Pastor Sentenced to 37 Months for Church and Ministry Commingling
By Raul Rivera
Pastor Hope was a man on the move. He pastored a growing church in Rockville, MD and also had his own ministry. The ministry was a private teaching center that taught English as a second language (ESL). He set it up as a business in 2001 but never kept accounting records. To many, it appeared that the school was part of the church, especially since he used the church and the pulpit to promote the school. The school attracted students from all over the world and brought in significant income, which he never reported on his personal tax returns. When the IRS did an audit of his business/ministry and personal tax returns it brought serious trouble for him.
Stewards, not owners
I have noticed that there are a large number of churches today that have significant commingling issues. At our Ultimate Church Structure conferences, many pastors discover that they are unknowingly commingling funds. It is usually rooted in the belief that it is theirs. While I understand you may have started your church because of a call that is deeply rooted in your soul, it is always best to clearly establish boundaries that put you in a position of a steward rather than an owner. This may be difficult to accept-believe me-I get your struggle. We are talking about your life's call. You want to be sure that it cannot be taken away from you. Below are three ways churches and ministers commingle, and solutions on how to fix them.
1. The pastor starts a church and opens a bank account using the church's name but with his/her social security number: Many pastors start churches in their homes, and meet for a period of time before they officially incorporate and legally establish their ministries. In the meantime, the pastor opens an account in his/her name, using his/her social security number. This creates serious commingling issues because now all of the church's money is personally tied to the pastor. As I shared in an earlier blog, any tax issues the pastor has can cause the church serious problem because to the IRS, the pastor and the church's finances are one and the same.
2. The pastor advertises his/her personal business from the church: Many pastors own their own businesses. How that business is treated makes a difference. Pastor Hope did not separate his business from his church. He talked about his business and advertised it from the pulpit. That is a commingling of personal and church business, and it is illegal. Even if the business provides a great service to the community and the members of the church, if it is a personal business, the law prohibits it.
3. Church funds pay for personal expenses: There are many times when the church pays for expenses that are legitimate "church business expenses." Some of these can be travel to attend a conference or a retreat, or expenses involved in performing hospital visitations. But there are times when some of those same expenses are not legitimate, such as when there is an improperly documented reimbursement that does not meet the requirements of section 62(a), or when lunch meals are paid for by the church for the pastor's convenience, or when the pastor's gas tank is filled using the church debit card, etc. This kind of commingling can bring three types of legal consequences, as listed below.
a. Penalties and fines of up to 200% for each transaction;
b. In some circumstances, imprisonment; and
c. Loss of personal liability protection from lawsuits.
Where is Pastor Hope?
Pastor Hope talked about his school as part of the church. He may have felt that because of its noble purpose and impact, it was part of the church, but the law prohibited personal private inurement from his position as pastor. He was prosecuted by the IRS, found guilty, and was sentenced to serve 37 months in Federal prison.
How to fix such problems
Fixing commingling issues can at times be difficult because it may require paying back money. It is precisely for that reason that many ministers choose to ignore it. I mentioned three ways that commingling occurs but let me give the three ways to correct it.
Church bank account and the pastor's Social Security Number: In the eyes of the IRS' computer system, the pastor and the church account are one. Therefore, in order to correct that, the church ought to incorporate and get its own E.I.N. (tax-ID). It is important that the church's E.I.N. is in the proper delineation. Make sure when the application for the number is filled out that it is for a church and not a non-profit organization. Once the church does this, move all of the money to the church's new bank account number.
The pastor advertising his personal business from the church: Using the church to advertise is legally prohibited and can have serious legal consequences. There are several ways to fix this, as follows:
1. No longer advertise it from the pulpit.
2. Remove links on the church website that point to the business.
3. Remove advertisements on all church publications.
4. Set up a bulletin board that allows church members to post or advertise their businesses; then the pastor can include his/her, too.
Church funds pay for personal expenses: To correct this error, one must first learn what a legitimate church business expense is and what can at times be classified as personal. This can be difficult, but in essence a true church business expense must involve a necessary activity that furthers the exempt purposes of the church in a way that is usually understood as a generally accepted business practice for churches or ministries. The IRS states it this way:
A business expense must be both ordinary and necessary. An ordinary expense is one that is "common and accepted" while a necessary expense is one that is "helpful and appropriate" to further the church's purposes.
Even with the above two definitions, additional guidance may be necessary. Below are a couple of personal expenses that many pastors think are church business expenses.
- Meals while running church errands
- Using the church debit card when filling up the pastor's gas tank.
- Paying any of the pastor's bills as a housing allowance such as utilities, credit cards, mortgage, or rent
- Suits for preaching
- Making car payments
I think I am in trouble
Without fail, many pastors will read this article and realize they might be in trouble. In many of our Ultimate Church Structure conferences, I see pastors and church administrators nudge each other in confirmation of practices that they have been doing that are wrong. However, by the end of the day, they leave encouraged and empowered because they realize that they can correct the error of their ways and get their ministries in alignment with God's best. If reading this article has revealed some improper practices within your church, the time is now to get things right. We can help you in the journey. Check online to see our latest Ultimate Church Structureconference schedule; perhaps attending one is just what you need in order to get the knowledge and tools necessary for better stewardship of the ministry God has granted you.