What Happens If the IRS Looks at Our Pastor's Pay?

An IRS audit of your pastor's pay can be scary and hard to understand. Pastor compensation is one of the most closely watched areas of church finances, even though churches usually don't have to pay taxes. If you make a mistake or don't have enough proof, you could face fines, excise taxes, or even lose your tax-exempt status. This tutorial goes into great length on what causes IRS audits, how they work, what the IRS usually looks at during pastor pay audits, what happens if you don't respond, and how to get ready and respond.

What is the reason for the IRS to look into pastor pay?

The IRS wants to make sure that pastor pay is fair, well-documented, and follows tax regulations to stop private inurement or excess benefit transactions that could put tax-exempt status at risk. They want to make sure:

• Pay is in line with what other churches and jobs pay for similar tasks.
• Housing allowances follow IRS standards and are officially named.
• Payroll taxes are correctly taken out and reported.
• Bonuses, reimbursements, and benefits are legal and well-documented.

Things that often cause audits

• Big or unexplained raises or bonuses in pay.
• There are no formal job contracts or board approvals.
• Differences between the stated pay and the norms set by the denomination or sector.
• Previous tax problems or audits connected to them.
• Complaints or reports from whistleblowers saying something isn't right.

What the IRS Looks at During an Audit

Contracts and letters of agreement that spell out compensation and benefits are called employment agreements. Board minutes and resolutions are written approvals of pay and housing allowances. Compensation benchmarking is looking at salaries from churches that are similar to yours. Tax filings for payroll involve checking Forms W-2, 1099, and tax payments. Reimbursement for expenses requires proof of accountable plans and receipts. Church financial statements, budgets, and audit reports are examples of financial records.

Possible IRS Results and Effects

• Excess Benefit Transactions: The pastor and other responsible parties have to pay excise taxes on the extra money (up to 25% on the extra, going up to 200% if not fixed).
• Back taxes and penalties: These are for not paying payroll taxes or not reporting pay.
• Public disclosure and damage to reputation: Negative press that makes donors less confident.
• Loss of Tax-Exempt Status: In very bad circumstances of recurrent or very serious offenses.

How to Get Ready for an IRS Audit at Your Church

Keep Detailed Records

• Keep minutes, signed contracts, and board resolutions.
• Every year, write down the names of people who get housing allowances.
• Keep receipts and reports of money spent.

Do Internal Reviews and Audits

• Check your pay against third-party benchmarks every so often.
• Check to see if the IRS's responsible plan standards are being followed.

Teach Staff and Leaders

Teach boards and finance teams about tax requirements and pay practices.

What to Do During the Audit

• Answer IRS queries quickly and honestly.
• Get a lawyer who knows a lot about church tax issues.
• Before you answer, read and comprehend what the IRS found.
• Quickly fix mistakes and make the suggested modifications.

Strategies After the Audit

• Use the results of audits to make governance and pay policies better.
• Take on or improve executive pay committees.
• Set up regular audits of pay and compliance.

How Tier 3: THE PASTOR SUPPORT PLAN Helps Churches That Are Being Audited

• Quarterly Executive Compensation Audits: Finding and fixing risks before they happen.
• Priority Access to Legal Experts: Get answers to your audit inquiries and help with your plan right away.
• Full Governance Support: Help writing policies and keeping track of pay correctly.
• Pastoral Wealth and Tax Planning: Make sure that pay is in line with long-term tax-efficient plans.

Questions and Answers

• Q: How long does it take for the IRS to complete an audit? A: Depending on how complicated they are, audits can take anywhere from a few months to more than a year.
• Q: Can the IRS change pay after the fact? A: Yes, the IRS can say that payments are too much and have tax consequences.
• Q: What records are most important during an audit? A: Contracts, minutes from board meetings, salary records, housing allowance resolutions, and proof of payment.
• Q: Do we need a lawyer for the audit? A: It is very important to get a lawyer to help you deal with complicated issues and keep your church safe.

Disclaimer of Legal Responsibility

This blog article is not legal advice; it is simply meant to give you information. For detailed advice regarding IRS audits and pastor pay, talk to a lawyer who is licensed.

In short

Getting ready for an IRS audit of pastor salary is a big deal that needs planning, paperwork, and help from professionals. Churches may efficiently handle audits, avoid fines, and keep their tax-exempt status by knowing what causes audits, following documentation standards, and using Tier 3: THE PASTOR SUPPORT PLAN's full audits and legal help.

Links inside

• Church Legal Audit and Compliance Report
• Pastor Support Plan Overview
• Pastoral Compensation Legal Strategy

Links Outside

• IRS Guidance on Executive Compensation Audits: https://www.irs.gov/charities-non-profits/excess-benefit-transactions
• ECFA Audit Best Practices: https://www.ecfa.org/Content/Audit-Best-Practices
• Nonprofit Audit Resources: https://nonprofitquarterly.org/audit-preparation-resources/