a complete and accurate income tax return. The law does not require any special form of records. However, you should keep all receipts, canceled checks, and other evidence to prove amounts you claim as deductions, exclusions, or credits. Records should be retained for as long as they are important for any income tax law.

In general, you should keep records that support an item of income or a deduction appearing on a return until the statute of limitations (the period during which the IRS can audit your return) runs out. Usually this is three years after the date a return was filed (or three years after the due date of the return, if later). However, in some cases it is wise to keep records for a longer period of time since a six-year limitations period applies in some situations, and in others (e.g., no return was filed or a return was fraudulent) there is no time limitation on the authority of the IRS to begin an audit. The time limitation rules are summarized in “Clergy not exempt from federal income taxes” on page .

Specific recordkeeping requirements with respect to the following exclusions and deductions are discussed later in this tax guide:

Records of transactions affecting the basis (cost) of some assets should be retained until after the expiration of the limitations period for the tax year in which the asset is sold.

Here are some basics you need to know when figuring your tax.

Gross income

You must compute your gross income, AGI, and taxable income before you can figure your tax. Gross income is your income after deducting all exclusions allowed by law. It is the starting point for determining your tax liability, and its various components are reported directly on Form 1040 (lines 1–9).

Since gross income is net of any exclusions, no exclusions are reported on Form 1040. Exclusions are discussed fully in Chapter 5 and Chapter 6.

Example Pastor M rents his home, and his church provided him with a rental allowance of $15,000 for 2024. Assuming that Pastor M had actual rental expenses of at least $15,000 in 2024, his gross income would not reflect the $15,000 allowance, since it is an exclusion from gross income. This means that Pastor M’s Form W-2 (box 1) would report his church compensation less the $15,000. Pastor M should report his church compensation less the $15,000 rental allowance as wages on line 1 of Form 1040. This is the approach taken by the IRS in Publication 517. Note, however, that a rental or housing allowance provided by a church to a minister as compensation for ministerial services is an exclusion for federal income taxes only. It must be included in Pastor M’s self-employment earnings (Schedule SE of Form 1040) in computing his self-employment tax liability (assuming he has not exempted himself from self-employment tax by filing a timely Form 4361 with the IRS).

Adjusted gross income (AGI)

AGI is gross income minus various adjustments that are reported on Form 1040, lines 10–11.

Taxable income

If you do not itemize deductions, your taxable income is your AGI less the standard deduction ($14,600 for single persons and $29,200 for married persons filing jointly). If you itemize your deductions, your taxable income is your AGI less your itemized deductions. If you must itemize your deductions (this rule applies to various categories of taxpayers, including a married person filing a separate return if his or her spouse itemizes deductions), then you should refer to the instructions accompanying Form 1040 for the more complicated rules that apply. The rules described above are explained more fully in the chapters that follow. Tax liability is determined by taking your income tax liability (ordinarily computed from a table) less any credits plus any other taxes (Form 1040, line 23, including self-employment taxes), minus tax payments already made (Form 1040, line 33).

The instructions for Form 1040 state that the deadline for filing Form 1040 for the 2024 tax year is April 15, 2025. The filing deadline has been extended by the IRS for several states due to natural disasters. See the IRS website for details. Your return is filed on time if it is properly addressed and postmarked no later than the due date. The return must have sufficient postage.

Taxpayers can obtain an automatic six-month extension (from April 15 to October 15, 2025) of time to file their 2024 Form 1040. To get the automatic extension, you must file a Form 4868 by April 15, 2025, with the IRS service center for your area. Your Form 1040 can be filed at any time during the six-month extension period.

An extension only relieves you from the obligation to file your return; it is not an extension of the obligation to pay your taxes. Therefore, you must make an estimate of your tax for 2024 and pay the estimated tax with your Form 4868. When you file your Form 1040, list the estimated payment made with your Form 4868 as a prior payment of taxes. If your actual tax liability for 2024 is more than the amount you estimated and enclosed with your Form 4868, you may have to pay an underpayment penalty.

If you overpay income or Social Security taxes, you can get a refund of the amount you overpaid. Or you may choose to apply all or a part of the overpayment to your next year’s estimated tax (if applicable). If you are due a refund, no interest will be paid if the refund is made within 45 days of the due date of the return. If the refund is not made within this 45-day period, interest will be paid for the period from the due date of the return or from the date you filed, whichever is later.

In general, a taxpayer must file a refund claim within three years of the filing of the return or within two years of the payment of the tax, whichever period occurs later. A refund claim that is not filed within these time periods is rejected as untimely.

The tax code permits the statute of limitations on refund claims to be “tolled,” or suspended, during any period of a taxpayer’s life in which he or she is unable to manage financial affairs by reason of a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of not less than 12 months. Tolling does not apply during periods in which the taxpayer’s spouse or another person is authorized to act on the taxpayer’s behalf in financial matters.

If your tax liability exceeds the amount of taxes that have been withheld or the amount of your estimated tax payments (or other payments), you have several payment options, including cash, check, credit card, electronic fund withdrawal, or online payment. See the instructions for Form 1040 for details. 

You may be liable for an underpayment penalty (discussed in “Estimated tax” on page ) and interest.

If, after filing your return, you find that you did not report some income, you claimed deductions or credits you should not have claimed, or you did not claim deductions or credits you could have claimed, you should correct your return. Use Form 1040-X to correct the Form 1040 that you previously filed.

The amended return should be filed within three years of the date you filed your original return (including extensions) or within two years of the time you paid your tax, whichever is later. A return filed early is considered filed on the due date.

The IRS audit rate for 2023 (the most recent year for which data is available) was 0.4 percent, or about 1 in every 250 tax returns. Most of these examinations were conducted by correspondence (many taxpayers do not realize that they are being “audited”).

When analyzing examination coverage rates, one must recognize differences in the types of contacts that are counted in audit statistics. Examinations range from issuance of an IRS notice asking for clarification of a single tax return item that appears to be incorrect (correspondence examination) to a full, face-to-face interview and review of the taxpayer’s records. Face-to-face examinations are generally more comprehensive and time consuming for the IRS and for taxpayers, and they typically result in higher dollar adjustments to the tax amounts. Thus, caution should be used when combining statistics from the various examination function programs into overall examination rates. To illustrate, during a recent year, 75 percent of all examinations were conducted by correspondence.

Some taxpayers have a much higher risk of being audited because of a number of considerations, including the following:

Accuracy-related penalties

Penalties are imposed for various inaccuracies in tax returns, as noted below.

Negligence or disregard

If an underpayment of tax is due to negligence or a disregard of tax law, a negligence penalty is imposed. This is computed by multiplying 20 percent by the amount of the underpayment of taxes that is due to negligence or disregard. IRC 6662(b)(1).

“Negligence” includes (1) failure to make a reasonable attempt to comply with the tax law; (2) failure to exercise reasonable care in the preparation of a tax return; or (3) failure to keep adequate records or to substantiate items properly. “Disregard” includes any careless, reckless, or intentional disregard of federal tax law. Reliance on the advice of a tax adviser does not relieve a minister of liability for either the negligence or disregard penalties.

Taxpayers can avoid the negligence penalty only “with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” IRC 6664(c). You can avoid the penalty for the disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis (discussed below).

Example The Tax Court concluded that the “reasonable cause” exception applied to a pastor because of his reliance on the tax advice and filings of his CPA: “We find nothing in [the CPA’s] education or experience that would have reasonably caused him not to rely on the accuracy of her preparation of their returns. We therefore find that the pastor relied in good faith on professional advice [of his CPA].” Brown v. Commissioner, T.C. Memo. 2019-69 (2019).

