Reduce Your Church's Risk of an IRS Audit
By: Keith Hamilton
One of the greatest fears of a church treasurer might be an Internal Revenue Service audit. Understandably, an IRS audit would scare every church treasurer. At least one sales organization plays on this fear in their advertisements by depicting a church financial leader going to jail.
Despite this misconception, the exact opposite is true. A church treasurer would rarely face a harsh penalty over an IRS audit. However, even the possibility of facing such a situation can cause fear and stress.
There are several things your church can do reduce its chances of an IRS audit.
File federal payroll documents accurately and on time. Double-check all forms before submitting them. There's no shame in asking another person with accounting experience to check your forms. We all make mistakes.
The amounts you enter on IRS Forms 941 or 944 must match those on church-issued W-2s. If the amounts recorded for taxable wages on these forms don't agree, chances are good the IRS will contact your church for an explanation.
Treat ministers as employees for Federal income tax purposes and as self-employed for Social Security and Medicare purposes. If the minister has taxable wages from your church, issue a W-2. If you issue any minister a 1099 MISC form instead, your chances of facing an audit increase.
Because ministers are self-employed for Social Security purposes, your church may not pay Social Security and Medicare taxes as FICA. Ministers are responsible for personal Social Security self-employment taxes. Social Security and Medicare taxes for ministers are not reflected on 941, 944, or W-2 forms.
To help reduce accounting mistakes that involve the IRS, file the fourth quarter Form 941 or annual Form 944 on the last day of January. Send W-2s to the church employees as close to the first day of January as possible. This action will allow extra time to correct accounting mistakes without involving the IRS.
Your church may only give contribution credit for a gift of cash or cash equivalents - such as electronic deposits, checks, debit cards, or credit cards - to the church. A survey revealed that 30 percent of churches record contribution credits for donations of property, time, or services. For gifts of property such as real estate, stocks, building materials, receipts of items purchased on behalf of the church, and other tangible items, a church may only send a thank you to the donor acknowledging the gift without assigning a value. Only cash or cash equivalent contributions may appear on a contribution statement.
Contributions made to a specific person for benevolence reasons are not charitable contributions to a church. For instance, a donor gives a gift designated to the church for a specific person who has benevolence needs. The donor cannot receive a contribution credit from the church for this designated gift. However, a donor's contribution that does not name a specific person but is given to the church's general benevolence fund is an allowable credit.
Your church's financial leader should subscribe to the IRS nonprofit newsletter. This newsletter service provides notification of updates and breaking news. Subscribe to the free IRS nonprofit newsletter at www.irs.gov.
Maintain a proper accounting system through which you document all church receipts and expenditures. Do not pay expenditures without receiving an invoice or lost receipt form from the requestor.
If your church is ever audited by the IRS, remember that God could be using this experience so the IRS agent might hear the good news of Jesus Christ. Remember, two well-known figures of the New Testament were former tax collectors! Trust that God will guide you and your church through the audit process, and thank Him for the opportunity to represent Him and His kingdom well.
Dr. Keith T Hamilton is the founder of MyFinancialSupport, a ministry to help churches with financial matters, www.myfinancialsupport.com. This article is courtesy of Lifeway Christian Resources.