How a Church Debit Card Can Cause Trouble

Written by Founder Raul Rivera on Aug 17, 2010 in IRS Compliance

The convenience of debit cards

"It's convenient and much easier than writing a check," were the words one pastor said as he swiped his card at a Christian bookstore.  He was buying research material for a sermon series he was doing on marriage and family.  He purchased several books and one set of DVD teachings from a popular Christian speaker.  Later on that day he went online and made a small purchase of mp3 messages as he continued to do his research.  The pastor took all of the research material home and stayed up until the wee hours of the night studying and preparing.  He was now at the tail end of preparation for this six-week series and would soon preach it at the church.  The total bill of his research was approximately $400.00.  It was a small price to pay compared to the impact it would have on the church and its families.

What the IRS has to say about it.

In 1996, Congress passed section 4958, designed to give the IRS power to penalize board members and others of significant church/ministry influence when they violate certain rules.  Under the rules of section 4958, if a board member, such as the pastor, receives a benefit without proper documentation it is automatically classified as an "excess benefit transaction."

What is an excess benefit transaction?

Please stay with me on this one!  It is of great important to get this right because it is very common for the church to pay for sermon research materials using the church debit card, and for those materials to end up in the pastor's personal library.  Although this is reasonable and there is normally nothing wrong with it, if the church paid for the materials then it has to be properly documented as part of the church's accountable reimbursement plan.  It is usually in the area of documentation that we are sloppy because it feels like unnecessary or unreasonable paperwork.  However, IRS agents are instructed to look at each transaction to determine if the written requirements were satisfied, regardless of whether or not the transaction was reasonable, and to issue very heavy fines if they do not meet the documentation requirements.

How to properly document such transactions

In order to properly document the pastor's use of the church debit card to pay for the pastor's study, three things have to be done, as follows:

  1. Adopt an accountable reimbursement policy: In order for the church to reimburse any expenses, it first has to adopt a reimbursement policy that meets the requirements of section 62(a)(2)(A).  This policy has to describe an arrangement that either pays for or reimburses expenses that are in connection with the performance by him/her of services as an employee.
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  2. Authorize the pastor:  The pastor has to receive written authority, in advance, by the board of directors, to make purchases of this nature.  If the pastor is on any type of salary, then this authority has to be part of the salary compensation agreement.  If the pastor is not on salary, then it needs to be passed as a resolution of the board of directors.  Below is sample text that gives this authority.
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    The board agrees to reimburse Reverend John Doe for all authorized expenses incurred in business directly related to the church, which include but shall not be limited to the cost of books, periodicals, and reference materials used in the performance of duties.
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  3. Write on the back of receipts:  It is very important that you take the receipt and write a detailed description on the back.  It is especially important when the pastor uses the church debit card because it proves that the purchase was necessary as a church expense and that it meets the requirements of the church reimbursement policy as well the agreement or resolution.

 The IRS is ramping up its audits on churches

The regulation of IRS Code section 7611 has been updated and the IRS is once again going to ramp up audits of churches.  Is it possible that your church may get audited in the next several months?  That, I do not know!  But, what I do know is that if your church does get audited you will filled with gladness that you took the information in this article and put in into practice.  Therefore, keep receipts, take the necessary steps mentioned above, and ensure that your records reflect excellence of stewardship.

Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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