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11 Aug 2016

How Pastors Misuse Church Credit Cards & What To Do About It

Raul Rivera

A few weeks after being hired as the new senior pastor, Howard was given a church credit card. He was told the credit card was for times when he needed to make purchases for the church. In addition, Howard was informed that he could use the church credit card when he was traveling for ministry and needed to fill-up his gas tank.

Howard was also told that if he happened to use the church credit card for personal expenses then it would be fine; the board had approved it. But he would need to repay the amount each month when the bill was due.

This arrangement seemed to work fine for a while. Each month, if there was personal expenses of Howard’s on the church credit card, then he would pay it back. But then he started missing some payments. When he was able to make a payment for his personal expenses, it was usually just the minimum amount due.

Before long, the church credit card had a balance of $5,700.00 from Howard’s personal expenses. No one on the board has said anything to Howard, and it doesn’t look like he’s going to be able to payoff his balance anytime soon.

What should the church do? Is it legal for the church to allow the pastor to use a church credit card for personal reasons, even if he pays it off each month?

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Issues concerning the use of a church credit card and one’s personal expenses can cause serious legal trouble for a church. This is a classic example.

Many church boards, in sincerity of heart to help their pastor, approve arrangements that will not only get the pastor, but also themselves into, trouble with the IRS.

It’s actually quite common

A large number of minsters use the church credit card for both church and personal use. Yes, many of the ministers repay the church for the personal use of the credit card, but there is also a good number of ministers who never do.

While it is good to repay the church, this is a practice that should be avoided because the legal consequences can be very serious.

Below are some of the consequences that could result from ministers using the church credit card for personal use:

1. Loss of tax-exempt status

Section 501(c)(3) states that “no part of the net earnings of which inures to the benefit of any private shareholder or individual.” This is essentially saying that your ministry is not established to personally benefit someone because of their position or influence with the organization.

(Recommended reading: "Does a Church Need to be 501(c)(3) Approved?")

Despite the good intentions of ministers to repay the funds used, use of the church’s funds, even on a temporary basis, is considered a private inurement. This alone is enough for a church/ministry to lose its tax-exempt status.

Loss of this tax exemption would also make the donations to the church non-deductible. The consequences could affect more than just the minister.

2. Excessive taxes and penalties

What would happen if, as in the example used above, the minister were unable to pay the church back?  Section 4958 of the tax code would classify this as an excess benefit transaction. This would then result in penalties, known as an intermediate sanctions, of up to 225%.

As in the case of the minister who racked up personal charges of $5,700.00, the penalty would be $12,825.00. In addition, section 4958(d)(2) says that board members who approved this practice can also be held liable and fined up to $20,000.00.

We see how what was intended to be a generous perk for the pastor, can quickly turn into a costly one.

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3. Embezzlement

One of the very real dangers that ministers aren’t even aware of is that when the IRS does an audit of the church, it looks at paper trails and other evidence to determine if a crime was committed.

Though the intentions of a minister is not to commit a crime with the church credit card, if an agent or revenue officer believes the credit card was used with the intent to never pay it back, it could be interpreted that way.

Normally, the lack of documentation and the type of purchases made combined with the amount left unpaid could result in an unexpected prosecution.

What if I use the church card by accident?

Mistakes happen, and even I have been guilty of accidentally using the church’s credit card to make a personal purchase. If I still had an opportunity to reverse the transaction and make the purchase with my personal card, I was sure to do that.

What was intended to be a generous perk for the pastor, can quickly turn into a costly one.

However, if I noticed after I had already left the store, I would immediately write the church a check and explain (in writing) the reason for the check.

It is better to be safe than sorry.

An easy remedy for every church

Every church should have a credit card policy that has the following three criteria.

  1. How the card may be used:  The church should only allow the card to be used on purchases that are necessary and within the budget of the church.
  2. Applied spending limits:  One great thing about technology is the ability that a bank possesses to allow you to apply monthly spending limits on each credit card that your church issues.  It also lets you see transactions sorted out by credit card user. You know who and how much each user spent on the card.
  3. Strict reporting requirements: Require that every transaction be accompanied with a receipt. To keep the church out of tax trouble, the policy should state that failure to provide the receipt could result in having to classify that transaction as personal income.

If your church or ministry has not implemented a credit card policy and are in need of one, call our office at 877-494-4655 and we will be happy to provide you with one for free.

How trouble begins

No one starts a church thinking the will get into trouble with the IRS. Yet, an alarming number of churches would face trouble if an IRS audit were to take place.

(Recommended reading: "IRS to Hire 700 Enforcement Officers; What This Means for Churches")

Life, today, moves at a significantly faster pace than it once did. When my wife and I started a church, we thought life was fast paced then, yet compared to today's world of ministry, our church planting days now appear slow and laid back.

The fast pace of ministry life is surrounded by literally hundreds of state and federal laws that impact the financial and civil aspects of ministry. Many pastors, soon after starting their churches, begin to lose sleep over the fact that they did not StartRIGHT.

After a while, past mistakes pile up and before you know it, the legal and financial side of church becomes a heavy burden loaded with an internal nagging voice constantly asking the unknown question, "What if . . ."

Having pastored myself and consulted thousands of pastors, I understand how you feel. At the same time, I have a word of encouragement for you.

Knowledge is power.

If you will take the time to gain the knowledge you need to bring your ministry into legal compliance, you will soon feel a burden lift from your soul and your heart will feel set free to dream and soar into the destiny of your ministry.

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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.

Raul Rivera

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About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.