Archive for John Stancil

The Church Audit Procedures Act – Part Two

In Part one of this series, we examined the basics of the Church Audit Procedures Act.  In this Part, we are taking a look at what measures a church can take to be prepared in the event of an IRS examination.  These steps are not just to ward off the IRS, but are just good, basic business practices.

First, understand that there is not a high risk of your church being the subject of an IRS examination.  Although the IRS does not disclose such data, it is estimated that fewer than 100 churches per year are examined.  Those subject to such audits are those examining the most conspicuously bad behavior.  There is a higher chance that the Department of Labor would examine a church for violation of the Fair Labor Standards Act, but that is a topic for another time.

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Written by | Posted in Audit • IRS • Religion

The Church Audit Procedures Act – The Basics

There is a concern among many that the IRS will come sweeping down on their church, ruthlessly coming in and examining every nuance of the church, upsetting its operations, and causing general disruption and loss of reputation for the church. There are established procedures for the IRS in initiating an examination, so the above is not likely to happen. This is the first of two articles on the Church Audit Procedures Act. Here we are going to examing the basics of the law and the protections it affords to churches. In Part 2, we will examine what the church needs to be doing in the event the IRS come knocking.

History

The Church Audit Procedures Act was passed by Congress in 1984. Its intent was to protect churches from its constitutional separation of church and state, while allowing the IRS to Read More

Written by | Posted in Audit • IRS • Religion

Achieving A Better Life Experience (ABLE) Accounts Established By Congress

Somewhat obscured by the Congress’ passing of the “Tax Increase Prevention Act of 2014,” better known as the tax extenders legislation, was another bill passed by Congress and expected to be signed by the President this week. The Achieving a Better Life Experience Act of 2014, establishes “ABLE” accounts for disabled persons. These accounts basically function similar to a Sec. 529 Qualified Tuition Plan (QTP).

Following the procedures for a QTP, ABLE accounts are established and maintained by the individual states. Persons residing in a state with no ABLE program may participate in a program maintained by a “contracting” state. An individual is limited to one account, and there can only be one beneficiary for each account. In order to qualify for an account, the individual must be entitled to benefits based on blindness or disability under the Social Read More

Written by | Posted in Disability • Income Tax • Individual

Unrelated Business Taxable Income For An IRA

In a previous article, we discussed the concept of Unrelated Business Taxable Income (UBTI) as it relates to non-profit organizations. If you have a self-directed IRA, you may be surprised to know that UBTI may also apply to your IRA. An IRA is a tax-exempt entity, under IRS rules. Note that the IRA itself is the tax exempt entity and the tax would be paid by the IRA, not the owner of the IRA.

The basic rules for UBTI in an IRA are pretty much the same as for any non-profit organization, but there are a couple of issues that may be encountered more commonly with an IRA. If a non-profit entity has UBTI, it will be subject to tax on that income at the applicable corporate rates. The purpose of this is to level the playing field for for-profit entities that must pay tax on their income. Read More

Written by | Posted in Non-Profit Tax • Retirement

Unrelated Business Taxable Income

Non-profit organizations in the United States do not pay income tax on their “income.” However, when a non-profit ventures into certain business activities, it will owe income tax on this income, termed “unrelated business taxable income (UBTI).” This is only fair, as the non-profit is now competing with profit-making organizations that must pay tax on its income. UBTI levels the playing field.

What is Unrelated Business Taxable Income?

The IRS defines unrelated business taxable income as “gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business.” Let’s unpack this definition and see how it applies in particular cases. Read More

Written by | Posted in IRS • Non-Profit Tax • Religion

Christmas Gifts To The Minister

It is a tradition in many churches to give the ministerial staff a Christmas gift, or bonus at the end of the year. The IRS has some rules regarding the taxability of these gifts and it serves the church, the minister, and the members of the church to adhere to these rules so as to not run afoul of the IRS.

Many times, these Christmas gifts are considered by the church and the minister to be gifts, not compensation, and they are not included in the minister’s W-2 at the end of the year. It is a basic tenet of our tax law that a “gift” cannot be given to an employee, but is disguised compensation. The exception to this is that the employer may give a gift to an employee if the value is $25 or less and is not cash or a gift card. Thus, an employee may receive a small gift from the employer as long as the value is under the IRS limitation. Read More

Written by | Posted in Clergy • Individual

Church Exemption From Filing Form 990 Challenged

Churches are exempt from having to file Form 990 with the IRS. This exemption has been in place since the early 1940’s when Form 990 was adopted, and non-profit organizations were required to file the form with the IRS. This was brought about by a concern that tax-exempt organizations were using their status to engage in unfair competition with for-profit businesses. Churches have held to be exempt, as to do so would violate the First Amendment to the Constitution.

