5 Ways to Protect Your Church from an IRS Audit
By Raul Rivera
When it comes to managing a church, financial integrity is paramount. Ensuring your church’s compliance with tax regulations demonstrates good stewardship and shields your organization from potential IRS audits.
The IRS continues a campaign to increase the number of revenue agents in the Exempt Organizations Unit, expanding the number of audits conducted on exempt organizations.
These audits will primarily target compliance matters, including compensation structures for officers, including pastors, ministers, and founders, as well as the payment methods for staff. It's common for churches and ministries to mistakenly issue 1099-MISC forms instead of W-2s to their workers, which may draw scrutiny during these audits.
While audits can be stressful and time-consuming, there are proactive steps you can take to protect your church. Here are five ways to shield our church from IRS Audits.
1. Maintain board meeting minutes accurately.
Many of us tend to believe that the most crucial records for a church to maintain are its financial records. While managing financial records is vital for day-to-day church operations, one could argue that the most pivotal records for churches to uphold are the minutes from board meetings. Why? Because these minutes serve as the official documentation of the corporate decisions made by your church.
Board meeting minutes are pivotal as they validate the church's corporate actions. Without these minutes, your church lacks tangible evidence that it duly approved significant decisions, such as appointing board members, adopting essential bylaws and policies, and authorizing salary structures.
All corporate actions must be meticulously documented within well-maintained board meeting minutes for a nonprofit organization like a church. These minutes are the backbone, providing a clear historical record of the church's decisions and ensuring transparency and accountability in all its operations.
2. Record all salary and compensation details
Exercise meticulous care in managing salaries and compensation. The payment of salaries by your church necessitates annual approval by the board of directors during an appropriately convened board meeting.
In essence, compensation agreements for salaries should encompass, among other details, the specific monetary amount to be disbursed, the job responsibilities, the weekly hours expected, any included benefits, and comparative data indicating how the position aligns with others in similar roles.
Furthermore, it is imperative to handle honorariums for guest speakers correctly. This involves your church obtaining a Form W-9 from each guest speaker. If a speaker receives $600 or more from your church in a single year, a 1099-MISC form should be provided to them. This careful approach ensures compliance and transparency in financial dealings.
3. Review your church’s activities
During a church audit, one of the IRS's objectives is to ascertain if the church's operations align with its purpose and section 501(c)(3). Hence, assessing your church's activities is crucial to ensure this alignment.
When scrutinizing your church's activities, confirming that every ministry and department directly corresponds to the church's core mission is essential. If, during this evaluation, you find an activity that might be categorized as an unrelated trade or business (like a bookstore or coffee shop), it might be wise to consider establishing a church-owned business.
4. Examine your church’s printed and publicized materials
Since the IRS can use any printed or publicized material as a source of “reasonable belief” to begin a church inquiry, you will want to keep a close guard on such materials. This also includes your church’s website. It is best not to have any type of advertisements on your church’s website because, depending on the facts and circumstances, they may be considered unrelated business activity and could potentially jeopardize your church’s tax-exempt status.
5. Review all internal governing documents of your church
Your church must consistently review and uphold several essential documents, including:
- Articles of Incorporation, Amendments, Annual Reports, Charity Registration, IRS Approval Letter, and Public Records Updates: These documents establish your church's legal status and tax-exempt standing.
- Bylaws: These outline the internal governance structure and rules your church follows.
- Written Doctrines: These are fundamental beliefs and teachings guiding your church's faith practices.
- Policies and Procedures: Including conflict of interest, accountable reimbursement, and benevolence policies.
- Corporate Contracts: Such as leases and property titles, defining your church's rights and responsibilities in agreements.
- Accounting and Bookkeeping Records: Maintaining accurate financial records is crucial for transparency and compliance.
- Membership Records: Keeping up-to-date and precise records of your church members is essential.
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What course of action will you take?
Finding your way through an audit could be daunting, especially if you need guidance on where to begin or which specific actions to take. In situations like these, having a clear roadmap and guidance becomes crucial. It's not just about the initial confusion; it's also about understanding the intricate details of the process, knowing which steps are essential, and having a comprehensive plan.
With StartCHURCH, you have a reliable partner. Our specialists support you if you have questions, need clarifications, or require detailed guidance. Your journey to a thriving church operation starts with a conversation. Don't hesitate; give us a call at 770-638-3444, let's embark on this journey together, making your vision a reality.
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