Substantial understatement

Taxpayers who substantially understate their income tax are subject to a substantial understatement penalty. IRC 6662(b)(2). This penalty is computed by multiplying 20 percent by the portion of an underpayment of income taxes that is due to a substantial understatement. A substantial understatement of income taxes exists if an understatement exceeds the greater of (1) 10 percent of the actual income taxes that should have been paid or (2) $5,000. However, the amount of an understatement is reduced by either of the following:

Example Pastor S failed to properly report several items, including a salary he paid his wife for performing duties at the church, without satisfactory explanation. He also failed to prove that many of his business expense deductions (claimed on Schedule C) were for business purposes and failed to keep adequate books and records to support the amounts claimed on his tax returns. Pastor S explained that he was too busy to keep records. The Tax Court upheld an IRS assessment of a negligence penalty. The court defined negligence as “the lack of due care, or the failure to do what a prudent person would do under the circumstances.” Shelley v. Commissioner, T.C. Memo. 1994 432 (1994).

Example The Tax Court upheld an IRS assessment of a negligence penalty against a pastor who attempted to deduct commuting expenses as a business expense. The court concluded that “the record in this case is replete with examples of [the pastor’s] negligence. [He] claimed deductions for numerous items which in many cases are either nondeductible or lack substantiation. Accordingly, we find that [the pastor is] subject to the addition to tax for negligence for all the years at issue.” Clark v. Commissioner, 67 T.C.M. 2458 (1994).

Example The Tax Court disallowed a $25,000 charitable contribution deduction for gifts of two items of property since the donors failed to obtain qualified appraisals and attach qualified appraisal summaries (IRS Form 8283) to their tax return as required by law. The Tax Court further ruled that the IRS could assess an accuracy-related penalty against the taxpayers. Section 6662 of the tax code permits the IRS to assess a penalty of 20 percent on the amount of underpayment of tax attributable to a “substantial understatement” of tax. A substantial understatement of tax is defined as an understatement of tax that exceeds the greater of 10 percent of the tax required to be shown on the tax return or $5,000. The understatement is reduced to the extent that the taxpayer has (1) adequately disclosed his or her position or (2) has substantial authority for the tax treatment of the item. The court concluded that neither the taxpayers nor their accountant “provided an explanation why timely qualified appraisals were not conducted for the noncash charitable contributions and why the appraisal summaries on Form 8283 were not fully completed. We, therefore, sustain [the] imposition of the accuracy-related penalty with regard to the underpayment associated with the . . . ​noncash charitable contributions.” Jorgenson v. Commissioner, 79 T.C.M. 1444 (2000).

Example A pastor reported $28,000 as income from his church. The IRS audited the pastor’s tax return and concluded that he understated his taxable income by $24,000 and overstated several business expense deductions. The pastor insisted that the $24,000 of unreported income came from voluntary gifts or offerings from members of the congregation, which were not taxable. The Tax Court rejected this argument, noting that

we have no evidence as to the dominant reason for the transfers. Instead, all we have is his characterization of the transfers as gifts, which in itself has little or no evidentiary value. On the other hand, the evidence that we do have strongly suggests that the transfers were not [nontaxable] gifts. The transfers arose out of the pastor’s relationship with the members of his congregation presumably because they believed he was a good minister and they wanted to reward him. Furthermore, the pastor testified that without the gifts his activity as a minister was essentially a money-losing activity. In short, as the pastor recognized, the so-called gifts were a part of the compensation he received for being a minister. As such, the transfers are not excludable from income.

In addition, the court concluded that the pastor had overstated his business expense deductions by $19,000, mostly due to his failure to substantiate these deductions. The court imposed a negligence penalty against the pastor based on his understatement of income and overstatement of expenses. It concluded: 

Negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. The question then is whether [the pastor’s] conduct meets the reasonably prudent person standard. We do not believe that the pastor’s conduct meets this standard. The law surrounding the disputed items is not complex. With respect to the claimed deductions, the pastor was required to maintain records, which he failed to do. Furthermore, there is no indication that he sought the advice of a qualified tax advisor concerning any of the disputed items. Swaringer v. Commissioner, T.C. Summary Opinion 2001-37 (2001).

Example The Tax Court ruled that a pastor who underreported his tax liability using a “corporation sole” and “vow of poverty” was not subject to an accuracy-related penalty since the amount of underreported taxes was less than $5,000. It concluded:

It may be argued that the pastor made a reasonable and honest mistake of law that using the corporation sole structure in conjunction with the vow of poverty would exempt him from tax on amounts the church paid on his behalf. In actuality, restructuring the church as a corporation sole on its own did nothing to shield him from tax on the amounts paid on his behalf. His understanding of the pertinent law seems to be that the vow of poverty protected him from income tax in all circumstances, particularly when the religious entity is set up as a corporation sole. He mistook the body of law surrounding the vow of poverty to apply to his circumstances. It does not. His failure to avail himself of the established exemption [from self-employment tax] in favor of the tenuous corporation sole theory they espoused was not a reasonable mistake of law given all the facts and circumstances.

The court concluded, however, that the pastor was not liable for the accuracy-related penalty since the amount of tax required to be shown on his tax return was not understated by $5,000 or more. T.C. Memo. 2013-177 (2013).

Example The Tax Court upheld an accuracy-related penalty under tax code section 6662 that the IRS assessed against a minister. This section authorizes the IRS to impose a 20-percent penalty on the portion of an underpayment of tax that is attributable to negligence or disregard of rules or regulations. The term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws, and the term disregard includes any careless, reckless, or intentional disregard. Negligence also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. The court concluded that the IRS met its burden of establishing the appropriateness of the penalty:

The taxpayer did not maintain sufficient records to support the expenses underlying the deductions, and the disallowed deductions are directly attributable to his failure to maintain adequate records. Nor has the taxpayer offered any evidence that he had reasonable cause for a failure to maintain adequate business records or for the improper deductions. On the contrary, he testified that he had previously been a return preparer ‘for one of the major companies’ which shows that he should have been aware that he was required to support his deductions with adequate records. We therefore hold that petitioners are liable for an accuracy-related penalty on the grounds of negligence and disregard of rules and regulations. Lewis v. Commissioner, T.C. Memo. 2017-117.

Example The Tax Court upheld a 20-percent penalty against a pastor for a substantial understatement of income tax based on his assumption that personal gifts of $200,000 from church members constituted nontaxable gifts rather than taxable compensation. The court rejected the pastor’s argument that the penalty should be excused because he had reasonable cause for his position. Felton v. Commissioner, T.C. Memo. 2018-168 (2018).

Substantial valuation misstatement

Taxpayers who understate their income taxes in any year by $5,000 or more because they misstated the value of property on their tax return are subject to a penalty. IRC 6662(b)(3). The penalty only applies if the misstated value is at least 150 percent of the property’s actual value. The penalty is computed by multiplying 20 percent by the amount of the underpayment of income taxes. The penalty rate increases to 40 percent for “gross” valuation misstatements (overstated value is at least 200 percent of the property’s actual value). IRC 6662(e). There is no disclosure exception for this penalty.

A common example of valuation overstatements involves overvaluations of properties donated to charity. Such overvaluations result in inflated charitable contribution deductions and a corresponding understatement of income taxes. However, the tax code clarifies that taxpayers who comply with the substantiation requirements that apply to contributions of noncash property valued by the donor in excess of $5,000 are not subject to this penalty even if there is an overvaluation. These requirements include a qualified appraisal of the donated property and the inclusion of a qualified appraisal summary (IRS Form 8283) with the donor’s tax return on which the contribution is claimed. See “Contributions of noncash property” on page  for details.

Property overvaluations that are not enough to trigger this penalty may still be subject to the negligence or substantial understatement penalties discussed previously.

