9 Ways to Lessen the Chances of an IRS Church Audit

Written by Keith Hamilton

One of the greatest fears of a church treasurer is that of an audit by the Internal Revenue Service. 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 over these issues. In spite of this misconception, the exact opposite is true. A church treasurer rarely faces jail time or harsh penalties over an IRS audit. However, an IRS audit can be challenging and stressful.

Management Essentials for Christian Ministries

There are several things a church can do reduce its chances of an IRS audit.

Federal payroll requirements are filed timely and accurately. The church treasurer needs to make sure that IRS Forms 941 or 944 are filed on time. Also, the treasurer needs to double check the forms to make sure the correct amounts are entered on the proper lines.
The IRS Forms 941 or 944 need to match the amounts on the church-issued W-2s. For instance, if the taxable wages on the W-2s do not match the taxable wages on the quarterly Form 941s, then the chances are pretty good the IRS will contact the church for an explanation of why there is a difference.
The church needs to 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 the church, then the church should issue him a W-2. If the church is issuing its minister a 1099MISC, then the chances are high the church will face an IRS audit.
Since a minister is self-employed for Social Security purposes, the Social Security and Medicare taxes cannot be paid by the church to the government as FICA taxes. The minister is responsible for his personal Social Security self-employment taxes. Social Security and Medicare taxes for ministers are not reflected on the 941, 944, or W-2 forms.
To help reduce accounting mistakes that involve the IRS, the church treasurer should file the fourth quarter Form 941 or annual Form 944 on the last day of January. The church treasurer should 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.
The church can 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. According to the latest survey conducted, thirty percent of the 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, the church can only send a thank you to the donor acknowledging the gift, without assigning a value. Only cash or cash equivalent contributions can be recorded on a contribution statement.
Contributions made to a specific person for benevolence reasons are not charitable contributions to the 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 can receive a contribution credit from the church.
The church 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.
The church should have a proper accounting system through which all church receipts and expenditures are well documented. For example, expenditures should not be paid unless a receipt, invoice, or lost receipt form is provided by 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. Some of the greatest men in the Bible were former tax collectors. Finally, if the IRS audits the church, you will survive it!

About Dr. Hamilton

Keith Hamilton, D.Ed.Min, CFP, CRPC is with the Georgia Baptist Convention. He has written several publications on establishing church designated funds, managing your household finances, and protecting your church and ministry from identity theft. Check out www.churchfinancialservices.org for more help. Other articles by Keith...