IRS ANNOUNCEMENTS AFFECTING MINISTERS
BY AUBREY L. JAYROE
Recent Internal Revenue Service announcements could affect all ministers for their 1994 income tax returns. The IRS is continuing its pursuit of various taxpayers who work within targeted professions. This “Market Segment Specialization Program” provides auditors with detailed information on the target groups so that the auditors will understand more about the income and expenses of these targeted taxpayers. This type of information allows an auditor to understand a business or profession well enough to know where to look for taxable income that may not have been reported. This program will be effective in 1995 for the 1994 tax return.
Ministers have been included in the targeted segment as announced by the Internal Revenue Service. Therefore the minister taxpayer will want to be certain that his 1994 tax return is accurate, with all income reported in the proper places and all expenses substantiated.
The IRS also announced that it will return to its special compliance audits. These “Taxpayer Compliance Measurement Program Audits” are known as the superaudit program, which randomly selects taxpayers for detailed auditing of tax returns. TCMP audits are very costly and time consuming as all documents of a tax return are selected for the review instead of various specific items on the tax return.
Fortunately, ministers have some time to plan ahead. The following is a checklist of what can be done to prepare for an audit and make certain that the 1994 return is correct.
1. Be certain that you are filing as an employee of the church for tax purposes. Continuing to report your salary on Schedule C will increase the chances of an audit. Each pastor should receive a
W-2 form from the church for his or her salary as well as a written notice of the amount of housing allowance received from the church.
2. Keep all records of income and expenses in detail. Logs or other record keeping of travel, reimbursements, etc. are necessary.
3. Make sure that you have the proper resolutions enacted for the 1994 tax year. Each pastor needs a “qualified accountable reimbursement plan” and a “housing allowance resolution” effective for 1994.
4. Depending on the type and amount of compensation, the church may need to establish a compensation plan. This is critical if the pastor receives a substantial percentage of the total church income. Contact professionals for assistance in this vital area.
5. Under the accountable reimbursement plan, be sure that you have documented expense sheets or other reports that were provided to the secretary of the church for reimbursement. Remember, undocumented expenses are not legitimate expenses for tax purposes.
6. A pastor should be careful in signing church checks. If he “regularly” signs church checks (regardless of the type of account), the IRS will normally include that church account in the audit process. This could lead to a full audit of the church records.
7. Clearly indicate on personal canceled checks what the check is for, and clearly indicate on all deposits the type of income received. Be sure that the income deposited matches the tax return.
1. Documentation of all expenses is necessary, especially for travel. Each evangelist should have a detailed travel log with odometer readings for the beginning of the year and the end of the year.
2. Some evangelists do not use checking accounts, but it is almost impossible to answer an audit without proper bank records. Do not cash checks received or pay bills by cash.
3. It is good to have a detailed listing of the location of each church where you minister. This listing could also show the account received from each church, therefore providing an additional document to prove income.
4. Be sure that you provide each church with your name and Social Security number. Churches may need this information in order to provide the evangelist with a Form 1099 at the end of the year.
5. If an evangelist does not have a tax home and travels without having household expenses at a physical location, the IRS considers him to be an itinerant. This means that the meals and lodging (including travel trailer or motor home costs) will not be deductible. In other words, you must pay monthly amounts for housing in order to have a tax home. This includes payments for rent, mortgage, and utilities for the physical location where you normally stay when not actively evangelizing, or you will have no deduction for meals, lodging, or trailer expenses.
1. Be sure that the pastor and all other staff receive a W-2 form at the end of the year. In most cases the church secretary must prepare quarterly payroll reports (Form 941).
2. Prepare all Forms 1099 for the year. These are required when the church pays $600 or more per year to an evangelist or guest speaker.
3. Make certain that all resolutions affecting the pastor are accurate and up to date.
4. Keep all expense reimbursement documents for the year, showing details of expenses reimbursed to any employee of the church, including the pastor.
5. Have a good accounting procedure that provides clear audit trails of income and expenses.
THE ABOVE MATERIAL WAS PUBLISHED IN THE OCTOBER-DECEMBER 1993 ISSUE OF FORWARD NEWSLETTER, AND WAS WRITTEN BY AUBREY L. JAYROE. THIS MATERIAL HAS BEEN COPYRIGHTED AND MAY BE USED FOR RESEARCH AND STUDY PURPOSES ONLY.