WHO IS RESPONSIBLE FOR PAYROLL TAXES?

By: Julie Bloss

If your church has at least one paid employee who is not a minister, it may have a legal obligation to withhold payroll taxes. But who is actually responsible for payroll withholding? Is it the minister, the church treasurer, or the chairman of the church’s governing board? That’s the question a federal bankruptcy court recently addressed in an important case, In re Triplett, 115
B.R. 955 (N.D. III. 1990). This article will examine that case and its relevance to churches.

Background

Before looking at the court’s decision in Triplett, we need to review the legal background of failure to withhold or pay over payroll taxes. Although the Internal Revenue Code imposes a number
of penalties for violations of various provisions, one of the stiffest penalties is found in section 6672. According to section 6672, the IRS may impose a penalty of 100% of payroll taxes that
are not withheld or paid over to the government by anyone who is responsible for withholding and paying those taxes. So if an employer does not withhold or pay over, for example $10,000
connected with the employer, perhaps an employee or officer or director, may have to cough up $10,000 out of his or her pocket.

But what about volunteers for a non-profit organization like an unpaid church treasurer? Surely they can’t be held personally responsible for payroll taxes, can they? Yes, they can.

In 1989, a federal court in New York upheld a penalty of over $200,000 imposed by the IRS against each of four officers of a church-operated charity which did not pay over taxes withheld from
employee paychecks. Carter v. United States, 717 F. Supp. 188 (S.D.N.Y. 1989).

So why did these four officers have a duty to collect or pay over payroll taxes? According to the Carter court, there were several factors making them responsible parties despite the fact that they
were unpaid volunteers of a charitable organization. First, they were board members as well as officers. Perhaps more importantly, they had authority to sign payroll checks. Finally, they also had
general business responsibilities including bookkeeping and hiring and firing.

Once the court had decided that these people were responsible parties, it had to decide if their conduct in failing to withhold and pay over the taxes was willful. According to the court,
“willful” didn’t imply an evil motive or intent to defraud, but instead meant voluntary or conscious. In fact, the failure to investigate or correct the problem once they were aware of it
meant that these officers had acted willfully. Keep in mind the Carter decision as we examine the more recent Triplett case.

The Triplett Case

The Triplett case involved a Baptist church member who was elected financial secretary and served as church treasurer. Mr. Triplett was paid $100 a week for his services and also served as interim business manager for the church’s private school. As church treasurer, his primary responsibility was preparing checks for the church although he did not determine to whom to write the checks. Instead, he received bills on a weekly basis from the church clerk or chairman of the board of deacons. After writing and signing the checks, Triplett didn’t mail them himself; he returned them to the clerk or chairman of the deacons. The checks had to be signed by two people, and Triplett was one of three people authorized to sign them.

Testimony indicated that the chairman of the board of deacons had refused to mail certain checks the treasurer had prepared on his own initiative based on the bills he thought were most important. The treasurer prepared financial statements for the church as well as the quarterly 941 forms, but he did not have much to do with the financial policies of the church which were determined by the pastor or the chairman of the board of deacons.

In addition to his responsibilities as treasurer, Triplett served as temporary business manager of the church school for two and a half months. Although the school’s regular business manager had
the authority to decide which bills to pay, as interim manager, Triplett didn’t have the authority. In fact, although he had possession of the school’s financial records and checkbooks, he
didn’t even have authority to sign checks for the school.

Despite his limited authority over payment of church bills and despite the fact that he had absolutely not authority over the school’s bills, the IRS imposed on Triplett a penalty of 100% of the payroll taxes that the church and school had failed to pay to the government. Basing its argument on section 6672 of the Internal Revenue Code, the IRS argued that he was personally liable for these taxes. When Triplett filed for bankruptcy, the IRS filed a claim for over $70,000. Fortunately for Triplett, the court rejected the IRS position.

Like the court in Carter, the Triplett court recognized that an individual cannot be subject to the section 6672 penalty unless he is both a responsible person and willfully fails to pay over taxes. According to this court, control over finances is the key to determining whether an individual is a responsible person within the meaning of this law. In this case, the court found that the treasurer lacked sufficient control over the church finances to be held liable. The court noted that he could not determine which church bills were to be paid and that he had no responsibilities for day-to-day business decisions. The court recognized that he had even less control over the financial affairs of the school and therefore could not be considered as responsible person with respect to its payroll taxes regardless of the fact that the school was considered a ministry of the church. Because the court found that Triplett was not a responsible person within the meaning of the law, it did not address the issue of whether he had acted willfully. Interestingly, the court observed that the pastor and chairman of the board of deacons would probably satisfy the definition of responsible persons.

Lessons For Churches

Although the church treasurer in the Triplett case was not held liable for payroll tax penalties, the case does not stand for the proposition that church treasurers cannot be penalized for a
church’s failure to withhold or pay over payroll taxes. The decision in this case turned on the issue of whether the treasurer had sufficient control over church finances to be considered a
responsible person under the law. In this case, the treasurer didn’t have that kind of control, but that doesn’t mean that other church treasurers don’t have enough control to be considered
responsible persons. Additionally, the church observed that the minister and chairman of the deacons probably could have been considered responsible parties.

There is no question that volunteers as well as paid church officers and employees can be penalized for failure to withhold and pay over payroll taxes. The Triplett case illustrates that the
IRS is serious about pursuing and penalizing individuals connected with churches which do not properly withhold or pay over payroll taxes. The court observed that payroll taxes which are generally paid only four times a year can be tempting sources of ready cash for employers, but employers must resist that temptation. Don’t let your church use its payroll deposits as a way of robbing Peter to pay Paul – the consequences are severe.

(The above material appeared in the March/April 1993 issue of Christian Management Report.)

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