IRS Increases 2019 Audit Focus

By Raul Rivera

The IRS has begun the process of increasing the number of revenue agents it has in the Exempt Organizations Unit. The goal is to reinvigorate its enforcement presence by increasing the number of audits it conducts on exempt organizations. 

The audits will focus primarily on compliance issues such as compensation to officers including pastors, ministers, and founders and how staff is paid. Many churches and ministries make the mistake of giving 1099-MISC forms instead of W-2s to their workers.

Organizations most at risk

Of concern to me will be ministries that went through the streamlined short 501(c)(3) process (using Form 1023-EZ) and churches and ministries with records kept by volunteers.

When the IRS announced that certain small charities would qualify for a shorter 501(c)(3) approval process, it was initially praised as a win for smaller organizations.

However, two problems immediately arose. The first was that many grant makers would not give money to organizations approved through this process. The second problem is that the application was shortened so that many of these organizations did not go through a process that ensured adequate compliance. Now, several years later, they find themselves operating out of basic compliance.

Churches with volunteer record keepers

In the face of an audit, many churches and ministries that have used volunteers to keep the records of the church find themselves unable to produce the necessary information to satisfy revenue agents. One of the strengths of our StartRIGHT Service is the retention of records and the ability to StayRIGHT through our bookkeeping and annual filing services.

How does a church get audited?

To protect churches from unjust audit procedures, Congress enacted section 7611. This section of the tax code establishes guidelines and procedures for how the IRS may conduct a church audit.

The IRS can begin a tax inquiry against a church when a high-level IRS official has written information that provides reasonable belief that a church is not operating according to its tax-exempt purpose or in a charitable manner.

This information can come from:

• Newspaper or magazine articles or ads,
• Television and radio reports,
• Internet web pages,
• Voter guides created and/or distributed by the church,
• Documents on file with the IRS (e.g., a Form 990-T filed by the church), 
• Reliable information reports from concerned members of the church or the general public, and
• Records concerning the church in possession of third parties or informants.

How does the IRS know it has reliable information?

Sadly, the IRS is not required to ensure it has reliable information. Let me explain. If a revenue agent receives information about your church from a church member, secretary, or board member, or any random person, the agent does not have to spend reasonable resources vetting the information to make sure it is reliable. The agent only has to have proof that the informant is not reliable. The revenue agent does not have to question or vet the informant; the agent just has to have some record from the past that the informant has a reputation of being unreliable. 

So, what if a disgruntled employee or member of the church simply makes up information about the church? Too bad! The IRS will use the information unless it has proof that the informant is unreliable.

How to do ministry without falling out of compliance

Let me share five things you can do to be in a ready state of preparedness. If you train your team in these procedures and apply them annually, you will be taking great strides in protecting your church against an IRS audit.

1. Review your board meeting minutes annually. As a charitable organization, it is imperative that all corporate actions of the church be properly documented in well-maintained board meeting minutes. Your board meeting minutes are the legal history of your organization. If decisions made by the board are not properly recorded in minutes, how can a church prove that decisions were made? From a legal standpoint, those decisions were never made. Without board meeting minutes, the church has no way of demonstrating that the governing body operated in compliance with its bylaws or made decisions in the best interest of the church.

2. Watch what the pastor and employees post on social media. It is important to know that the IRS has internet access. In recent years, the IRS has used the posting of information on social media accounts to assess taxes on individuals and organizations. Let me give one example. Many pastors today post the happenings of their day within a church context as a way to stay in touch with its members and regular attendees. To not mention any names, let’s say that Pastor X takes a selfie of himself and his wife at a church conference. The church paid for him and his wife to travel halfway across the country to attend. The problem is that his wife is not on staff at the church and is on her summer break from teaching at the local elementary school. Under IRS code, the church is out of compliance and the pastor will be deemed of engaging in private inurement. The social media post is all the proof the IRS needs to say, “Gotcha.” I have an entire blog dedicated to how social media can be used by the IRS; you can read it here.

3. Review and update all compensation agreements annually. Compensation agreements for all employees and contractors should be maintained with diligence. Incorrect documentation of salaries is one of the common ways that churches violate section 501(c)(3) requirements. The IRS will consider all money given to board members and pastors that are not properly documented as private inurement resulting in severe penalties. To avoid the misstep of private inurement, the board of directors must approve all salaries annually during a properly called board meeting.

Also, make sure to review how your church compensates guest speakers and contract workers. Guest speakers and other contractors for your ministry should receive a Form 1099-MISC for each tax year they receive $600 or more in payments from your ministry. Employees, including pastors, worship leaders, youth ministers, and others who work at the church on a continual basis, should receive a Form W-2.

4. Review your church’s activities annually. To maintain tax-exempt status, your church must have a purpose consistent with section 501(c)(3) and must operate in alignment with that purpose. Churches are permitted tax-exempt status due to their religious purposes. It is important to regularly assess your church's activities to ensure they are consistent with your religious and charitable purpose.

5. Conduct a review of all of your church’s internal governing documents. There are several documents that your church must maintain and review regularly. These include:

• The church’s articles of incorporation and amendments, the church’s bylaws, charity registration, and IRS approval letter. The organization should notify the IRS if any significant changes have occurred. (Ministries can do this on Form 990, but churches cannot. Instead, churches must submit those changes to the IRS through a letter of update. We refer to this as the reconsideration process at StartCHURCH.)
• The church’s written doctrines.
• The church’s policies and procedures. (You will want to make sure that your church has a conflict of interest policy, accountable reimbursement policy, and a benevolence policy.)
• Accounting and financial records.
• It is also necessary for the members of your board of directors to sign a conflict of interest statement each year. This statement indicates that they are aware of the conflict of interest policy that the church has in place, and they fully understand the policy’s meeting.

Take your ministry to the next level

I am a believer in empowering pastors and church leaders to take their church to the next level. With the IRS increasing its number of enforcement officers, taking your church to the next level in church compliance has never been more necessary.

In truth, no pastor ever wants to go through an IRS audit. Just the idea alone can raise stress to unnecessary levels. But with the right tools and discipline, your church can create a solid legal foundation that can help lessen the likelihood of your church being audited.

If your church or ministry needs help with any of the items I have listed above, give us a call today at 877-494-4655, and we will be happy to serve you. At StartCHURCH, our goal is to empower your ministry to succeed and go to the next level.

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