Love Offerings Directly to Pastor Spell IRS Trouble
By Raul Rivera
I have often been asked if love offerings to a pastor are taxable. My answer is usually as follows. "In just about every single instance or method it is taxable."
Today, I want to write about the type of pastoral love gift whereby the church specifically asks members to contribute to a special offering and to make their checks payable directly to the pastor or to simply give cash. The church collects the money in the offering baskets and then gives it directly to the pastor without running the money through the church books.
Is that type of scenario taxable to the pastor as gross income?
What the law appears to say about love offerings
Section 102(a) of the Internal Revenue Code says, "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance." Many churches have relied on this section of the tax code to give large gifts to their pastors, tax-free.
(Recommended reading: "3 Things Every Minister Should Know About Housing Allowance")
It is common to see churches that encourage the congregation to give to their pastors as gratitude for his/her services to the congregation. Every week across America, congregations bless their pastors by giving directly to them special love offerings that are collected by the church. I know that the average pastor is overworked and underpaid. He/she gives many hours per week in an unselfish manner, ministering to families and doing the work of mending broken hearts.
Therefore, when I hear of a pastor receiving a love offering from the church, I celebrate it. Of course, there are always extreme cases, which I will not address.
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Does the law as documented is section 102 support the church collecting an offering of checks and cash made payable directly to the pastor? It is very likely that an IRS auditor would say, "NO."
In fact, because the pastor is also considered a disqualified person (person of influence and significant control over the church), section 4958 would seriously penalize such transactions to the tune of 225%. Here is why.
What the law actually says about love offerings
It is true that section 102(a) allows gifts to be given directly to the pastor. However, section 102(c) makes an exception. It says that section 102(a) "shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee."
In other words, the law says in section 102(c) that when any amount of money or gifts is given by or in behalf of the church to the pastor, it cannot be excluded from gross income. It has to be reported on the minister's tax return.
Where ministers run into tax problems
Several years ago, I spoke to a very nice and wonderful pastor in Virginia. She and her husband had started a church many years earlier. The church was doing well and had grown to over 450 registered members. For the last 12 years she and her husband were under the impression that all love offerings were to be treated as tax-free gifts.
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When I hear of a pastor receiving a love offering from the church, I celebrate it.
(Recommended reading: "Restricted Offering vs. Designated Offering")
Every week, many of the church members would, out of their own free will, make checks payable directly to the pastor. The church would not deposit these checks into its account, but rather pass them along to her as they came in. These checks were enough each week that she did not need to seek any other employment. The pastor would receive them each week and deposit them directly into her account.
A better understanding of minister's taxes
I believe that over the next several years, many pastors will face tax trouble because of issues like this one. We have to understand that it is easy to audit these transactions because a paper trail is left behind when pastors deposit these gifts into their checking accounts. How does one properly explain to the auditing agent that they are truly gifts?
There are certain sections of the tax code that may apply when love offerings such as the one discussed in this article occur.
1. Section 7203: This section speaks clearly for itself. Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. While the prosecutions are not every day occurrences, the fines are very real and common.
2. Section 4958: Under part (d)(2) of this section, the board of directors may be held liable to pay a fine of up to $20,000.00 if they participated in or voted in favor of a transaction that benefits the pastor and goes unreported. Moreover, the fine to the pastor can, in addition to the other fines of section 7203, be as high as 225%.
3. Section 6701: When churches participate in love offerings being given directly to the pastor, the potential of the church being fined under this section for aiding and abetting someone in the understatement of tax liability. When love offerings are collected by the church and then given to the pastor in the form of a gift, the church participates in a transaction that goes unreported. This can lead to heavy fines against the church and the board members.(Recommended reading: "Two Clauses in Your Bylaws That Can Save You and Your Ministry")
We can help!
The pastor that I talked to was glad to know that we were able to help her get things in order. As tax season rolls along, our staff of consultants and professionals, including our CPA and attorney, can help you plan and also properly structure your church income to take advantage of every benefit provided to you in the tax code.
Did you know that most ministers in America could make up to $70,000.00 of income either tax-free or nearly tax-free?
At our conferences we teach you every tax advantage available to you, and at our offices we prepare hundreds of tax returns every year for ministers and church leaders. Between the months of February and mid April we often hear the question, "Am I really getting that much back as a refund?" We hope to hear you ask us the same.
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