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Unpaid Payroll Taxes: A Hidden Liability for Churches and Leaders

A recent case in the for-profit world underscores the potential threat.

The News

“A company’s CFO is liable for its past-due employment taxes, a court says. He had control over the company’s bank account and oversaw all aspects of the firm’s operations and finances, including payroll, tax return preparation and personnel matters. He knew that the firm failed to deposit payroll taxes and file tax returns when due. He had check-signing authority and paid creditors before the IRS. That makes him liable for the tax shortfall” (The Kiplinger Tax Letter, Feb. 8, 2019).

The Church Law & Tax Take

The case referenced by The Kiplinger Tax Letter involved a motion for summary judgment by the government against the company’s CFO, a certified public accountant who was caught in 2009 embezzling from the company. The CFO’s actions resulted in more than five years of unpaid payroll withholding taxes by the company, or more than $11 million total. Throughout the scheme, the CFO told the company’s board the company was financially strong and meeting all of its tax obligations.

The CFO was charged with first-degree felony theft of property worth over $200,000 in 2013, pled guilty, and was sentenced to 10 years in prison. Separately, the IRS instituted $4.3 million in penalties against the company’s founder, indicating he faced personal liability as a “responsible person” of the company. The estate of the founder, who had since died, legally challenged the penalties, prompting the government to file a counterclaim naming both the founder and the CFO. Earlier this year, a federal district court in Texas found the now-imprisoned CFO was a “responsible person” and ruled his “failure to pay taxes was willful,” making him responsible for the $4.3 million, plus interest.

Why is this issue relevant to churches? The IRS watches this issue closely, doling out billions of dollars in fines and penalties for unpaid employment taxes every year. This means pastors and church board chairs must make certain all employment-related taxes are being withheld and remitted, on time and in full, every quarter. Failure to do so can lead to fines and penalties for both churches and individuals alike.

A new article on ChurchLawAndTax.com further illustrates the importance of this topic. One 200-member congregation owed $350,000, including penalties and interest, for unpaid payroll taxes due to a financial secretary’s embezzlement scheme. Other churches get hit with penalties because leaders sometimes mistakenly assume they can dip into withholdings to cover other operational expenses, which is illegal. And still others do not closely monitor the third-party vendors hired to handle payroll services, only to later learn the vendors mishandled—either intentionally or unintentionally—the withholdings.

Learn more about this crucial matter in “When Churches Neglect Payroll Taxes,” on ChurchLawAndTax.com. Also get more help on payroll matters through CPA Elaine Sommerville’s book, Church Compensation: From Strategic Plan to Compliance.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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  • March 26, 2019

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