One Lost Paper Cost Pastor $309,000.00

By Raul Rivera

" I know I filed it . . . I know I did!" said Pastor John Hunter.  "Where is it?" was the instant reply from the agent that sat across the desk.  "I don't know, but I am sure that I will find it." 

What you have just read is a conversation that will become common if the IRS increases the number of pastors that they audit.  For Pastor John Hunter-one who had 17 years of pastoral experience in Detroit, Kansas City, Seattle, and now Los Angeles-here is how that conversation got started in the first place.

The sting of a surprise tax bill

When the IRS conducted the audit of his tax returns they focused primarily on the fact that he had not paid self-employment tax on his tax returns for the past three years.  The pastor was confused as to why the IRS said he owed self-employment tax because he had applied for the exemption 17 years earlier.  Why would they start charging him this tax now?

Whenever a minister applies for self-employment tax exemption, he/she files the proper IRS paperwork and waits for the agency to return the application with a stamp showing "Approved", or in some older applications "Filed."  That approval is for the lifetime of the minister, and the only proof of that exemption is that piece of paper that the minister holds.  The IRS is supposed to keep a copy on record.  There have been some reports in which ministers have lost their approved applications and when a copy is requested from the IRS, the agency responds by saying they cannot find record of the application ever being filed with them. 

A problem with the system

We have assisted many pastors in filing for this exemption and as a practice, when the minister gets approved we store a copy for them on our secure server.  It is the responsibility of the minister to keep a copy of that approved application for life.  Yet many ministers misplace it and find themselves in a predicament.  On one hand they want to ask the IRS to send them a new copy, but on the other hand they fear that if they cannot find it, a red flag may be triggered.  What should one do?  Let me give you three things you can do to avoid losing it.

1.     Copy:  Make a copy of the approval letter and store it in the church's Corporate Records.

2.     Scan:  Scan a copy into your computer and save it on your hard drive.  Also make sure that you back it up frequently.

3.     Submit:  The law allows you to submit information on a tax return that supports your tax return.  I recommend that you submit a copy of the approved application on at least one tax return.  Though the IRS says you do not have to file it with your tax return, you are not prevented from doing so.   If you ever lose it, and the IRS says they cannot find your copy, you can always use form 4506 and ask the IRS for a copy of your tax return and all supporting documentation.

Pastor John Hunter's audit

The audit did not turn out too well.  He was not able to find the approved application and the IRS assessed a very large tax bill.  As of December 2008 he owed approximately $309,000.00. 

As a pastor, you have a lot at risk.  No one will risk more than you to help the church succeed.  With that in mind, remember that it is easy to make a mistake and lose a paper that could save you thousands of dollars.  According to Pastor John, one lost paper cost him over $300,000.00.