Fraud

The fraud penalty, which is imposed at a rate of 75 percent, applies to the portion of any underpayment of income taxes that is due to fraud. See IRC 6663. If the IRS establishes by “clear and convincing evidence” that any portion of an underpayment of income taxes is due to fraud, then the entire underpayment is treated as fraudulent except for any portion that the taxpayer can prove (by a preponderance of the evidence) is not based on fraud.

The IRS must establish fraud by a high standard (clear and convincing evidence). Once it does so, the taxpayer can rebut the presumption of fraud by a lesser standard of proof (a preponderance of the evidence). No accuracy-related penalty (defined above) can apply to any portion of an understatement of income taxes on which the fraud penalty is imposed. However, an accuracy-related penalty can be assessed against any portion of an underpayment that is not due to fraud.

Example The Tax Court ruled that a pastor who failed to report as taxable income deposits he made into a church bank account over which he exercised complete control was not guilty of fraud. The court noted that the tax code imposes a penalty “equal to 75 percent of the portion of the underpayment which is attributable to fraud.” Taxpayers commit fraud when they “evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” The IRS bears the burden of proving fraud and must establish it by clear and convincing evidence. To satisfy this burden of proof, the IRS must show that (1) an underpayment in tax exists and (2) the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. If the IRS establishes that any portion of an underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud. The IRS insisted that there was sufficient circumstantial evidence in the record to conclude that petitioners fraudulently intended to evade taxes. It pointed to a number of facts, including the establishment of the petitioners’ church as a “corporation sole,” but the court concluded that the IRS failed to meet the high standard of proving fraud by clear and convincing evidence. Chambers v. Commissioner, 101 T.C.M. 1550 (2011).

Sanctions and costs

The Tax Court can impose a penalty of up to $25,000 if a taxpayer (1) initiates an action primarily for delay, (2) takes a position that is frivolous, or (3) unreasonably fails to pursue available administrative remedies within the IRS. IRC 6673. This penalty is designed to reduce the large numbers of lawsuits brought by taxpayers who claim frivolous positions. The Tax Court also can require a taxpayer’s attorney to pay the costs of litigating a frivolous lawsuit (including court costs and attorneys’ fees incurred by the government).

Example In assessing a penalty under section 6673 of the tax code, the Tax Court concluded: 

We find that [the minister] has advanced a frivolous and groundless argument in this proceeding. In his petition, he contended that he is a “worker of common right and a nontaxpayer” and thus “not subject to the jurisdiction of revenue law because of his occupation.” Despite the Court’s conclusion that such an argument is frivolous, he has continued to advance it in his most recent filing and at trial. In his most recent filing, he continues to claim that his compensation is excluded from gross income and that he is not subject to self-employment tax. These contentions have no merit and reflect common tax protestor arguments. [The minister] has been warned multiple times that his arguments were frivolous and that the Court would consider imposing a penalty should he continue to advance them. Petitioner has done just that. Under such circumstances, we believe the imposition of a penalty under section 6673 in the amount of $2,500 is warranted here. Van Pelt v. Commissioner, 2021 U.S. Tax Ct. LEXIS 69 (2021).

Failure-to-file penalty

If you do not file your return by the due date, you may have to pay a failure-to-file penalty. The failure-to-file penalty currently is 5 percent of your unpaid taxes for each month or part of a month after the due date that the tax is not paid—but ordinarily not more than 25 percent of your tax (if fraudulent, 15 percent per month, with a maximum of 75 percent of your tax). The penalty is waived if you can show reasonable cause for not filing your return on time. IRC 6651.

If a 2024 tax return is filed more than 60 days after its due date, then the failure-to-file penalty may not be less than the lesser of $485 or 100 percent of the tax required to be shown on the return, whichever is less.

Frivolous income tax return

Taxpayers can be assessed a penalty of $5,000 for filing a “frivolous” return that does not include enough information to figure the correct tax, or that contains information that shows on its face that the tax shown on the return is substantially incorrect, if the return was filed due to a frivolous position or out of a desire to delay or interfere with the administration of the federal tax laws. This penalty is in addition to any other penalty allowed by law. IRC 6702.

Liens and foreclosures

Pursuant to sections 6321 and 6322 of the Internal Revenue Code, upon the assessment of a federal income tax deficiency against a taxpayer, a tax lien arises in favor of the United States as a matter of law and attaches to all property in which the taxpayer holds an interest. A district court may then foreclose the tax lien and force the sale of the property for the benefit of the United States. The following case illustrates these principles in a case involving a minister.

After a trial on the merits, a federal court determined that a minister had fraudulently failed to pay federal income taxes on hundreds of thousands of dollars of otherwise taxable income for tax years 1996–2005. The court accordingly entered a final judgment in favor of the United States and against the minister in the amount of $975,000 and attached a lien against two properties owned by a defunct church that the IRS claimed were in act owned and controlled by the minister.

The court noted: “The language of [Section 6321] is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. . . . ​Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.”

The court rejected the minister’s attempt to conceal taxable income by funneling cash through a defunct church. It noted that under the so-called nominee doctrine,

When a taxpayer’s property or rights to property are held in the name of another, or are transferred to another with the taxpayer retaining beneficial ownership, the third party is said to hold the property as a nominee for the taxpayer. . . . ​“The nominee [doctrine] focuses on the delinquent taxpayer’s relationship to the property, because the ‘[p]roperty of the nominee . . . ​of a taxpayer is subject to the collection of the taxpayer’s tax liability. . . . ​Focusing on the relationship between the taxpayer and the property, the [nominee doctrine] attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner.’”

The court concluded that the defunct church held title to two properties in its own name as a nominee of the minister, and therefore the IRS could recover his unpaid taxes by attaching a lien against the properties and selling them in a foreclosure sale. The court observed: 

[The minister’s] contention that [the church] is a bona fide church and . . . ​is predominately used for religious purposes is not credible. It no longer operates as a legitimate church. There is no church membership, and there are no regular church services. Religious activities, to the extent they occur, involve only a small number of family, friends, and neighbors. Nearly all the expenditures made from its account are used to pay the personal expenses of [the minister] and his family. United States v. Wilkins, 2019 U.S. Dist. LEXIS 238818 (M.D. Fla. 2019).

Criminal penalties

In addition to the civil penalties discussed above, a taxpayer can be subject to criminal penalties for a willful attempt to evade taxes. Criminal liability requires an affirmative act (typically filing a false return). Omissions are generally insufficient. Tax evasion is a felony punishable by a fine of not more than $100,000 ($500,000 for a corporation) or a prison sentence of up to five years or both. IRC 7201.

Example Pastor O claimed on his 2024 income tax return a deduction for a contribution he made in 2016 but forgot to claim, as well as an unallowable deduction for the education expenses incurred by his dependent children in attending a private school. He sincerely believed he was legally entitled to claim both deductions on his 2024 return. Pastor O’s taxes were underpaid by $4,000 because of these deductions. Such conduct amounts to negligent disregard of the tax laws and subjects Pastor O to a penalty of 20 percent of the amount of the underpayment (a total penalty of $800, excluding interest). Pastor O also will have to pay the full $4,000 of underpaid taxes.

Example Pastor W believes that ministers should not pay taxes. He bases his belief on his interpretation of the Bible. In 2024 Pastor W had church income of $40,000. Assume that Pastor W should have paid federal taxes of $5,000. In addition to having to pay the $5,000 tax deficiency, Pastor W will be subject to a delinquency penalty for fraudulently failing to file a tax return. The penalty is 15 percent of the net amount of tax due for each month that the return is not filed (up to a maximum of five months or 75 percent—a total of $3,750 in this case). The IRS has the burden of proving that the taxpayer fraudulently failed to file a return. Pastor W also may be liable for criminal penalties on the basis of a willful attempt to evade taxes. However, the likelihood of a criminal conviction under these circumstances is reduced by the Supreme Court’s decision in the Cheek case (discussed earlier).

