Key point. The tax code imposes penalties on employers, including churches, that fail to issue information returns (i.e., W-2, 1099) to employees and contractors, and these penalties are significantly increased if the failure is willful.

The United States Tax Court ruled that the Internal Revenue Service acted properly in assessing penalties against a church for intentionally refusing to issue W-2 forms to its employees. Section 6721(a) of the tax code imposes a penalty on employers for failure to file correct W-2 and other information returns. This penalty applies when an employer required to file an information return neglects to file it on time or fails to include within all information required to be shown. For the tax years involved in this case the penalty was $100 for each return with respect to which such failure occurred. However, if an employer intentionally disregards the filing requirement for Form W-2 and other information returns, the penalty significantly increases.

The IRS determined that a church with several full- and part-time employees had failed, for 2010 and 2011, to provide the Social Security Administration (SSA) with Forms W-2 for these workers. The IRS sent the church a notice of penalty (a "CP215 Notice") for each year, informing the church of this discrepancy, requesting further information, and notifying the church that it risked penalties under section 6721.

Having received no response, the IRS, on December 2, 2013, assessed $5,942 of section 6721 penalties against the church for 2010. On November 3, 2014, the IRS assessed $6,354 of section 6721 penalties against the church for 2011. In an effort to collect these unpaid liabilities, the IRS sent the church a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing." This notice informed the church that its unpaid liabilities, including accrued interest, then totaled $12,840. The notice stated: "If you wish to request an Appeals hearing, complete the enclosed Form 12153, Request for a Collection Due Process or Equivalent Hearing, and send it to us within 30 days from this letter's date."