A High Price to Pay

Church pastors, leaders may be liable for not withholding payroll taxes.

In re Vaughn, 2011-2 U.S.T.C. ¶50,681 (E.D.N.C. 2011)

Background. A federal court in North Carolina ruled that a minister met the definition of a “responsible person” under section 6672 of the tax code, and therefore the IRS could assess a penalty against her in the amount of 100 percent of the payroll taxes that were not withheld or paid over to the government by the church. Church leaders should be familiar with this case and its implications.

Without question, the most significant federal reporting obligation of most churches is the withholding and reporting of employee income taxes and Social Security taxes. These requirements apply, in whole or in part, to almost every church. Yet many churches do not comply with them due to either unfamiliarity or financial pressures. This can trigger various penalties. One of the most serious penalties is found in section 6672 of the tax code. This section specifies that “any person required to collect, truthfully account for, and pay over any [income tax or FICA tax] who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Stated simply, this section says that if an employer has failed to collect or pay over income and employment taxes, the trust fund recovery penalty may be asserted against those determined to have been responsible and willful in failing to pay over the tax. Responsibility and willfulness are both required.

KEY POINT. The withheld employment taxes will be collected only once, whether from the employer or from one or more of its responsible persons.


The IRS Internal Revenue Manual (IRM) states that responsibility is a matter of “status, duty, and authority,” that “a determination of responsibility is dependent on the facts and circumstances of each case,” and that “potential responsible persons” include an officer or employee of a corporation, or a corporate director. IRM The IRM further clarifies that a responsible person has: (1) power to direct the act of collecting withheld taxes; (2) accountability for and authority to pay employment taxes; and (3) authority to determine which creditors will or will not be paid. The IRM lists the following “indicators of responsibility”:

  • The full scope of authority and responsibility is contingent upon whether?the person had the ability to exercise independent judgment with respect to the financial affairs of the business.
  • If a person has the authority to sign ?checks, the exercise of that authority does not, in and of itself, establish responsibility. Signatory authority may be merely a convenience.
  • Persons with ultimate authority over financial affairs may generally not avoid responsibility by delegating that authority to someone else.
  • Persons serving as volunteers solely in an honorary capacity as directors and trustees of tax-exempt organizations will generally not be considered responsible persons unless they participated in the day-to-day or financial operations of the organization and they had actual knowledge of the failure to withhold or pay over the trust fund taxes. This does not apply if it would result in there being no person responsible [for the section 6672 penalty].

To determine whether a person has the status, duty, and authority to ensure that employment taxes are paid, the IRM directs IRS agents to consider “the duties of the officers as set forth in the corporate bylaws as well as the ability of the individual to sign checks.” In addition, agents are instructed to determine the identity of individuals who:

  • are officers, directors, or shareholders of the corporation;
  • hire and fire employees;
  • exercise authority to determine?which creditors to pay;
  • sign and file the excise tax or employment tax returns, such as Form 941 (Employer’s Quarterly Federal Tax Return);
  • control payroll and disbursements; and
  • make federal tax deposits.

IRS Policy Statement 5-14 (part of the Internal Revenue Manual) specifies:

An employee is generally not a “responsible person” if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. However, if an employee … has significant control over making the company’s other financial decisions about who to pay or has the ability to obtain financing for the company, then such an employee cannot avoid being responsible for the [section 6672 penalty] by merely showing that [the employer] limited his discretion on the specific matter of paying taxes that the company owed.

Here are a few examples that appear in the IRS Internal Revenue Manual (they are adapted for church use):

Example. A church bookkeeper has check-signing authority, and she pays all of the bills the treasurer gives her. She is not permitted to pay any other bills, and when there are not sufficient funds in the bank account to pay all of the bills, she must ask the treasurer which bills to pay. The bookkeeper should generally not be held responsible for the section 6672 penalty.

Example. An employee works as a clerical secretary in the office. She signs checks and tax returns at the direction of, and for the convenience of, a supervisor. She is directed to pay other vendors, even though payroll taxes are unpaid. The secretary is not a responsible person, because she works under the dominion and control of the owner or a supervisor and is not permitted to exercise independent judgment.


Willful means intentional, deliberate, voluntary, reckless, or knowing, as opposed to accidental. No bad motive is required. To show willfulness, the IRS generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the willfulness requirement.

Application to churches

Does the penalty imposed by section 6672 apply to churches and other nonprofit organizations? The answer is yes. In Policy Statement 5-14 the IRS states:

In general, non-owner employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in section 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.

In order to make accurate determinations, all relevant issues should be thoroughly investigated. An individual will not be recommended for assertion if sufficient information is not available to demonstrate he or she was actively involved in the corporation at the time the liability was not being paid. However, this shall not apply if the potentially responsible individual intentionally makes information unavailable to impede the investigation.

This language indicates that the IRS will not assert the 100-percent penalty against uncompensated, volunteer board members of a church who:

  • are solely serving in an honorary capacity;
  • do not participate in the day-to-day or financial operations of the organization; and
  • do not have knowledge of the failure to withhold or pay over withheld payroll taxes.