Example Pastor G purchased a home many years ago, and last year he paid off the mortgage loan. In order to boost his housing allowance exclusion this year, he takes out a home equity loan (secured by a mortgage on his home) that he uses to pay for a new car and his daughter’s college expenses. Pastor G is aware that some courts have ruled that a housing allowance cannot be used to pay for home equity loan repayments unless the loan is for home improvements. However, he believes that he is entitled to apply his housing allowance to his home equity loan payments because the loan is secured by a mortgage on his home and “I will lose my home if I don’t repay it.” Pastor G’s position results in an understatement of his income taxes of $6,000. Under these facts Pastor G may be subject to the following penalties (in addition to having to pay the tax deficiency of $6,000): (1) the negligence penalty, which would be 20 percent of the underpayment of $6,000 (for a total penalty of $1,200); or (2) a substantial understatement penalty, which would be 20 percent of the underpayment of $6,000 (for a total penalty of $1,200).

Example Same facts as the preceding example, except that Pastor G makes an adequate disclosure of his position by including a properly completed IRS Form 8275 with his Form 1040. Such a disclosure may avoid the penalty for substantial understatement of tax—at the cost of disclosing to the IRS the questionable position that is being asserted. To avoid the penalty, Pastor G’s disclosed position must be reasonable.

Example A federal appeals court affirmed the enhanced prison sentence of a pastor who failed to report on his income tax return more than $500,000 in compensation and benefits received from his church. A church hired a new pastor, under whose leadership the church membership grew from 500 to 2,000 people. Weekly church income grew from $7,000 to $40,000. The church provided the pastor with compensation of $110,000. However, the pastor chose to supplement his salary by taking money directly from the Sunday collection without reporting it on his tax returns. He also failed to report on his tax return several fringe benefits, such as a church-provided car that he used for both personal and church business, making personal credit-card and life-insurance payments with church funds, and using the church credit card for personal expenditures.

From these benefits and the weekly draws on the collection plate, the government calculated that the pastor had additional gross income in the amount of $520,602 in the years 1996–2001, resulting in a large tax deficit. The government indicted the pastor on five counts of willfully making and subscribing a false income tax return and one count of failure to file an income tax return. The pastor was found guilty of some of the charges and was sentenced to prison under section 7206(1) of the tax code, which specifies that “any person who willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter . . . ​shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 or imprisoned not more than three years, or both, together with the costs of prosecution.” The sentence prescribed by section 7206(1) can be “enhanced” due to several factors, including abuse of a position of trust and obtaining more than $10,000 in income from illegal sources without reporting it. A federal appeals court ruled that the enhancement of the pastor’s sentence in this case was justified.

This case demonstrates that a church employee’s failure to report compensation and taxable fringe benefits as taxable income on his or her income tax return may result in criminal liability for filing a false income tax return. And the criminal penalty may be enhanced due to an abuse of a position of trust or obtaining more than $10,000 in income from illegal sources without reporting it. United States v. Ellis, 440 F.3d 434 (7th Cir. 2006).

Example A federal appeals court ruled that a pastor was properly convicted and sentenced to prison for filing a fraudulent tax return as a result of his failure to report several items of taxable income. At the pastor’s trial, the prosecution documented $110,000 of unreported taxable income for various personal expenses for the pastor and members of his family by the church. These items included insurance policies, monthly payments on a loan the pastor had taken out to purchase a car for his daughter, and payments for a time-share property. The prosecution noted that the pastor’s annual salary was $115,000 but that he had acquired numerous “luxury items” that seemed excessive in light of his salary, including two time shares, a 2.73 carat diamond ring, a projection television, a camcorder, a DVD player, and custom-made clothes. According to the prosecution, the excessiveness of his lifestyle relative to his reported income was indicative of fraud. A federal appeals court affirmed the conviction. 2009 WL 723206 (11th Cir. 2009).

Example A federal appeals court affirmed the conviction of a pastor and his wife (the “defendants”) on several tax crimes based on various forms of church compensation they failed to disclose on their tax returns.

The defendants’ total church compensation between 2001 and 2007 totaled nearly $3.9 million. During that time, the wife received compensation from the church in the form of salary, bonuses, allowances, and reimbursements, totaling nearly $1 million. The IRS reconstructed the couple’s income for the years 2002–2007 and determined that they understated their taxable income by $2,486,771 between 2002 and 2007, resulting in a tax deficiency of $664,352 for those years.

The federal government eventually obtained a 19-count indictment against the couple. Their trial resulted in conviction on charges of conspiracy to defraud the United States, tax evasion and aiding and abetting the same, and for the defendant, filing false tax returns. Following a four-week trial that involved the admission of over 90,000 pages of documentary evidence and the testimony of more than 70 witnesses, the defendants were convicted on several counts. The pastor was sentenced to 105 months’ imprisonment and restitution in the amount of $1.3 million, and his wife to 80 months’ imprisonment and restitution in the amount of $1.2 million.

The couple appealed their convictions and sentences. The court concluded that the couple had willfully failed to report taxable income and attempted to conceal the true extent of their compensation from church staff, the congregation, and the IRS. The defendants’ sentences were enhanced, pursuant to the federal sentencing guidelines, for abusing a position of trust. The appeals court agreed with this enhancement:

The abuse of trust enhancement enables the sentencing court to punish those who wield their power to criminally take advantage of those who depend upon them most. As leaders of the church, the defendants were entrusted with the spiritual well-being and financial stewardship of their religious community. They exploited the trust of their unsuspecting congregation to conceal criminal acts from the government, as well as the church, and to maintain an extravagant lifestyle lived at the church’s expense. We thus affirm the district court’s application of the abuse of trust enhancement.” United States v. Jinwright, 2012-2 U.S.T.C. ¶50,417 (4th Cir. 2012). See also Lloyd v. Commissioner, T.C. Memo 2020-92 (2020).

For how many years can the IRS question or audit your income tax returns? Consider the following three possibilities:

Section 6502(a)(1) of the tax code specifies that “where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected . . . ​within 10 years after the assessment of the tax.”

Ministers can prepare their own tax returns. While ministers’ taxes present several unique rules, these rules are not complex. Unfortunately, many people confuse uniqueness with complexity. With a little effort, most ministers should be able to comprehend these rules sufficiently to prepare their own tax returns. The information provided in this tax guide, together with IRS Publication 17 (Your Federal Income Tax), should be all the information needed in most cases.

Of course, some ministers will prefer, for a variety of reasons, to have someone else prepare their tax returns. If that is your choice, be sure you select someone with experience in the preparation of ministers’ tax returns (preferably a tax attorney or a CPA). You may wish to share a copy of this book with the person you select.

Important considerations

Before deciding to have someone else prepare your tax return, consider the following:

Tips on selecting a tax preparer

The IRS has provided the following tips on selecting a tax preparer:

When preparing and filing a tax return, one’s filing status affects:

Here are the five filing statuses:

You must file as single if on the last day of last year you were unmarried or separated from your spouse either by divorce or separate maintenance decree and you do not qualify for another filing status. State law governs whether you are married, divorced, or legally separated.

