Ministers who have been audited say: Follow IRS rules carefully
NASHVILLE, Tenn. (BP)--Churches and their employees should understand and follow tax rules carefully, according to several Southern Baptist ministers who have been audited by the Internal Revenue Service.
Citing privacy concerns, most of the ministers interviewed by Baptist Press asked their real names not be used, but all expressed eagerness to help others understand what an audit can entail.
"Keep good records -- not just good records but excellent records," said Ted, an evangelist from Oklahoma who is still working through an IRS audit that began two years ago. "Canceled checks won't be enough. You'll need other documentation, like utility bills, church giving statements
and actual receipts."
Leon, an associational director of missions in Alabama, agreed. "If the minister is a pastor or other church staff person, then they'd better keep a record of miles traveled, dates, odometer readings and the business purpose of the trips. The first thing the auditor told me was, 'Let me see your mileage log.'"
Sometimes inaccurate records can be even worse than no records at all. Bob, a pastor from the Midwest, was asked during an IRS audit to provide copies of minutes from his church's business meetings.
When the IRS examined the amount Bob and his wife, Mary, had reported as income, it was less than what the church minutes reflected as annual salary.
Three years before the audit, when Bob first came to the church, an inaccurate figure was recorded in the church's minutes, reflecting a few thousand dollars more than Bob actually received annually.
"We even showed in the church budget where the church didn't pay us the larger amount," Mary said. "But the IRS assumed we made the higher income. They wouldn't allow us to correct the minutes, because that was three years prior and would have had to be corrected soon after the error."
With additional taxes, interest and penalties, Mary said the IRS claimed she and Bob owe well over $10,000 in back taxes, interest and penalties. That amount will likely be trimmed in half if the couple can come up with the money in 90 days, Mary said.
In the meantime, Bob and Mary continue on a strict budget imposed upon them by the IRS, which regulates how much they can spend for utilities, transportation, and groceries.
Even their two children, both under age 7, had to make lifestyle adjustments to accommodate IRS financial restrictions on the family.
"My daughter was in private school, but they disallowed that," Mary said. "We had to take her out of her school. Now we're home schooling her. We're not allowed any expenditures for child care."
Other prohibitions included eating out, vacations, other forms of entertainment and even more basic expenses, Mary acknowledged. "We can't buy clothing. If we have health care expenses over the amount they allow, that's just too bad for us."
Perhaps the most ironic restriction, particularly for a Baptist pastor, was the IRS prohibition against tithing.
"They allow us only $90 a month in charitable contributions of any kind," Mary explained. "That's way below what we normally give to our church, and it's hard to handle. The way we were raised, you give at least 10 percent; that's
But Mary said the family found a measure of comfort in materials published by Larry Burkett, a well-known Christian financial planner, who reminds readers to "render unto Caesar."
"It was an easier process for me to know I was following the Lord's guidelines," Mary said. "It's just for a season. You look for the good in all of it and watch for God's hand. He promises if we follow his guidelines, we will be blessed."
Marvin, a pastor from a Western state, found himself in conflict with the IRS after his church treated him as an employee for Social Security purposes.
"They were paying an employer's matching portion of Social Security," Marvin said. In doing so, the church violated an IRS policy requiring ordained ministers to pay all their own Social Security taxes, known as "self-employment taxes."
The church declined to change the practice, even though Marvin asked them to do so.
Still when Marvin filed his annual tax returns, he followed IRS guidelines and paid all the self-employment tax due, even though he knew it was being duplicated by the church's payments on his behalf.
Upon auditing Marvin's tax return, the IRS assumed Marvin was receiving two equal salaries from the church: 1) an amount for being pastor, for which Marvin had paid self-employment taxes and 2) an amount for non-ministerial services, for which the church had paid an employer's matching portion.
In reality, Marvin said, his income was only half what the IRS assumed for purposes of calculating his back taxes, interest and penalties.
When Marvin informed the IRS of the church's insistence on treating him as an employee, the auditor told Marvin there was a simple solution: Have the church file for a refund of the employer's matching portion paid on his salary.
The IRS would then recalculate and assume Marvin had only been paid as pastor and not in some other capacity as well.
"When I asked the treasurer to do this, she went ballistic," Marvin recounted. "She called the finance committee together, most of whom were deacons and trustees. They wouldn't budge. It was simply a matter of putting the preacher in his place.
"The church wasn't willing to admit they hadn't followed the instructions, so I basically just lost $10,000. It wouldn't have cost them a dime to fill out the forms."
Marvin said his only legal recourse would have been to sue the church, which he never seriously considered. Soon after the controversy, he resigned the church and is now a bivocational pastor.
"I would never serve in a church where they didn't at least follow the law," Marvin declared. "I'm not ever going to allow a church to hold a rope around my neck or determine my financial affairs. It's a terrible thing to be at the mercy of people who knowingly and willing say, 'We don't care if we're doing things right.'"
Ted, the Oklahoma evangelist, spends most of the year traveling to revivals and other church meetings. Mostly, he and his wife, Valerie, live out of a travel trailer and are often away from home for weeks at a time.
When the IRS audited, they initially disallowed all Ted's travel expenses -- a deduction claimed by most vocational evangelists.
"The IRS said, 'You must have a home in order to qualify for travel expenses,'" Ted noted. "But they told me, 'You live in a trailer, so you can't deduct travel.'"
Through a very tedious, lengthy process, Ted documented that he and Valerie own a home, pay utilities and property taxes on it and return home periodically throughout the year.
But the IRS is still claiming Ted owes taxes on a new truck given to him by a couple from a church where he had preached a year before.
Ted said the truck was a gift and shouldn't have been treated as income, but the IRS views the truck as compensation from the revival Ted had preached and claims he should pay self-employment taxes on the vehicle's $15,000 value.
At this point, Ted said, the IRS may accept a settlement of several hundred dollars, which is a far cry from the several thousand dollars the agency originally sought.
All the ministers interviewed stressed the importance of having a certified public account prepare tax returns and present during IRS audits.
"Never make the mistake of going by yourself, like I did during the first meeting," said Leon, the Alabama director of missions. "Today, I wouldn't think of doing my own taxes. Having a CPA prepare them is absolutely essential, in my opinion."
A key resource for Baptist churches, Mary said, can be found in state Baptist convention offices, where annuity and insurance staffers offer a variety of seminars and resources on ministerial tax planning and church responsibilities.