In 2005 I wrote the fairly exhaustive article, Luther’s “Snow-Covered Dunghill” (Myth?). I could not find conclusive evidence that Martin Luther had ever used this phrase; although I thought I found all the basic component ideas present in Luther. I was curious to see if anyone else had come up with anything since that time. Apparently not, and it seems that my paper remains the most in-depth treatment of the question online.
It may be that I have found, today, an important clue as to how the common use of this phrase, attributed to Luther (but never documented) may have come about.
I was searching the Internet, trying to find any clues, and happened to run across a fascinating book called Proverbial Language in English Drama Exclusive of Shakespeare, 1495-1616: An Index (Robert William Dent, University of California Press, 1984). On page 307 in Appendix A, we find the entry, “A DUNGHILL covered with snow (etc.).” Some of the listed references come close to the exact notion, but not quite. The first one that is precisely the same idea is the following (my colored emphasis):
1610 Stoneham Treatise First Psalme 153: These their vertues are done by the wicked first, for shew, as Hypocrites, like a dung-hill covered with snowe.
The next one is equally relevant to our search:
1616 T. Adams Soul’s Sickness I,494f.: He [a hypocrite] is . . . a stinking dunghill covered over with snow.
Fascinating, huh? I think we may be onto something here. I managed to find both works in either Internet Archive or Google Books (thank God for both of those magnificent sources of primary material). The first, A Treatise on the First Psalme, by Mathew Stonham (alternate name spelling), was published in 1610 in London. A photocopy of the exact citation can be seen on page 153.
I was unable to find out much about this man, other than that he was born in 1571, lived till at least 1641, was puritanistically “inclined” and was a “Minister and Preacher in the Cittie of Norwich” (found on the title page). The Reformed Books Online site recommended his commentary, accompanied by a quotation from Charles Spurgeon: “Somewhat dry, scholastic and out of date; but still an interesting and instructive piece of old divinity.” This more or less proves that he was a Calvinist; if he was not, this site likely wouldn’t recommend him.
The book, The Social Structure in Caroline England (David Mathew, Oxford: Clarendon Press, 1948), notes on page 63:
After taking Orders he returned to his native city and not later than 1600 opened a private school which for nearly forty years would continue to provide scholars for his own college.
What is interesting is that Stoneham’s reference (like Adams’) is strictly referring to the pretense of hypocrites: not at all to the doctrine of imputed justification (as Luther supposedly used it, and as the reference today is commonly understood). Thus, if these two passages were the origin of the assumption in use today, their original intent and meaning and context have been considerably modified. Consulting the immediate context of Stoneham’s reference on page 153 ff., one can clearly observe Stoneham issuing blistering condemnations of hypocrisy, similar to Jesus’ excoriation of the Pharisees. The olde English is fun to read, too.
I found quite a bit more about the Calvinist Thomas Adams (1583-1652). A Puritan’s Mind website provides a fairly extensive biography of him, written by Joel R. Beeke, of Puritan Reformed Theological Seminary in Grand Rapids, Michigan. Here are some key excerpts:
Thomas Adams graduated from Trinity College, Cambridge, with a Bachelor of Arts degree in 1602, and four years later, with a Master of Arts degree from Clare College. Ordained deacon and priest in the Lincoln diocese in 1604, he served as curate of Northill, Bedfordshire from 1605 to 1611. . . .
In 1614, he became vicar of Wingrave, Buckinghamshire, and then moved to London in 1619, where he was given the rectories of St. Benet Paul’s Wharf and the small church of St. Benet Sherehog. For his first five years in London, he also held the lectureship of St. Gregory’s, a parish of 3,000. Later on, he preached on occasion at St. Paul’s Cross and Whitehall, and served as chaplain to Henry Montagu, First Earl of Manchester and Chief Justice of the king’s bench.
Adams was a powerful preacher, much-quoted writer, and influential divine. Prominent leaders in church and state, such as John Donne and the earl of Pembroke, were among his friends.
Adams was a Calvinist Episcopalian in terms of church polity. He was not opposed to kneeling to receive communion and feared that the abolition of episcopacy advocated by some Puritans would lead to Anabaptism. Nonetheless, Adams embraced Puritan theology, polemics, and lifestyle. . . .
Robert Southey . . . describe[d] him as “the prose Shakespeare of the Puritan theologians.”