If you were married as of the last day of last year, you and your spouse may be able to file a joint return, or you may choose to file separate returns. You are considered married even if you are living separate and apart, provided that you and your spouse were not legally separated under a decree of divorce or separate maintenance. (As noted below, you may be able to report your taxes as a head of household under these circumstances if you meet certain requirements.) If your spouse died during the year, you are considered married for the whole year. If you and your spouse both have income, you should figure your tax both on a joint return and on separate returns to see which way gives you the lower tax. In most cases you will pay more taxes if you file separately. If you do file separately and one spouse itemizes deductions, the other spouse ordinarily should itemize deductions too since he or she cannot take the standard deduction.

Married couples can choose to file separate tax returns. Doing so may result in less tax owed than filing a joint tax return.

The last year for which you may file a joint return with your deceased spouse is the year of your spouse’s death. However, for the two years following the year of death, you may be able to figure your tax using the joint rates. These rates are lower than the rates for single or head of household status.

To use the joint rates, you must file as a qualifying widow or widower and meet all of the following conditions: (1) you were entitled to file a joint return with your spouse for the year your spouse died; (2) you did not remarry before the end of the current year; (3) you have a child who qualifies as your dependent for the year; and (4) you paid more than half the cost of keeping up your home, which is the principal home of that child for the entire year.

Example Pastor B died in 2023. His surviving spouse has not remarried and has continued during 2023 and 2024 to keep up a home for herself and her two dependent children. For 2023, Pastor B’s surviving spouse was entitled to file a joint return for herself and her deceased husband. For 2023 and 2024, she may use the joint rates because she is a widow with dependent children.

You may be able to file as head of household if you meet all the following requirements:

The terms qualifying person and keeping up a home are defined in IRS Publication 501.

In 2015 the United States Supreme Court ruled that the right of same-sex couples to marry is part of the Fourteenth Amendment’s guarantees of due process and equal protection of the laws, and therefore, any state law that in any way limits this right is unconstitutional and void. Obergefell v. Hodges, 135 S.Ct. 2584 (2015). The effect of the Court’s decision was to invalidate laws and constitutional provisions in 13 states defining marriage solely as a union between one man and one woman and to treat same-sex marriages the same as opposite-sex marriages for the purposes of federal tax law.

There are more than 1,000 federal laws in which marital or spousal status is addressed, including the following. Note that each of these applies to a marriage lawfully performed under state law, regardless of the sexual orientation of the couple.

Church leaders should be familiar with the application of these and related provisions to same-sex couples who are legally married.

Under prior law, in determining taxable income, an individual reduced AGI by any personal exemption deductions and either the applicable standard deduction or itemized deductions. Personal exemptions generally were allowed for the taxpayer, the taxpayer’s spouse, and any dependents. However, the deduction for personal exemptions was suspended by the Tax Cuts and Jobs Act of 2017, effective in 2018 through 2025.

The federal income tax is a “pay as you go” tax. You must pay your tax as you earn or receive income during the year. You can pay as you go in two ways: tax withholding and quarterly estimated tax payments. These two procedures will be summarized in this section.

Most employers are required to withhold federal income taxes from employees’ wages as they are paid.

Exceptions

Some exceptions to the withholding requirement exist, including the following:

Wages paid to ministers for services performed in the exercise of ministry

The tax code exempts wages paid for “services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry” from income tax withholding. IRC 3401(a)(9). This means a church is not required to withhold income taxes from wages paid to ministers who report and pay their income taxes as employees. This exemption only applies to “services performed in the exercise of ministry.” This significant term is defined under “Service performed in the exercise of ministry” on page .

Example The United States Supreme Court has observed: 

The chapter [of the tax code] governing income tax withholding has a broad definition of the term ‘wages’: ‘all remuneration . . . ​for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash.’ The definitional section for income tax withholding, like the definitional section for FICA, contains a series of specific exemptions that reinforce the broad scope of its definition of wages. The provision exempts from wages [for income tax withholding], for example, any remuneration . . . ​for services performed by a minister of a church in the course of his duties. United States v. Quality Stores, Inc., 134 S.Ct. 1395 (2014) (quoting section 3401(a)(9) of the tax code).

Self-employed workers

Persons who are self-employed for income tax purposes report and prepay their income taxes and Social Security taxes by means of the estimated tax procedure (discussed below). Self-employed persons are not subject to tax withholding.

IRS Tax Guide for Churches and Religious Organizations

The IRS Tax Guide for Churches and Religious Organizations (Publication 1828) contains the following paragraph on the application of tax withholding to ministers:

Unlike other exempt organizations or businesses, a church is not required to withhold income tax from the compensation that it pays to its duly ordained, commissioned, or licensed ministers for performing services in the exercise of their ministry. An employee minister may, however, enter into a voluntary withholding agreement with the church by completing IRS Form W-4, Employee’s Withholding Allowance Certificate.

IRS audit guidelines for ministers

The IRS has issued audit guidelines for use by its agents in auditing ministers. The guidelines specify:

Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self-employment. . . . ​A minister, unless exempt, pays social security and Medicare taxes under the Self-employment Contributions Act (SECA) and is not subject to Federal Insurance Compensation Act (FICA) taxes or income tax withholding.

Payment for services as a minister, unless statutorily exempt, is subject to income tax, therefore the minister should make estimated tax payments to avoid potential penalties for not paying enough tax as the minister earns the income. If the employer and employee agree, an election can be made to have income taxes withheld. Even though a minister may receive a [Form 1099-NEC] for the performance of services, he or she may be a common law employee and should in fact be receiving a Form W-2.

Voluntary withholding

Ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their church. Under such an arrangement, the church withholds federal income taxes from the minister’s wages just as it would for any nonminister employee. Some ministers find voluntary withholding attractive since it avoids the additional work and discipline associated with the estimated tax procedure.

How is a voluntary withholding arrangement initiated?

A minister who elects to enter into a voluntary withholding arrangement with his or her church need only file a completed IRS Form W-4 (Employee’s Withholding Allowance Certificate) with the church. The filing of this form is deemed to be a request for voluntary withholding.

Can a voluntary withholding arrangement be revoked?

Voluntary withholding arrangements may be terminated at any time by either the church or minister, or by mutual consent of both. Alternatively, a minister can stipulate that the voluntary withholding arrangement terminates on a specified date. Note that a voluntary withholding arrangement will affect the church’s quarterly Form 941 (see “The 10-step approach to compliance with federal payroll tax reporting rules” on page ).

What about a minister’s self-employment taxes?

Ministers are deemed to be self-employed for Social Security purposes with respect to services performed in the exercise of ministry. Therefore, a church whose minister elects voluntary withholding is only obligated to withhold the minister’s federal income tax liability. The minister is still required to use the estimated tax procedure to report and prepay the self-employment tax (the Social Security tax on self-employed persons). But consider the following alternative. Ministers who report their income taxes as employees (and who are not exempt from Social Security) should consider filing an amended Form W-4 (Withholding Allowance Certificate) with their church, indicating on line 4(c) an additional amount of income to be withheld from each pay period that will be sufficient to pay the estimated self-employment tax liability by the end of the year. IRS Publication 517 states: “If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and self-employment tax that may be due.”

A church whose minister has elected voluntary withholding (and who is not exempt from self-employment taxes) simply withholds an additional amount from each paycheck to cover the minister’s estimated self-employment tax liability for the year and then reports this amount as additional income tax withheld on its quarterly Forms 941. The excess withheld income tax is reported on line 25(a) of Form 1040 and is applied to all taxes the minister reports on Form 1040, including both income taxes and self-employment taxes.

Since any tax paid by voluntary withholding is deemed to be timely paid, a minister who pays self-employment taxes using this procedure will not be liable for any underpayment penalty (assuming that a sufficient amount of taxes is withheld).

