Pastor T's. Good Heart Looked Bad On Paper
By Raul Rivera
He could not believe that something he had done for so many years was actually illegal. In the 6 years that he had pastored the church, the strong and muscular "Pastor T.", as he was affectionately called, had always made sure that the church came first. His salary was very small and many times when the church funds were low, he opted to forego his paycheck. Now, as he and I spoke during the break at the Ultimate Church Structure conference, he realized that the way the church had been paying for his gas and meals was out of compliance with sections 62(a)(2)(A) and 4958(c)(1)(A). It put him, his church, and his board of directors in jeopardy of converting all such transactions as taxable income, and at risk for paying substantial fines.
Church paid for meals and travel
Six years earlier, shortly after starting the church, Pastor T. started a motorcycle outreach that required him to spend many hours on the road attending rallies and ministering to some of America's toughest people. He used his personal motorcycle while the church paid for his gas and meals. When he needed to attend a rally or do evangelism, he filled up the gas tank with the church debit card. While away, he also used the church debit card to pay for his meals, so long as he submitted all the receipts to the church. How could that be wrong? Why was it wrong and why couldn't he do it? Those were his most pressing questions. Continue reading and you will find the answers below.
Good heart, bad practice
I have met hundreds and hundreds of pastors who have good hearts but bad practice when it comes to the church's books. Good books do not only keep track of income and expenses, they go much further. Good books must also keep records in a manner that is compliant with the laws of the land. Pastor T's books were not compliant. They did not pay for his gas and meals in accordance with the law.
What the law requires
IRS section 62 requires all transactions that pay for gas and meals to be "accountable." This means that the transaction must be detailed in such a manner that the individual does not experience personal gain. Section 62 requires that the church establish an accountable reimbursement/expense program to ensure the following.
1. The transaction must be documented to prove it had a necessary church business purpose: Simply recording a transaction does not meet this requirement. The church must take it a step further by documenting the reason and showing that it was necessary to fulfill the church's purpose.
2. The transaction must prove that Pastor T. did not receive more than what was actually expensed: When the church paid to fill up Pastor T's gas tank, he was not required by the church to keep track of his miles. Therefore, when he visited the rallies, some residual amounts of gasoline remained in his tank. He never gave thought to that or how that gasoline was used.
3. The church must have a policy that requires excess payments to be returned: The church needs to implement as part of a plan a policy that requires excess payments to be returned within a reasonable amount of time. For example, suppose Pastor T. purchases a new wireless microphone that he will use while traveling. He buys it with his own credit card. The church reimburses him for the purchase, but after using it for two weeks, Pastor T. decides the quality is not good enough and so he decides to return it. The vendor refunds his card. Pastor T. must refund the church within a set period of time. I recommend that the church policy require excess funds to be returned within 60 days.
How to implement an accountable reimbursement program
The key to making the reimbursement plan most beneficial is to put it in writing. In the government's line of thinking, significant importance is placed on intention and arms length discussion. Therefore, proper implementation is required to ensure that the reimbursement plan is considered qualified under IRS code. There are three steps to getting an accountable reimbursement plan legally implemented in your church. They are:
1. Write down a list of all possible expenses that the pastor may incur during the normal course of ministry. Our Ultimate Church Structure Conference manual has a list of 11 expenses that should be documented.
2. Create a reimbursement form and prepare a reimbursement policy. A copy can be found on pages 110-111 of the Ultimate Church Structure Conference manual.
3. Have a board meeting to discuss the implementation of the accountable reimbursement plan; present the reimbursement form and policy, and have the board of directors approve it. Sample minutes can be found on page 109 of the Ultimate Church Structure Conference manual.
How Pastor T. does it now
Shortly after attending the conference, Pastor T. made the necessary changes. His church implemented an accountable reimbursement program using the three steps above. They wrote down a thorough list of expenses that are normal to his travel and ministry of evangelism. This included travel, meals, lodging, and 8 other types of expenses. Now every time he travels, he keeps track of his miles and submits to the church an actual account of the miles he has traveled and the church reimburses him for those miles using the IRS standard mileage rates, which is currently at 56.5 cents per mile. Now his meals are reimbursed only if the travel requires him to spend the night and it is more than 50 miles from the church office.
What about section 4958
While an entire article can be written on this, I will briefly tell you the problem that Pastor T.'s church had with the way they paid for his gas and meals. Under section 4958(a)(1), if the IRS discovers Pastor T.'s errors, they will convert all of the transactions to taxable income, thus adjusting prior years' tax returns. He would then have to pay the income tax, plus penalties and interest. He would also have to pay an additional tax of 25%. Then if the church does not correct the problem by the end of the current tax year, the additional tax jumps to 200%. Additionally, section (a)(2) imposes a tax of 10% on all of the church board members that participated in the transactions without doing their due diligence. Section (d)(2) states that the tax can be as high as $20,000.00.
A warning concerning IRS agents
The IRS has implemented a practice that lets them look for what they call "patterns of abuse." Under current practice, a field agent has the authority to invalidate all such transactions if in his/her opinion they show a pattern of abuse. Not much is needed to show that pattern. The way Pastor T.'s church paid for gas and meals was enough for the IRS to declare it as abuse and go after all reimbursements done by the church.
Practice makes perfect
I encourage you to take time to create an accountable reimbursement plan. Invest time and money in getting the knowledge you need to protect the ministry God has entrusted into your hands. Register to one of our conferences. You will be glad that you did. We guarantee it.