IRS Watches Use of Church Debit Cards

By Raul Rivera

Many churches allow the pastor to use the church debit card for necessary church expenses such as a car allowance, travel costs, lunches and many other things. Under the law, most of these allowances are illegal and can result in fines and back taxes for the minister.

Improper use of the church debit card is of high priority on the IRS watch list, as many ministers have used it to pay for church expenses for which it is difficult to account. Additionally, if the church does not have a legally ratified Section 62 reimbursement plan, the use of the church debit card to pay for gas, travel and other expenses deemed necessary can be classified by the IRS as embezzlement and can result in fines and possibly criminal charges.

If there is one area where churches are vulnerable it is in the use of the church credit or debit card. That is because these expenses are easy to disguise as "necessary." Please be diligent in educating yourself on how to properly use a church credit or debit card. Do not think that paying for certain expenses that you feel are necessary is OK with the IRS. There is a right way and a wrong way to do it.

Income tax regulations require that any and all money given to the pastor be reported as income unless certain requirements are met. Most churches are not aware that these regulations exist; much less, that failure to follow these regulations may result in heavy fines to the church, the board members and the pastor. Let me give you an example.

Church ABC pays Pastor Tom's car payments. At the end of the year the total payments are $6,500.00. Since the pastor is wholly dedicated to the ministry, he uses his car for both ministry and personal use. The church board of directors recognizes his dedication to the call of God on his life and knows that he is unselfish in using his car for church purposes. Out of love and admiration, they approve for the church to make all his car payments. The problem with this scenario is very big and the consequences are, too!

Since 2005, Treasury regulations have focused on these types of transactions. These regulations have been tightened each year. Section 4958 empowers the IRS to issue intermediate sanctions against the pastor and the board of directors for violations. If the church makes Pastor Tom's car payments, the church is required to report those payments as income on Pastor Tom's W-2. This means that a tax free car stipend or allowance really does not exist. It is now labeled by the IRS as an excess benefit transaction. Under the code, the IRS will fine the pastor 200% of the car allowance plus penalties and interests on back taxes. Additionally, each board member that approved the transaction can be fined up to $10,000.00.

This article is not written to scare you, rather it is a trumpet call to the Church. We need to know that the times have changed, the laws are real and so are the consequences. I am trying to empower you to make the necessary changes.