A self-employed minister may enter into an unofficial withholding arrangement whereby the church withholds a portion of his or her compensation each week and deposits it in a church account, then distributes the balance to the minister in advance of each quarterly estimated tax payment. No Form W-4 should be used, and the withholdings are not reported on Form 941. A church’s withholding obligations under federal law are explained (and illustrated) fully under “The 10-step approach to compliance with federal payroll tax reporting rules” on page .

Application to ministers

Compensation paid to ministers for services performed in the exercise of their ministry is exempt from income tax withholding (see above). As a result, ministers prepay their taxes using the estimated tax procedure unless they request voluntary withholding.

Since ministers are self-employed for Social Security with regard to services performed in the exercise of ministry, they must use the estimated tax procedure to report and prepay their self-employment taxes unless they have entered into a voluntary withholding arrangement with their employing church.

Form 1040-ES

Estimated taxes are computed and reported on IRS Form 1040-ES.

Who should make estimated tax payments

In 2025 you must make estimated tax payments if you expect to owe at least $1,000 in taxes for 2025 (after subtracting your withholding and refundable credits) and you expect your withholding and refundable credits to be less than the smaller of (1) 90 percent of the tax shown on your 2025 tax return, or (2) 100 percent of the tax shown on your 2024 tax return (110 percent of that amount if the adjusted gross income shown on that return is more than $150,000, or if married filing separately, more than $75,000). If you did not file a 2024 tax return or if that return did not cover 12 months, item (2) above does not apply.

If you are required to pay estimated taxes but fail to do so, you will be subject to an underpayment penalty. Since the penalty is figured separately for each quarterly period, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. If you did not pay enough tax by the due date of each of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.

Example Pastor T’s 2024 income tax return (which was for the entire calendar year) showed a tax of $7,000. Pastor T expects that her 2025 tax liability will be $7,500. She also anticipates that no taxes will be withheld from her 2025 income as a minister (her only source of income). Pastor T is exempt from self-employment taxes on her ministerial earnings (she submitted a timely Form 4361 exemption application to the IRS in a prior year). Under these facts, Pastor T’s estimated tax will be $7,500 (tax liability of $7,500 with no withholding). Since Pastor T’s estimated tax for 2025 will be at least $1,000 and none of it will be subject to withholding, she must make estimated tax payments for 2025.

Example Same facts as the preceding example, except that Pastor T has entered into a voluntary withholding agreement with her church and estimates that $6,500 will be withheld from her compensation in 2025. Must she make estimated tax payments? Yes, since the total amount of income taxes to be withheld from her compensation in 2025 is less than the lesser of (1) 90 percent of her estimated total tax liability for 2025 (90 percent × $7,500 = $6,750), or (2) 100 percent of the tax shown on her 2024 return ($7,000). If she fails to pay estimated taxes, she will be subject to a penalty (as explained later in this section).

Example Pastor G did not make estimated tax payments for 2024 because he thought he had enough tax withheld from his wages (through voluntary withholding) to cover his total tax liability. Early in January 2025, Pastor G made an estimate of his total 2024 tax and realized that his withholdings were $2,000 less than the amount needed to avoid a penalty for underpayment of estimated tax. On January 10, 2025, he made an estimated tax payment of $3,000, which was the difference between his withholding and his estimate of total tax. His final tax return showed his total tax to be $500 less than his estimate, so he was due a refund. Pastor G does not owe a penalty for the quarterly estimated tax payment due January 31, 2025. However, he may owe a penalty through January 10, 2025 (the day he made the $3,000 payment), for underpayments for the previous quarters.

Estimated tax procedure for 2025

The four-step procedure for reporting and prepaying estimated taxes for 2025 is summarized below:

Step 1: Obtain a copy of IRS Form 1040-ES

Obtain a copy of IRS Form 1040-ES prior to April 15, 2025. Note that Form 1040-ES consists of a worksheet, instructions, and four dated payment vouchers. You can obtain a copy from any IRS office, the IRS website (IRS.gov), many public libraries, or by calling the toll-free IRS forms hotline at 1-800-TAX-FORM (1-800-829-3676).

Step 2: Compute estimated taxes for 2025

Compute your estimated tax for 2025 on the Form 1040-ES worksheet. This is done by estimating adjusted gross income (AGI) and then subtracting estimated adjustments, deductions, and credits. Use the data set forth on your previous year’s tax return as a helpful starting point. To determine your estimated taxes for 2025, estimated taxable income is multiplied by the applicable tax rate contained in the Tax Rate Schedule reproduced on Form 1040-ES. Remember to include your estimated Social Security tax on the worksheet if you are not exempt and to include your housing allowance exclusion in computing your estimated earnings subject to the self-employment tax (the housing allowance is excluded from income only in computing income taxes, not self-employment taxes).

Step 3: Pay estimated taxes in quarterly installments

If estimated taxes (federal income taxes and self-employment taxes) are more than $1,000 for 2025 and the total amount of taxes to be withheld from your compensation is less than the lesser of (1) 90 percent of the total taxes (income and Social Security) to be shown on your actual 2025 tax return, or (2) 100 percent of the total taxes (income and Social Security) shown on your 2024 return (110 percent for certain high-income taxpayers), you must pay one-fourth of your total estimated taxes in four quarterly installments, as follows:

Payments that are mailed must be postmarked no later than the due date. If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday.

Payment vouchers. You must send each payment to the IRS, accompanied by one of the four payment vouchers contained in Form 1040-ES. If you paid estimated taxes last year, you should receive a copy of your 2025 Form 1040-ES in the mail with payment vouchers preprinted with your name, address, and Social Security number.

If you did not pay estimated taxes last year, you will have to get a copy of Form 1040-ES from the IRS. After you make your first payment (April 15, 2025), you should receive a Form 1040-ES package in your name with the preprinted information. There is a separate payment voucher for each of the four quarterly payment periods. Each one has the due date printed on it. Be sure to use the correct payment voucher.

Starting a job midyear. A minister may become liable for estimated tax payments midway through a year. For example, a minister may change churches midway through the year, leaving a church that voluntarily withheld taxes and going to a church that does not withhold taxes. In such a case the minister should submit a payment voucher by the next filing deadline, accompanied by a check for a pro-rated portion of the entire estimated tax liability for the year.

Example Pastor K graduates from seminary in May 2025 and assumes the position of associate pastor of a church on July 20, 2025. Pastor K had no income for the year until he began working for the church. Pastor K estimates his total tax liability for 2025 to be $5,000. He should obtain a Form 1040-ES and submit the third payment voucher on or before September 15, 2025, along with a check for half of the total tax (i.e., $2,500). He should send the remaining half with his January 15, 2026, payment voucher.

Changing your quarterly payments. After making your first or second estimated tax payment, changes in your income, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax and adjust your remaining quarterly payments accordingly.

Example Pastor H’s church board fails to designate a housing allowance for 2025 until May 1, 2025. Pastor H’s April 15 estimated tax payment was based on his annual earnings less an anticipated housing allowance. The delayed designation of a housing allowance may affect Pastor H’s estimated taxes for 2025, and so his remaining quarterly payments should be recalculated to avoid an underpayment penalty.

Step 4: Compute actual taxes at the end of the year

At the end of 2025, compute your actual tax liability on Form 1040. Only then will you know your actual income, deductions, exclusions, and credits. Estimated tax payments rarely reflect actual tax liability. Most taxpayers’ estimated tax payments are either more or less than actual taxes as computed on Form 1040.

The consequences of overpayment and underpayment of estimated taxes are summarized below.

Overpayment (estimated tax payments exceed actual tax liability). If you overpaid your estimated taxes (i.e., your estimated tax payments plus any withholding were more than your actual taxes computed on Form 1040) in 2024, you can elect to have the overpayment credited against your first 2025 quarterly estimated tax payment or spread out in any way you choose among any or all of your next four quarterly installments. Alternatively, you can request a refund of the overpayment.

