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IRS audits of ministers estimated at ‘normal’ 1%


SPRINGFIELD, Mo. (BP)–Contrary to rampant rumors, churches and ministers are not being targeted for special scrutiny by the Internal Revenue Service, said Richard R. Hammar, an attorney and specialist in tax issues for religious workers and organizations.

“It is outrageous for anyone to spread deep fear in the minds of pastors and church workers regarding the threat of IRS audits or criminal prosecutions,” said Hammar, whose office is in Springfield, Mo. “It is not true. Ministers are not being targeted by the IRS any more than other taxpayers.”

The IRS typically audits 5,000 ministers per year, Hammar said. “Since there are about 500,000 ministers in this country, that’s only about a 1 percent audit rate. They’re right in the mainstream, because 1 percent is the normal
audit risk for any taxpayer.”

Hammar was sharply critical of tax consultants who promote their services by using “scare tactics.” One such firm sends out brochures that shows photographs of pastors in handcuffs or standing before a judge, Hammar said.

“It’s easily proven that there’s no campaign from the IRS against ministers and churches,” Hammar said. “Anyone who says otherwise has ulterior motives. It may attract business, but it’s based on a faulty and flawed premise that is being increasingly exposed.”

Hammar acknowledged many ministers and churches became concerned when the IRS published a manual designed to teach IRS examiners how to audit ministers under the IRS “Market Segment Specialization Program.” Ministers were one of 31 such “businesses” for which manuals were prepared.


But the MSSP manual was actually good news for ministers, Hammar said, because before its release IRS agents were often unaware of tax issues peculiar to ordained ministers.
“I think it’s wonderful for ministers to have informed auditors,” said Hammar, who publishes the “Church Treasurer Alert Newsletter.” “We have nothing to fear from educated IRS agents who have been trained to conduct competent audits.”

Hammar urges lay leaders in churches to educate themselves about proper structuring of ministerial pay packages and IRS reporting requirements for nonprofit organizations.
A key tool for churches and ministers is the “1997 Ministers Tax Guide for 1996 Returns,” available free from the Annuity Board of the Southern Baptist Convention, Hammar noted.

The book, which includes a special pull-out section on reporting requirement for churches, can be obtained by calling the Annuity Board at 1-800-262-0511.

In his newsletter, Hammar summarized the contents of a report from the U.S. House Ways and Means Committee on nonprofit organizations. He said the report indicates IRS resources devoted to nonprofit organizations and their workers are either staying constant or declining.

Among the statistics Hammar cited were:

— In 1990, the IRS employed 501 examiners of tax-exempt organizations. By 1995, the number had declined to 497.

— Funding for IRS oversight of exempt organizations was $47.8 million in 1990 and $49.2 million in 1995. “That doesn’t even keep pace with inflation,” Hammar said. “In real dollars, it’s actually a cut.”

— In 1990, the IRS examined 7,232 exempt organizations. By 1993, the number was only 5,472 or less than one-half of 1 percent of all tax- exempt organizations.

— In 1992 and 1992, the IRS revoked the tax-exempt status of 60 nonprofit organizations. “That’s about 30 per year or only 2 out of every 100,000,” Hammar said.
Hammar advises churches and their employees to maintain a keen awareness of IRS policies and to establish policies that protect both congregations and ministers in case of an audit.

Primarily, Hammar urges ministers to avoid what he calls “audit triggers,” including:

— filing as self-employed instead of as a church employee for income-tax purposes. “The number one red flag for the IRS is when a minister files as self-employed,” Hammar stated. “In doing so, you probably increase your income audit risk 10 times. However, a minister who reports his income tax as an employee has the ordinary audit risk of only about 1 percent.”

— claiming a deduction for a home office. “It is so remote that anybody, ministers included, can qualify for a home office deduction that it has become an audit trigger,” Hammar warned.

— using Schedule A. “Most of the audit battles are on Schedule A,” Hammar observed. “They’re going to look at your medical expenses, state taxes, mortgage interest and charitable contributions. But if you have enough deductions for Schedule A, you should go ahead and use it.”

Since most ministers tithe, their charitable contributions are much higher than the IRS expects, Hammar said.

In fact, some ministers include copies of their year-end church giving statements when filing income tax returns, Hammar said.

“It’s not required, and very few people actually do it, but it’s not a bad idea if you have large charitable contributions,” he said. “A person who tithes is automatically thrust beyond the average charitable giving rate of 3 percent, which is what the IRS often expects.”