A recent case

The federal court in North Carolina ruled that a minister met the definition of a “responsible person” under section 6672 of the tax code, and therefore the IRS could assess a penalty against her in the amount of 100 percent of the payroll taxes that were not withheld or paid over to the government. In re Vaughn, 2011-2 U.S.T.C. ¶50,681 (E.D.N.C. 2011). In deciding if an officer or employee is a “responsible person,” the court noted that the most important question is whether the person “had the effective power to pay the taxes—that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.” It listed the following factors which are indicative of this authority including “whether the employee: (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company’s payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.”

The court concluded that the minister in this case was a responsible person based on the following considerations:

  • The ministry’s bylaws stated that the minister was “CEO over all spiritual and business matters,” and a member of all boards and committees.
  • The bylaws specified that the minister had “the general powers and duties of supervision and management usually vested in the office of president of a corporation.”
  • The minister was authorized to cosign loans.
  • The minister had the authority, and exercised that authority, to sign checks on behalf of the ministry without any other signature. Although the minister claimed that she rarely wrote checks, the court concluded that “the issue is not how many checks [she] signed, but whether [she] had authority to do so.”
  • The minister had the authority to hire and fire employees.

The court acknowledged that responsible person status does not in itself create personal liability under section 6672. Liability arises only if the responsible person acts willfully in failing to collect, account for, or pay over the taxes. The court noted that willfulness can be established if a responsible person: “(1) has actual or constructive knowledge of the unpaid taxes and the employer continues to pay other creditors in lieu of the United States; (2) lacks actual knowledge of the unpaid taxes, but recklessly disregards the existence of an unpaid deficiency; or (3) becomes aware of the unpaid taxes and fails to use all unencumbered funds to pay the tax liability.”

The court noted that “reckless disregard” exists when the person “(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.” In this case, the minister testified that she had actual knowledge that the ministry had failed to remit its employment taxes in the past and that she was aware that it had entered into an installment payment with the IRS.

The court concluded that the minister

was on notice that the taxes were not being paid, but she failed to engage in any investigation to verify that the subsequent trust fund taxes were being paid. Failing to do so meets the reckless disregard test. This notice placed a duty on her to investigate and confirm that the ministry was paying trust fund taxes. The Form 941s filed by [the ministry] showed significant unpaid taxes and little to no payments for any of the quarters. As CEO and president of the ministry she could have easily confirmed the outstanding liability.

Taxpayer Bill of Rights 2 (TBOR2)

Congress enacted the Taxpayer Bill of Rights 2 in 1996. This law contains four important limitations on the application of the penalty under section 6672 (most of these were amendments to section 6672):

  1. The IRS must issue a notice to an individual it has determined to be a responsible person with respect to unpaid payroll taxes at least 60 days prior to issuing a notice and demand for the penalty.
  2. TBOR2 requires the IRS, if requested in writing by a person considered by the IRS to be a responsible person, to disclose in writing to that person the name of any other person the IRS has determined to be a responsible person with respect to the tax liability. The IRS is required to disclose in writing whether it has attempted to collect this penalty from other responsible persons, the general nature of those collection activities, and the amount (if any) collected. Failure by the IRS to follow this provision does not absolve any individual from any liability for this penalty.
  3. If more than one person is liable for this penalty, each person who paid the penalty is entitled to recover from other persons who are liable for the penalty an amount equal to the excess of the amount paid by such person over such person’s proportionate share of the penalty. This proceeding is a federal cause of action and is separate from any proceeding involving IRS collection of the penalty from any responsible party.
  4. TBOR2 clarifies that the responsible person penalty is not to be imposed on volunteer, unpaid members of any board of trustees or directors of a tax-exempt organization to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial activities of the organization, and do not have actual knowledge of the failure. However, this provision cannot operate in such a way as to eliminate all responsible persons from responsibility.

Example. Bill serves as the treasurer of his church. Due to financial difficulties, the pastor decides to use withheld payroll taxes to pay other debts. The IRS later asserts that the church owes $25,000 in unpaid payroll taxes. The church has no means of paying this debt. The IRS insists that Bill and other church board members are personally liable for the debt. It is likely that Bill is a responsible person who may be liable for the 100-percent penalty, since he has authority over the day-to-day financial activities of the church. TBOr2 will not protect him. However, it will protect members of the church board who (1) are volunteer, unpaid members; (2) serve solely in an honorary capacity; (3) do not participate in the day-to-day or financial activities of the organization; and (4) do not have actual knowledge of the failure to pay over withheld taxes to the government.

Example. A church board votes to use withheld taxes to pay other debts of the church. During a three-year period, the church fails to deposit $100,000 in withheld taxes. The IRS claims that the board members are personally liable for the 100-percent penalty for failing to deposit withheld taxes. All of the members of the board claim they are protected by the provisions of TBOR2. They are not correct, since TBOr2 specifies that its provisions cannot operate in such a way as to eliminate all responsible persons from responsibility.


The precedent summarized above demonstrates that church officers and directors (and in some cases employees, such as administrators or bookkeepers) can be personally liable for the payment of income taxes and Social Security and Medicare taxes that they fail to withhold, account for, or pay over to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations and ensure that these obligations are being satisfied.

This article first appeared in Church Finance Today, March 2012.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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