Underpayment (estimated tax payments were less than actual tax liability). If you underpaid your estimated taxes (i.e., your estimated tax payments plus any withholding were less than your actual taxes computed on Form 1040), you may have to pay a penalty. In general, you will not be subject to an underpayment penalty for 2025 if either of the following situations applies:

You will not have an underpayment for any quarter in 2025 in which your estimated tax payment is paid by the due date for that quarter and equals or exceeds the lesser of 22.5 percent of the tax shown on your 2025 return or 25 percent of the tax shown on your 2024 return (if your 2024 return covered all 12 months of the year). If you are subject to the 110-percent rule for high-income taxpayers, discussed earlier, substitute 27.5 percent for 25 percent.

Example Pastor J does not elect voluntary withholding of any taxes and does not use the estimated tax procedure. Instead, he simply computes his taxes for the year and sends in a check with his Form 1040. Pastor J will be assessed a penalty for failure to pay each of the four quarterly payments he missed.

Example Pastor K estimates that his taxes for 2025 will be $8,000. He pays his first quarterly installment of $2,000 on April 15, 2025, but only pays $1,000 for his second quarterly installment on June 16, 2025, and another $1,000 for his third quarterly installment on September 15, 2025. He attempts to “make up the difference” by paying a fourth quarterly installment of $4,000 on January 15, 2026. While Pastor K has paid his entire estimated tax of $8,000, he will be assessed an underpayment penalty for failure to pay his full second and third installments on time.

Form 2210

You can use Form 2210 to see if you owe a penalty and to figure the amount of the penalty. If you owe a penalty and do not attach Form 2210 to your Form 1040, the IRS will compute your penalty and send you a bill. You do not have to fill out a Form 2210 or pay any penalty if (1) your total tax less income tax withheld is less than $1,000, or (2) you had no tax liability last year and you were a United States citizen or resident for the entire year.

The IRS can waive the underpayment penalty if it determines that (1) in 2023 or 2024 you retired after reaching age 62 or became disabled, and your underpayment was due to reasonable cause rather than willful neglect; or (2) the underpayment was due to casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.

Special rule for high-income taxpayers

High-income taxpayers cannot avoid the underpayment penalty by paying estimated taxes for the current year of at least 100 percent of last year’s tax. A high-income taxpayer is one with AGI for the previous year of at least $150,000 ($75,000 for married persons filing separately). For such persons the 100-percent rule is replaced with a 110-percent rule, meaning they will be subject to an underpayment penalty unless they have paid estimated taxes for the current year of at least the lesser of (1) 90 percent of the current year’s actual tax liability, or (2) 110 percent of last year’s actual tax liability (the prior year’s tax return must cover a 12-month period).

Tax returns are examined to verify the correctness of your reported taxes. An IRS computer program selects most returns that are examined. Under this program (called the discriminant function system, or DIF), selected entries on your return are evaluated, and the return is given a score. Returns are then screened by IRS personnel. The returns having the highest probability of error are selected for examination. The IRS describes its procedure for selecting tax returns for examination as follows:

We accept most taxpayers’ returns as filed. If we inquire about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. We may close your case without change; or, you may receive a refund. The process of selecting a return for examination usually begins in one of two ways. First, we use computer programs to identify returns that may have incorrect amounts. These programs may be based on information returns, such as Forms 1099 and W-2, on studies of past examinations, or on certain issues identified by compliance projects. Second, we use information from outside sources that indicates that a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If we determine that the information is accurate and reliable, we may use it to select a return for examination. IRS Publication 1 (Your Rights as a Taxpayer).

Other returns are selected because of discrepancies among forms (e.g., stated compensation differs from amounts reported on Forms W-2 or 1099-NEC).

An examination of your return does not suggest a suspicion of dishonesty. It may not even result in more tax. Many audits are closed without any change in your reported tax, and in others taxpayers receive a refund.

The examination (or audit) may be conducted by correspondence, or it may take place in your home or place of business, an IRS office, or the office of your attorney or accountant. The place and method of examination is determined by the IRS, but your wishes will be considered. You may act on your own behalf, or you may have someone represent you or accompany you. An attorney, CPA, enrolled agent (someone other than an attorney or CPA who is enrolled to practice before the IRS), or the person who prepared your return and signed it as the preparer may represent or accompany you. You must furnish your representative (if any) with a power of attorney (Form 2848).

If your return is selected for examination, you will be contacted by the IRS and asked to assemble records supporting the items on your return that are being investigated. When the examination is completed, you will be advised of any proposed change in your taxes and the reasons for any such change. If you agree with the findings of the examiner, you will be asked to sign an agreement form. By signing the form, you indicate that you agree with the changes. If you owe any additional tax, you may pay it when you sign the agreement.

If you do not agree with changes proposed by the examiner, the examiner will explain your appeal rights. This includes your right to request an immediate meeting with a supervisor to explain your position if your examination takes place in an IRS office. If an agreement is reached, your case will be closed. If an agreement is not reached at this meeting or if your examination occurs outside of an IRS office, you will be sent (1) a letter notifying you of your right to appeal within 30 days; (2) a copy of the examination report explaining the proposed adjustments; (3) an agreement or waiver form; and (4) a copy of IRS Publication 5 (which explains your appeal rights in detail).

If, after receiving the examiner’s report, you decide to agree with it, simply sign the agreement or waiver form and return it to the examiner. If you decide not to agree with the examination report, you may appeal your case within the IRS or take it immediately to the federal courts. For a complete explanation, obtain a copy of IRS Publication 556.

You may be eligible for an offer in compromise if you can’t pay the amount you owe in full or through installments. By requesting an offer in compromise, you’re asking to settle unpaid taxes for less than the full amount you owe. The IRS may accept an offer in compromise on three grounds:

When submitting an OIC based on doubt as to collectibility or effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 and referenced collection information statements are available in the Offer in Compromise Booklet, Form 656-B (PDF).

Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A “lump-sum cash offer” is defined as an offer payable in five or fewer installments within five or fewer months after the offer is accepted. If a taxpayer submits a lump-sum cash offer, the taxpayer must include with Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the $205 application fee. The 20-percent payment is nonrefundable, meaning it won’t be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the payment will be applied to the taxpayer’s tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the payment.

An offer is called a “periodic payment offer” under the tax law if it is payable in six or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with Form 656. This payment is required in addition to the $205 application fee. This amount is nonrefundable, just like the 20-percent payment required for a lump-sum cash offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities, and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.

Ordinarily, IRS collection activities are suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and where the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.

For an offer in compromise to be considered, you must pay an application fee (currently $205) and make an initial or periodic payment. However, low-income taxpayers may qualify for a waiver of the application fee and initial or periodic payments.

For more information, see the Offer in Compromise Booklet (IRS Form 656-B) or visit the IRS website.

Example The United States Tax Court ruled that the IRS can ignore a pastor’s tithes as a “living expense” in evaluating an offer in compromise. The court noted that the IRS Internal Revenue Manual concedes that if a minister is required “as a condition of employment” to tithe to a church, then this is a necessary living expense that can be considered in evaluating an offer in compromise submitted by the minister. The “only thing to consider is whether the amount being contributed equals the amount actually required and does not include a voluntary portion.” In this case, the court concluded there was no evidence that the person was employed as a pastor, and it rejected his argument that tithing was a “condition of employment” even with respect to earnings from a secular employer since he was required by church doctrine to tithe on such earnings.