The Freedom From Religion Foundation (FFRF) has filed suit in a federal district court in Wisconsin, alleging that it was required to file a “detailed application” (Form 1023) and pay a fee before obtaining tax exempt status, and has also been required to file “detailed, intrusive and expensive annual reports” (Form 990) in order to maintain that status. Read More

Written by | Posted in IRS • Religion • Tax Controversy • Tax Provision/Tax Reporting

Why The Ministerial Housing Allowance Might Not Survive

On September 7, as was discussed in “Appeals Court Upholds Clergy Housing Exemption,” the Seventh Circuit of appeals reversed a Federal District Court decision that ruled the minister’s housing allowance was unconstitutional. The suit had been brought by the Freedom From Religion Foundation. So the housing allowance survives, for now.

The Appeals Court ruling was actually based on the fact that the plaintiffs, Dan Barker and Laurie Anne Gaylor (co-presidents of FFRF) did not have standing to sue as they had not been denied the benefit of a housing allowance. In ruling that the plaintiffs did not have standing, the court did not actually address the issue of the constitutionality of the housing allowance. Read More

Written by | Posted in IRS • Religion • Tax Controversy • Tax Provision/Tax Reporting

Appeals Court Upholds Clergy Housing Exemption

The 7th U S Circuit Court of Appeals has dismissed a lawsuit by the Freedom From Religion Foundation (FFRF) that challenged the constitutionality of the clergy housing allowance. The suit was originally brought in the District Court for the Western District of Wisconsin where Judge Barbara Crabb ruled that the tax break for ministers was unconstitutional. Her basis for the ruling was that the law benefited religious people and no one else. The decision, which would potentially eliminate the most important tax break for ministers, was stayed pending appeal.

The law allows ministers of the gospel to exclude income tax on amounts designated by the church as housing allowance. Self-employment taxes are payable on these amounts. In addition, ministers may “double dip,” as they are allowed to deduct mortgage interest Read More

Written by | Posted in Clergy • IRS • Religion • Tax Controversy • Tax Provision/Tax Reporting

Potential Tax Changes Affecting Non-Profit Organizations

The Tax Reform Act of 2014 is currently in the House of Representatives. This law is a major reform effort and is almost 1,000 pages long. Congress is expected to take action on this proposal after the November elections. While it is often risky to speculate what changes Congress will enact, this proposal has several significant changes that will affect non-profit organizations. In a previous article (Potential Tax Changes Affecting Charitable Contributions) the proposed changes in regard to charitable contributions was discussed. This article deals with other changes that would affect non-profit organizations.

Excise Taxes

The proposed legislation would levy a one per cent excise tax on net investment income of Read More

Written by | Posted in Non-Profit Tax

Innocent Spouse Relief

Let’s suppose that you file a joint income tax return with your spouse in 2012. Not an uncommon occurrence, millions of couples do so every year. But from there, things go downhill and the two of you divorce two years later. Thinking that the divorce and its financial ramifications are behind you, you start to move on. Then one day you get a letter from your favorite Uncle Sam. The IRS has just notified you that your income for that 2012 return you filed was grossly underreported and that you have a $50,000 tax obligation. To make matters worse, you have no idea where your ex-spouse is and the IRS doesn’t know either.

As it turns out, your spouse was a compulsive gambler, unknown to you. In 2008 there were significant gambling winnings that 1) you did not know about and 2) were not Read More

Written by | Posted in Individual • IRS

Potential Tax Changes Affecting Charitable Contributions

It is always a risky proposition to predict what Congress will do, especially in the area of taxes. Currently, the Tax Reform Act of 2014 is in the House. This is a major tax reform effort of almost 1,000 pages. It should be taken seriously, as this proposal is the result of over three years of House Ways and Means Committee hearings with more than 30 hearings on tax reform and 11 separate bipartisan groups working to develop the proposed legislation. While it is not likely to be fully passed in its present form, there is reason to believe that significant tax reform will occur. Committee Chair Dave Camp listed two goals for this legislation “One goal is to make the tax code simpler and fairer for families and employers. Another goal is to strengthen the economy so there are more jobs and bigger paychecks for American families.” Included in the proposed legislation Read More

Written by | Posted in Tax Deductions
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