Adams shared the Puritan concern to purge the Church of England of remaining vestiges of Roman Catholicism or “popery,” as it was then called. His open expression of this concern and his identification with the Puritans in many areas, offended William Laud, Archbishop of Canterbury; doubtless, this hindered his preferment in the church. At the same time, Adams was staunchly loyal to the king, and so found himself in disfavor with Cromwell . . .
Alexander B. Grosart wrote of him: “Thomas Adams stands in the forefront of our great English preachers. He is not as sustained as Jeremy Taylor, nor so continuously sparkling as Thomas Fuller, but he is surpassingly eloquent and brilliant, and much more thought-laden than either.”
The Wikipedia entry on Thomas Adams states about him: “while he was a Calvinist in theology, he is not, however, accurately described as a Puritan.” We can find his relevant work in a 1909 volume devoted to an edited collection of his sermons. The context of his remark on page 202 (just word-search it) plainly shows that it had to do with hypocrisy, and actually of an empty Christian observance without works. The sermon was about Jesus’ parable of the two sons (see pages 184-185 for the beginning of it). Here is the parable (RSV):
Matthew 21:28-32 “What do you think? A man had two sons; and he went to the first and said, `Son, go and work in the vineyard today.’  And he answered, `I will not’; but afterward he repented and went.  And he went to the second and said the same; and he answered, `I go, sir,’ but did not go.  Which of the two did the will of his father?” They said, “The first.” Jesus said to them, “Truly, I say to you, the tax collectors and the harlots go into the kingdom of God before you.  For John came to you in the way of righteousness, and you did not believe him, but the tax collectors and the harlots believed him; and even when you saw it, you did not afterward repent and believe him.
Accordingly, we see the larger context of the point he was making in his sermon. I provide the entire concluding section (my paragraphs and some quotation marks added):
Words are but vocal interpreters of the mind, actions real; what a man does we may be sure he thinks, not ever more what he says. Of the two, give me him that says little and doth much. Will you examine further who are like this son? They that can say here in the temple, “Lord, hallowed be thy name”; scarce out of the church-doors, the first thing they do is to blaspheme it: that pray, “Thy will be done,” when with all their powers they oppose it: and, “Incline our hearts to keep thy laws”, when they utterly decline themselves.
These are but devils in angels feathers, stinking dunghills covered with white snow, rotten timber shining in the night ; Pharisees cups, ignes fatui, that seem to shine as fixed in the orb, yet are no other than crude substances and falling meteors. You hear how fairly this younger brother promiseth; what shall we find in the event? But he went not. What an excellent son had this been if his heart and tongue had been cut out of one piece! He comes on bravely, but, like an ill actor, he goes halting off. It is not profession, but obedience, that pleaseth God. “Not every one that saith unto me, Lord, Lord, shall enter into heaven ; but he that doth the will of my Father which is in heaven”, Matt. vii. 21.
There are three things that cozen many, because they are preparatives to obedience, but are not it: Some intend well, as if the blast of a good meaning could blow them into heaven. Others prepare and set themselves in a towardness; but, like the George, booted and spurred, and on horseback, yet they stir not an inch. Others go a degree further, and they begin to think of a course for heaven: for a Sabbath or two you shall have them diligent churchmen; but the devil’s in it, some vanity or other steals into their heart, and farewell devotion.
All these are short, are nothing, may be worse than nothing; and it is only actual obedience that pleaseth God. Beloved, say no longer you will, but do; and the “doer shall be blessed in his deed,” James i. 25. Which blessedness the mercies of God in Christ Jesus vouchsafe us! Amen.
Both Martin Luther and John Calvin taught the supreme importance and necessity of works in the regenerate Christian’s life. Luther strongly opposed antinomianism and closely connected faith and works. But (differing from Catholicism) they categorized the works as part of sanctification only; not justification. In light of all of this, the way this imagined use of an alleged phrase of Luther is used today can only be described — in the final analysis — as a distortion of Luther’s teaching on soteriology and justification, fully understood.
Whether this is the origin of the widespread story about Luther using this illustration, remains conjectural. But I have not found a better explanation thus far (or even any explanation at all, solidly documented). This theory seems possible and even plausible to me. In this scenario, these citations would be the actual origin (at least in the English language). The idea was then superimposed onto Luther’s theology (probably originally by Calvinists, seeing that that was the milieu in which the phrases occurred), because of certain utterances of his that seemed harmonious with it, and over time, folks falsely assumed that Luther was the originator of the word-picture.