Q: A minister on staff at our church has never filed a federal tax return. What are the consequences?
Why Some Pastors Don’t File Taxes
It’s not uncommon for ministers to misunderstand their tax responsibilities. Some believe they are exempt from taxation, while others are unaware of specific tax rules, such as the exemption of clergy wages from income tax withholding. Ministers must either elect voluntary withholding by filing IRS Form W-4 or prepay their taxes using the estimated tax procedure (Form 1040-ES).
Failing to file can result in substantial tax debt and penalties. Below is a summary of the consequences pastors may face for not filing or paying taxes.
Penalties for Not Filing Tax Returns
Failure-to-File Penalty
- The penalty is 5% of the unpaid taxes for each month or part of a month that a return is late, up to a maximum of 25% of the unpaid tax.
- If the failure to file is due to fraud, the penalty increases to 15% per month, up to a maximum of 75% of the unpaid tax.
- If a return is filed more than 60 days late, the minimum penalty is the smaller of $210 or 100% of the unpaid tax.
- Reasonable cause, not willful neglect, can exempt pastors from this penalty.
Failure-to-Pay Penalty
- The penalty is 0.5% of unpaid taxes for each month or part of a month after the due date, up to a maximum of 25% of the unpaid tax.
- If a notice of intent to levy is issued, the penalty increases to 1% per month starting 10 days after the notice.
- The penalty doesn’t apply during the automatic six-month extension if at least 90% of the tax liability was paid by the due date.
- Reasonable cause can also exempt pastors from this penalty.
Combination of Penalties
If both failure-to-file and failure-to-pay penalties apply, the failure-to-file penalty is reduced by the failure-to-pay penalty for the same months. However, for returns filed more than 60 days late, the minimum penalty applies.
Criminal Penalties for Tax Evasion
In addition to civil penalties, failing to file tax returns may lead to criminal charges if there is a willful attempt to evade taxes. Tax evasion is a felony and carries severe penalties:
- A fine of up to $100,000.
- A prison sentence of up to five years.
- Both a fine and imprisonment in some cases.
Criminal penalties require an affirmative act, such as filing a false return. Omissions alone are generally insufficient for prosecution. Most pastors face civil penalties rather than criminal charges.
Importance of Filing Taxes Correctly
Filing taxes correctly and on time is critical for pastors to avoid penalties and interest. The services of a qualified CPA can help ensure compliance. Churches should also educate clergy on the quarterly estimated tax procedure to prevent future issues.
FAQs About Penalties for Pastors Who Do Not Pay Taxes
Are pastors exempt from paying taxes? No, pastors must pay taxes on their ministerial income unless they qualify for specific exemptions, such as a housing allowance. Can pastors avoid penalties by claiming reasonable cause? Yes, if they can demonstrate a valid reason for not filing or paying taxes on time, they may avoid penalties. What happens if a pastor files taxes late but pays the full amount owed? They may still face a failure-to-file penalty, though the failure-to-pay penalty would not apply if the full amount was paid. Should churches educate clergy on tax requirements? Yes, educating clergy about tax filing and payment procedures helps avoid misunderstandings and potential penalties.
Conclusion
Failing to file or pay taxes can have serious consequences for pastors, including substantial penalties and possible criminal charges. Churches should ensure that their clergy understand their tax obligations and provide resources or access to tax professionals to help them stay compliant. Proactive measures can prevent financial and legal difficulties in the future.
