This was a story told to us by another Tax Advisor that we promised to protect their privacy if they shared their story with us and allowed us to share it with our audience. Therefore, we are publishing this under my name and encourage your comments at the end of this blog post.

There are wonderfully intelligent, honest and expert Tax Advisors to choose from on TaxConnections. However, on occasion we run across people who use unethical scare business tactics to gain your business. This is why we bring you this story.

Have a grace day!
Kat Jennings, CEO

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Tax issues for churches and their ministers are often misunderstood, misapplied, and misguided. It is not so much that they are difficult but they are different from tax issues faced by the average taxpayer. Special rules apply to churches in regard to their tax obligations and their treatment of ministers. Ministers are uniquely considered employees for income tax purposes but self-employed for social security and Medicare. Many ministers, church treasurers, church financial secretaries, and even tax preparers do not fully understand how to handle these tax issues.

Fortunately, there are a number of aids available to help understand these tax issues. Publications, seminars, and the like are in abundance. However, in seeking outside help, one should be careful to ascertain that the resource is a valid, informed resource. Oftentimes in my tax preparation career, I have had ministers tell me that I did not prepare their taxes the same way that a previous preparer did them. In these cases, I would explain to the client why I did it differently, as the prior preparer did it incorrectly. Before engaging someone to prepare taxes for a minister, it is especially important for a minister to check the experience and background of the preparer specifically as it relates to ministers.

A number of organizations offer seminars relating to church and minister tax issues. Many of these are very good and will give you good, straightforward advice. Others are teaching the tax law incorrectly. Others are somewhere in between, but may use scare tactics to spur their attendees into often misguided action.

I recently encountered one of these seminars. Some of what the leader said was true, but much of his seminar was made up of half-truths and scare tactics to convince those in attendance that they needed to utilize the services of this organization, who would supposedly help avoid trouble with the IRS.

As we signed in for the conference, we filled out a sheet indicating the organization we represented, along with other information. As representatives of our church, we indicated the church name and other information. Seminar personnel proceeded to look up the name of the organization in IRS Publication 78. This is a listing providing names of organizations that have been recognized by the IRS as eligible to receive tax-deductible contributions. When the name of our church was not found in Publication 78, they stamped “ILLEGAL” on our registration form, indicating we were not eligible to receive tax-deductible contributions. Nothing could be further from the truth, as churches do not have to register with the IRS to obtain this status. It is automatic for a church to have this status.

It was also stated that the minister’s compensation should be set by an outside agency. This is to avoid excessive compensation and avoid the specter of private inurement. While this is something that may be done, it is not a requirement, or even advisable in many instances. It did not take us long to realize the seminar was designed to elicit additional services from those in attendance. Verbal statements were often made that went further than what was included in the written materials.

The bottom line on this organization is that most of what they say has a grain of truth, but is often overstated in order to invoke the fear of adverse consequences in regard to the IRS. Of course, the seminar provider benefits as it provides services to help set a minister’s compensation, does an operational review of the church, does a compliance exam, sets up the corporate structure and applies for tax exempt status. They also offer bookkeeping and tax services to the church and ministers.

In seeking help in the area of church and ministerial tax issues, you would be well-advised to avoid sensationalism and see out those who are quietly competent in this unique area of taxation. Some good resources are www.churchtaxsolutions.com and www.churchtaxandlaw.com. Dan Busby’s Minister’s Tax and Financial Guide and Church and Nonprofit Tax and Financial Guide are very readable as is Church Finance by Batts and Hammar.