Why The IRS Prosecutes Some Pastors and Not Others, Part 2

By Raul Rivera

Should I be personally concerned?

As you read yesterday's article, you may have had some alarming thoughts cross your mind.  I have had conversations with many church treasurers and CFO's that describe the way money is handled, and at times I cringe.  The IRS focused on Pastor's Jinwright and Clarke for prosecution.  They could have just as easily targeted, you or your ministry.  Let me give you four examples that are causes for a personal alarm to ring loudly in your mind.

1. Receiving cash:  One common error is in the way love offerings are collected for the pastor.   The church collects an offering and the cash is given directly to the pastor while the rest is deposited into the church checking account and given to him in a check.  The problem is that only the amount given in check is reported as compensation on a W-2.  The cash goes unreported.  That is a cause for concern!
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2. Unreported honorariums:  Many pastors get the opportunity to preach at another church and usually receive an honorarium.  Often times, the church that gives the honorarium does so without ever issuing a form 1099-Misc.  Many pastors receive the honorarium and because they do not get a 1099, they do not report it on their income tax return.  What do you think will happen if the church that gives the honorarium gets audited?  Whether or not you get a 1099-Misc for an honorarium, be sure to always report it on your tax return, even if it's for just a few dollars.
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3. Consistently late tax returns:  When a pastor or leader is consistently late on his/her tax returns, it invites an audit.  The IRS focuses on these because they are almost always inaccurate and an easy target.  The problem with a consistently late minister's return is that he/she claims overstated housing allowance exclusions, unreported cash gifts, unallowable reimbursements, and improper use of church assets.   After an audit, the field agents may recommend the case to the Criminal Investigations Division (CID) for further investigation.
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4. Ownership of sermons:  Many pastors incorrectly assume that they own the copyrights to the sermons they preach at the church.  However, under the copyright act of 1969, the sermons you preach at the church are considered "works for hire" and belong to the church.  This is true even if you believe that you are not on salary at the church; a love offering, or anything that you have received from the church, even if it's a copy of your reordered sermon, constitutes work for hire and belongs to the church.  WE BELIEVE THIS AREA IS SO IMPORTANT THAT WE GIVE EVERYONE WHO ATTENDS OUR CHURCH COMPLIANCE CONFERENCE A FREE COPY OF AN INTELLECTUAL PROPERTY POLICY AND CREATIVE LICENSE AGREEMENT TO HELP YOU KEEP YOUR OWN SERMONS.

Every problem is an opportunity for good

You may believe that you now have a problem, but I believe that what you now think is a problem is rather, an opportunity.  When information that makes one feel uncomfortable presents itself, how one deals with it makes all the difference in the world.  Many reading this will feel a little nervous or uncomfortable, but soon forget it.  Others will hear this information and make decisions to systematically deal with the problems.  It is God's wonderful grace that we get the warning signs long before anything happens.  Please take this article as a call made to you by the Lord, because He loves you dearly enough not to want you to continue in error.  I think the biggest challenge I face in being a voice is convincing pastors that they have a need to make changes in the way they handle church funds.  On the contrary, when I succeed in convincing a pastor to make a change, he/she does it with zeal.  That is rewarding because it really is building the kingdom.

IRS soft targets on church examinations

As with any industry, the church has many audit areas that I refer to as "soft targets."  Most of these were the same targets that were central in the prosecutions of the two afrementioned pastors.  They are soft targets because the IRS finds it very profitable to examine these areas with relative ease and to make a quick determination.  You need to work to proof your church of these easy targets, since when examined, soft targets can lead to a personal audit.  When you know you have dealt with these items, you will most certainly welcome an audit.  When the audit is over, the IRS will give you a written summary of the audit and you will be able to publish it on your church website or in your bulletin.  Let me give you five common IRS soft targets.

1. You have received love offerings from the church and they were not reported on a W-2 form.
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2. You have been reimbursed without a reimbursement policy in your church records.
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3. You have had guest speakers but did not get a W-9 form from each one, and you have not filled out form 945 to pay the 28% penalty.
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4. You have received a housing allowance, but you cannot find minutes that properly designated the housing allowance under the new housing allowance clarification act of 2002.  Was the housing allowance a designation or a check you received from the church?
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5. The church has paid for your gas or cell phone without any documentation that is in agreement with section 62(a).  These are the easiest targets because they are almost always violated and they are easy to examine.  

Final thoughts

What actually triggers a tax inquiry or audit of your church may shock you.  As was stated previously, it usually begins with a disgruntled former employee or angry church member.  Under section 7611(a)(2) the only thing the IRS needs in order to begin a tax inquiry is reasonable belief that the church may have violated its tax-exempt status.  This gives the IRS broad power to audit.   Knowing these things, you cannot afford to allow your church to continue to operate in non-compliance.  God's zeal is towards you getting it right, because it is in keeping with Romans 13.  Why not do it?