Tax Update
By Aubrey L. Jayroe
Based on my experience of tax audits in recent months, ministers need to be aware of what the IRS is looking for on their tax returns and what they should be doing to prepare for the future
In recent audits, the IRS has looked closely at the following points.
1 Those ministers who are exempt from self-employment tax will need proof. The minister should retain the original Form 4361 that has been approved by the IRS. If the minister does not have the original or a copy of the approved form, he should try to get one from either the IRS or the Social Security Administration. To get it from the IRS, he should send Form 4506 to the IRS district office in his area. To obtain it from the Social Security Administration, he should make a request in writing to the office in Baltimore Maryland.
2 The IRS will determine whether the pastor is an employee of the church or self-employed. In most cases this will be a major item on the audit. The IRS is now stating that pastors are employees, mainly because they receive compensation from one primary source.
It appears that in the future, all pastors are going to be classified as employees for income tax purposes. For Social Security (self-employment)
tax purposes, the minister will still be self-employed.
To comply with this IRS opinion, the pastor should receive a weekly salary which should be consistent each week. The church will be required to file quarterly payroll reports (Form 941-E) on the pastor and other employees. The church should also establish a qualified expense reimbursement plan for the pastor so that all ministry-related expenses can be paid by the church and will not be reflected on the pastor’s tax return. This does not appear to be an option on the part of the pastor if he does not want to pay taxes on these expenses.
The IRS has stated that in the future it will be adjusting or returning a pastor’s income tax return where he has filed as a self-employed individual. If a pastor calculates his income taxes as a self-employed person, an audit could be costly.
3 If the pastor signs church checks on a regular basis, the church bank accounts could be included in an audit. Normally one question that the IRS asks at the beginning of the audit is “What accounts do you [the pastor/taxpayer] sign checks on?” If he does sign church checks on a regular basis, then the IRS asks for those accounts during the audit. To protect church accounts from being included in the pastor’s audit, the pastor should refrain from regularly signing any checks.
4 If the pastor or his wife is heavily involved in the bookkeeping, record keeping, check writing, or maintenance of the church books, he should be sure that the records are well kept. It is best that there be a secretary other than the pastor or his family, to handle the church financial records. The IRS has determined that the pastor is in “control” in certain situations where the pastor or his family is responsible for all record keeping. When this determination is made, then much of the total income from the church is taxed to the pastor, and the church stands a chance of losing its tax-exempt status.
5 At any audit of the pastor, the IRS will want to see copies of the signed resolutions that affect the pastor’s tax status. These include the annual housing allowance resolution, the annual compensation package resolution, and the authorization for a qualified expense reimbursement plan.
The following is a checklist of items that the pastor should be aware of in the coming months.
1 Housing allowance, compensation package, and reimbursement plan resolutions for 1992 should be completed by February 29.
2 The annual church business meeting should be held by February 29.
3 The 1991 income tax return is due on April 15, 1992. If the return is not ready to be filed, the extension should be prepared by this date, and all taxes paid to avoid penalties.
4 The quarterly Form 941-E is due for the first quarter of 1992 on April 30, 1992.
(The above material was published by Aubrey L. Jayroe)
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