The court also rejected the pastor’s claim that the IRS’s disregard of tithing expenses in evaluating offers in compromise violates the First Amendment guaranty of religious freedom since the effect of this policy was to reduce the funds taxpayers have to support their religion and divert those funds to the U.S. Treasury. The court concluded, “It may well be true that paying their taxes will leave the pastor and his wife with less funds to support their religion. But this is a burden, common to all taxpayers, on their pocketbooks, rather than a recognizable burden on the free exercise of their religious beliefs.” Pixley v. Commissioner, 123 T.C. 15 (2004).

You can request a monthly installment plan if you cannot pay the full amount you owe. To be valid, your request must be approved by the IRS. However, if you owe $10,000 or less in taxes and you meet certain other criteria, the IRS must accept your request. Before you request an installment agreement, you should consider other, less costly alternatives, such as a bank loan. You will continue to be charged interest and penalties on the amount you owe until it is paid in full.

Unless your income is below a certain level, the fee for an approved installment agreement has increased to $225 ($107 if you make your payments by electronic funds withdrawal). If your income is below a certain level, you may qualify to pay a reduced fee of $43.

For more information about installment agreements, see Form 9465, Installment Agreement Request.

Installment agreements may be set up in various ways:

You may be eligible to apply for an online payment agreement if you owe less than $50,000 in combined income tax, penalties, and interest and have filed all required returns.

The Sarbanes–Oxley Act was enacted by Congress in 2002 following several financial scandals involving high-profile companies. While the main purpose of the Act is to increase corporate accountability for companies that issue and sell stock to the general public, some of the Act’s provisions apply to churches. These include the following.

The Act amends federal criminal law to include the following new crime: “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”

The Act amends federal criminal law to include this crime: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.”

Most of the provisions of the Act are in the form of amendments to federal securities laws (the Securities Act of 1933 and the Securities and Exchange Act of 1934). Since religious organizations are exempt from these laws (except for fraudulent acts), they are not covered by the Act’s provisions. However, the two sections quoted above are amendments to federal criminal law. Since federal criminal law contains no blanket exemption for religious organizations, such organizations are subject to these provisions.

Example A church has 50 members and one full-time employee (its pastor). It also has a part-time office secretary and an independent contractor who performs custodial services. The church does not have a CPA firm audit its financial statements. The pastor discovers in March 2025 that the church board failed to designate a housing allowance for him for 2024. He creates a housing allowance that he dates December 31, 2023, and which purports to designate a housing allowance for all of 2024. The church is not a public company (i.e., it does not issue and sell stock to the general public) and therefore is not subject to most of the provisions of the Sarbanes–Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or pastors. It is possible that the pastor’s falsification of the 2024 housing allowance violates this provision, exposing him to a fine or imprisonment of up to 20 years.

The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, non-technical meaning” and pertains generally to “all matters within the authority of a government agency” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the pastor’s actions violate Sarbanes–Oxley. But even if they do not, the pastor’s actions may expose him to civil or criminal penalties under the tax code.

Example A church bookkeeper falsifies an application for property tax exemption for a building owned by the church in order to avoid the church having to pay property taxes. The Sarbanes–Oxley Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or church employees. In this case, however, the falsified record pertained to a local law and not a federal law, so the Act does not apply. However, the bookkeeper’s actions may expose her to civil or criminal penalties under other state or federal laws.

Example A church staff member realizes that the church failed to complete a Form I-9 (immigration form) for each new worker for the past several years. In order to avoid any penalties for noncompliance, the staff member completes a Form I-9 for each employee hired over the past three years and backdates each form to the date of hire. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes–Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or pastors. It is possible that the staff member’s falsification of the I-9 forms violates this provision in the Sarbanes–Oxley Act, exposing him to a fine or imprisonment of up to 20 years.

The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, non-technical meaning” and pertains generally to “all matters within the authority of a government agency” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the staff member’s actions violate Sarbanes–Oxley. But even if they do not, the actions may expose the staff member to civil or criminal penalties under other federal or state laws.

Example A church employee learns that the church is not paying over withheld income taxes and FICA taxes to the government. The employee notifies the local IRS office. When the pastor learns that the employee notified the IRS, he fires him. Has the pastor violated the Sarbanes–Oxley Act’s whistle-blower provision? Possibly. The Act amends federal criminal law to include the following crime: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.” The pastor’s decision not to pay over withheld taxes to the government may be a federal offense since section 7202 of the tax code imposes criminal penalties upon “any person required to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax.” As a result, the pastor’s dismissal of the employee for reporting the possible violation of this section may trigger liability under Sarbanes–Oxley.

Note that this section requires that the employee provide to a “law enforcement officer” information relating to the commission of a federal offense. Is an IRS agent a law enforcement officer? Federal law defines this term as “an officer or employee of the federal government, or a person authorized to act for or on behalf of the federal government or serving the federal government as an adviser or consultant—(A) authorized under law to engage in or supervise the prevention, detection, investigation, or prosecution of an offense.” Construed broadly, this could include an IRS agent. In summary, it is possible that the pastor’s dismissal of the church employee violated the whistleblower provision under Sarbanes–Oxley. If so, this would be a felony exposing the pastor to a fine of not more than $10,000 or imprisonment of not more than five years, or both, together with the costs of prosecution. Finally, note that apart from the pastor’s potential liability for violating Sarbanes–Oxley under these circumstances, the dismissed employee may be able to sue the pastor and church under state law for wrongful termination or some other theory of liability.

While evasion of taxes will subject a taxpayer to civil and possibly criminal penalties, every taxpayer has the legal right to avoid or minimize taxes. As Judge Learned Hand remarked: “Over and over again the courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more tax than the law demands; taxes are enforced exactions, not voluntary contributions.” Newman v. Commissioner, 159 F.2d 848 (2d Cir. 1947).

Another federal appeals court judge has observed that “it is a well settled principle that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes, or to avoid them altogether, by means which the law permits.” Jones v. Grinnell, 179 F.2d 873 (10th Cir. 1950).

In a 2008 ruling, the Supreme Court affirmed the right of taxpayers to minimize taxes. Boulware v. U.S. 552 U.S. 421 (U.S. 2008). In a unanimous ruling, the Court quoted from a 1935 decision: “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” Gregory v. Helvering, 293 U.S. 465 (1935). 

But the Court cautioned:

The rule is a two-way street: While a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not . . . ​and may not enjoy the benefit of some other route he might have chosen to follow but did not. . . . ​The question here, of course, is not whether alternative routes may have offered better or worse tax consequences [but] whether what was done . . . ​was the thing which the [tax code] intended.

Many taxpayers are surprised to learn that IRS notices are legally effective even if never received, so long as they are mailed to a taxpayer’s last known address. The Tax Court has ruled that the address listed on a taxpayer’s most recent federal tax return is his or her “last known address” unless the taxpayer has given the IRS “clear and concise notification” of a different address.

To effectively notify the IRS of a change in address, a taxpayer must send a change-of-address notification to the IRS Service Center serving the taxpayer’s old address or to the Chief, Taxpayer Service Division, in the local IRS district office. The IRS has developed a form (Form 8822) that is designed specifically to notify it of a change of address. Taxpayers are encouraged to use this form in notifying the IRS of any change in their address since it will satisfy the “clear and concise notification” requirement and will identify the specific IRS office to which the notification should be sent.

The IRS has stated that informing the U.S. Postal Service of a change of address will not constitute clear and concise notification to the IRS. Predictably, the IRS Form 8822 is seldom used by taxpayers to notify the IRS of a change of address.

Key point Taxpayers who submit a Form 8822 to the IRS following a change in address not only ensure prompt delivery of refund checks, but they also avoid the problems that arise when the IRS sends a notice of additional tax or penalties to a taxpayer at his or her “last known address” that is no longer the taxpayer’s residence.