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Ministers, churches get advice for complying with IRS rules

NEW ORLEANS (BP)–Most ministers and churches don’t realize how perilously close they may be to a painful audit by the Internal Revenue Service, a CPA told students at New Orleans Baptist Theological Seminary.

But both the IRS and lawyers are looking at churches and seeing a gold mine because of their careless lack of compliance to rules and regulations, said Rex Frieze, former chief business and financial officer for the First Baptist Church, Orlando, Fla., and now a tax law specialist and church management consultant based in Orlando.

Frieze was on the NOBTS main campus Jan. 10-11 and at the NOBTS North Georgia Campus Jan. 9 presenting a second annual continuing education conference on a topic that should be of extreme interest to all ministers and churches for up-to-date information, if not for sheer defense: income tax issues relevant to ministers.

In a day when lawyers think they can make some easy money by suing churches, church leaders must take the time to evaluate their areas of risk, Frieze said.

“It used to be unheard of for a church to be sued,” Frieze said. “Now lawyers see churches as easy targets with deep pockets.”

But a sadder situation, he said, is that embezzlement of church funds is at an all-time high. “It is a fact that 15 percent of churches have been, are being or will be victims of embezzlement,” he said. The number in actuality is higher, he said, because church embezzlement is so easy to cover up with the sloppy way some churches keep their records.

Sloppy bookkeeping is just one of the many reasons the IRS continually makes new rules impacting churches and ministers — rules they must be aware of.

One of those new rules came into effect August 1996 and must be addressed immediately by ministers and church staff members if they want to qualify for the clergy income non-taxable benefits which are available to them, such as housing allowance, insurance, annuity and ministry-related expenses.

According to the IRS, a minister or any other church staff member — whether ordained, licensed or commissioned — should not prepare his or her own compensation and benefit package, Frieze said.

If the following three important steps do not take place, a minister or church staff member’s entire compensation package could become taxable:

1) The compensation and benefit package must be put together by a board or committee “composed entirely of individuals who are unrelated to and not subject to the control of the minister or church staff member.”

2) The board or committee “shall obtain, review and rely upon objective ‘comparability’ information to substantiate their independent decisions regarding reasonable levels of compensation paid and benefits granted.”

3) The board or committee “shall adequately document the basis for all of its decisions and actions.” That means no more little notes torn off the corner of a church bulletin or verbal OKs over the phone, Frieze said.

Besides legal and tax problems that may result from an improperly structured minister’s compensation package, there are significant ethical problems, Frieze said, from “a misrepresentation to the congregation as to what the minister is truly receiving in the form of compensation” to church leaders and staff members being “viewed as unwise stewards of the tithes and offerings which have been entrusted to them.”

Two “historical mind-sets” prevalent in church settings that must be changed, according to Frieze, are:

1) the payment of a minister’s compensation through a “package arrangement” and

2) the payment of “expense allowances” to the minister for “ministry-related expenses” and “protection coverage reimbursements.”

Frieze gave six guidelines for “the ideal minister tax reporting arrangement:”

1) Report as an employee for federal income tax purposes.

2) Develop a church personnel budget which addresses separately each of the following three categories:

A. ministry-related expense reimbursements.

B. protection coverages.

C. personal (take-home) pay

3) Operate under a church-approved “Accountable Expense Reimbursement Arrangement.”

4) Consistently review adequacy of insurance coverages and retirement contributions.

5) Properly designate a housing or parsonage allowance through the church board before each new year begins.

6) Consider voluntary withholding of federal income and self- employment taxes through the church.

To continue to handle church money “the same old way” simply because “that’s just the way we’ve always done it” is setting up the church and minister for a disastrous situation, Frieze said.

“The church must be the pacesetter in demonstrating to its members and to a lost world the highest levels of integrity in organizing and operating its ministry affairs,” Frieze said.

“As the Lord’s people in the Lord’s house, we should not be saying, ‘All these rules are such a pain,'” he said.

Instead, “We should be taking pains to do what is right to
protect the Lord’s house and to be an excellent example, not because of possible punishments, but because of our testimony.”

    About the Author

  • Debbie Moore