The Mistakes You Make Can Cost You!

Written by Founder Raul Rivera on Apr 12, 2011 in IRS Compliance

In 2008, pastor Ned and his wife, Regina, started a church in northern California.  They had a goal of reaching into the community by using fine arts and athletic programs.  At first, when their church had only a few members, they did not have qualified individuals to assist them in bookkeeping and with IRS compliance.  However, their hearts were sincere and pure.  They did the best they could with the limited knowledge they had.  Shortly after incorporating and getting a Tax ID number for the church, they opened a checking account, started to write checks, and began to pay bills as necessary. 

How most churches do it

This is how most churches get started these days.  Pastor Ned's efforts are heroic.  He started a church right out of his own house with nothing more than just a word from the Lord and a lot of faith.  The problem is this: he made mistakes early on, and they are beginning to hold him hostage. He now feels concerned about the IRS finding out about his mistakes.  Here is a short list of some of the mistakes he has made.

  • He signs on the checking account with no real accountability: From day one, Pastor Ned has had a hard time separating himself from his ministry. Therefore, he and his wife are the only signers of the church checking account. They also make the decisions as to when to spend and when not to spend.
  • He gave benevolence to a family member: He recently helped his grandson pay a part of his college tuition, and called it benevolence; though the church did not have a benevolence program or policy. Moreover, because their grandson is family, he is classified by Section 4958 as a disqualified person. The penalties for this mistake are very big.
  • The church paid his cell phone: Most pastors assume that the church can pay his cell phone bill just because he uses it for church purposes. Every month the church paid his cell phone bill without regard to any reimbursement policies, or Section 280. The Small Business Jobs Act of 2010 that was passed on September 27, 2010, makes it much easier to pay the pastor's cell phone if the church owns the account.
  • The church incorrectly paid his utilities and mortgage: In the middle of 2009, Pastor Ned's board decided to start paying his light bill and mortgage. The board called it housing allowance. They never required him to keep any records, nor did they report the amount paid on line 14 of his W-2. He was not aware that he had to report this on his tax return, or pay self-employment tax. He is now concerned that he owes back taxes.
  • Mishandled donated property: In 2010, a member of the church bought Pastor Ned a Mac Book Pro laptop. The donor stated to him that he wanted to donate the laptop to Pastor Ned personally, but the donor also wanted a receipt from the church for his taxes. So, what did Pastor Ned do? He wrote him a tax-deductible contribution receipt for $1,300.00. The laptop sits in his home office and has served him well, but now he is bothered because he just found out that this transaction could be very costly.

Fight the "As We Grow" Mentality

For many leaders the "as we grow" mentality is a detriment instead of a help.  I hear so many ministers say to me, "We know we do not have it right now, but as we grow, the Lord will provide for us people to fill in the gaps."  The problem with that mentality is that, one believes that growth will cause things to fall into their places.  The exact opposite is true.  Growth will not come unless things are in their places.  Intentional and focused leadership creates a sustainable environment of growth.  Let me explain.

The Two areas of compliance

Intentional leadership recognizes the two main areas of compliance that foster growth.  Understanding them will give you clarity.

1.     Compliance with God's government:  Compliance in this area means that you spend blocks of time each week knowing the Word and how God governs His Kingdom.  You can't have a kingdom without government, and in order to operate in His government, you will have to be compliant with His laws and statutes.  In Jeremiah 31:31 (and also referenced in Hebrews 8), the Lord promised to give us His laws and to write them on our hearts.  Many ministers today spend less time reading the Word, and as a result, lose the deep sense of conviction for truth required to lead a congregation.

2.     Compliance with man's government:  Compliance in this area requires that you become sufficiently knowledgeable of the laws that govern your ministry; to be able to make wise decisions. For instance, when to do something in house vs. when to seek professional help.  While ministers often emphasize compliance with God's word, they tend to disregard compliance with man's laws simply because they disagree with some of the laws passed by men.  The deception is that we think God is OK with that, when in fact, the degree that you are compliant with man's laws is the degree that God will entrust you to lead His sheep. It is also the degree to which men believe you to be legitimate.  It is tough following a pastor with financial and tax trouble. 

Pastor Ned Taking his chances

Pastor Ned became aware of his non-compliance issues about three months ago.  To date, he has sat on the information and has not acted on it.  He feels paralyzed by the fear that if he suddenly starts to properly report these items, it will draw a red flag and he may end up owing back taxes.  What should he do?  Should he correct the problems of the past three years?  Or should he just continue on?  He is currently thinking about what to do.  Time has its way of soothing conviction and assigning it to the back our our minds, making our present reality easier.  I have one question for you: Will you be like the Pastor Ned of this story?

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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