Auditing Reimbursements; An Easy Win For the IRS

By Raul Rivera

A court case took place this year that reminds us of how ministers and church employees can lose largely in an audit.  It appears that the IRS has decided to rely on a 1984 T.C. Memo to deny over $31,000.00 in unreimbursed expenses.  This impacts ministers who often rely on reimbursements for out-of-pocket church expenses and also on writing off unreimbursed ministry expenses.  Unknowingly, many churches have engaged in a reimbursement practice that leaves the minister and other staff vulnerable in an audit.  Below are two ways that churches usually handle reimbursements. 

1.     He/she fills out a reimbursement request form and submits it with the receipt to the church, or;

2.     He/she chooses not to request a reimbursement and writes it off on his/her tax return as an unreimbursed business expense using form 2106.

2012, the year of legal surprises

We have seen many changes take place in the legal landscape of America-from the doubling of trust fund penalties charged directly to ministers, to a court's ruling that the IRS can give you bad advice and not be responsible for it.  Now, we see a new surprise by the awakening of an old rule.  In Stidham, T.C. Summ. Op. 2012-61, the court ruled that a taxpayer is not entitled to take a tax deduction for unreimbursed businesses expenses if the employer has a reimbursement policy.  So, in other words, if the church has an accountable reimbursement policy, then the minister/employee must apply for the reimbursement and not claim the deduction. 

What does this mean to a small fledgling church?

This ruling impacts small and young churches because these churches do not always have the funds to afford reimbursements.  Many ministers will find themselves not being able to write off expenses this year unless the church amends its reimbursement policy to include language that allows the church to strategically deny a reimbursement request if the church does not have the funds available.    Stay with me on this . . .the court clearly ruled that in order for the minister to be able to write off the expense, "the taxpayer must not have the right to obtain reimbursement from his employer."  This means that as a matter of documentation, when a church does not have the ability to afford to reimburse a minister's out-of-pocket reimbursement request, then the minister must still submit the reimbursement, but the church must send a written reply recognizing it as legitimate but also denying it according to its reimbursement policy on the basis that it cannot afford to issue the reimbursement.

Avoid the pitfalls

When it comes to ministry, tax pitfalls are everywhere.  That is why we strive every day to make sure we provide pastors and leaders with the tools they need to avoid the pitfalls and build their churches on solid foundations.  Our Church Compliance and Ministry Empowerment Conferences walk step-by-step through all of the stages required to help you start right and stay right.