There are ministers who have never filed a federal income return, and it is easy to understand why. Some ministers believe they are exempt from taxation. Others are not familiar with the exemption of clergy wages from income tax withholding and the need to either elect voluntary withholding (by filing a completed IRS Form W-4 (Employee’s Withholding Allowance Certificate) with the church or prepay taxes using the estimated tax procedure (Form 1040-ES).
Either way, a substantial tax debt can be incurred. Here is a summary of the consequences:
- If you don’t file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).
- If your failure to file is due to fraud, the penalty is 15 percent for each month or part of a month that your return is late, up to a maximum of 75 percent.
- If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
- You won’t have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect.
- You will have to pay a failure-to-pay penalty of 1/2 of 1 percent (0.50 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax isn’t paid. This penalty doesn’t apply during the automatic 6-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the due date of your return and pay the balance when you file the return. If a notice of intent to levy is issued, the rate will increase to 1 percent at the start of the first month beginning at least 10 days after the day that the notice is issued. This penalty can’t be more than 25 percent of your unpaid tax. You won’t have to pay the penalty if you can show that you had a good reason for not paying your tax on time.
- If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent (or 15 percent) failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
- These are some of the civil penalties the IRS can assess if a taxpayer fails to file a tax return and pay taxes. Other penalties may apply, as well as interest.
The calculation of penalties can be a difficult task. The services of a CPA can be invaluable in such cases. And, be sure all clergy staff members understand the quarterly estimated tax procedure.
In addition to the civil penalties listed 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 or a prison sentence of up to five years or both. But civil penalties are much more likely, as few ministers are convicted and imprisoned for tax crimes.
New ministers will find many of their tax questions answered in 12 Law & Tax Guidelines for New Ministers. And both churches and seasoned ministers will find detailed guidance on a variety of complex tax issues in the Church & Clergy Tax Guide.