Re: Turning Point Church World Outreach Center-Tell Your Story
Date: October 27, 2010 06:17AM
Does this fact pattern in this article sound familiar, with the exception that Mike's handpicked elders were not all family but they were loyal:
IRS CHARGES MINISTER AND HIS FAMILY
WITH INTERMEDIATE SANCTIONS
By Frank Sommerville, JD, CPA
What started out as a simple IRS examination of a tax return of a church
employee has turned into a major tax problem for a minister and his family. In five
Technical Advice Memorandums, the IRS has demonstrated the details that it will
examine.
FACTS
A nondenominational independent church was founded by a minister. He was
given the power to select all directors. He selected himself, his wife, two sons and his
daughter to serve as the church's directors. The church was apparently successful
because the church paid cash for several homes. The church secured several vehicles and
credit cards, which it distributed to the minister, his wife, two sons and son-in-law. The
church also secured cell phones for the family members.
The church never adopted or followed a qualified accountable expense plan. No
one accounted for the personal use of church assets or credit cards. The family members
charged a large amount of personal expenses to the credit cards. They lived in the
church's homes and drove the church's cars. Virtually, no receipts were kept. No logs
were kept.
The IRS examined the family's tax returns. They discovered that the church was
paying substantial amounts of their living expenses. Instead of opening a church
examination, they simply asserted penalties and taxes that could exceed 265% of the
benefits that the church conferred on the family.
PENALTIES
In lieu of revoking the church's tax exempt status, the IRS asked Congress to
allow it to assess an excise tax on the bad actor who wrongfully exploited the church's
assets. Congress then passed what is commonly called "intermediate sanctions." This
sanction is imposed on insiders who work for the church and who benefit from "excess
benefit transactions." An excess benefit transaction is one where the insider is paid more
than is reasonable. The IRS has interpreted this sanction to apply to transactions where
an insider receives a taxable benefit, but that benefit is not included in the insider's
taxable income on the church's Form W-2.
First, an excise tax in the amount of 25% of the excess benefit transaction is
imposed on the insider who received the benefit. This tax is in addition to income taxes
on the amount of the benefit. The insider must make the church whole by paying the
amount of excess benefit transaction to the church within the same taxable year that he
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received the excess benefit. If the amount is not repaid, then an excise tax in the amount
of 200% of the excess benefit transaction is imposed.
Since 1989, Treas. Reg. Section 1.62-2 has required employers to adopt and
follow a qualified accountable expense reimbursement plan. The plan must be written
and communicated to employees. It must require that the employee document all
expenses timely and in the manner required by Section 274 of the Internal Revenue Code.
The regulation requires other details to be covered as well.
APPLICATION
Since the church did not have a qualified accountable expense reimbursement
plan, all expenses that benefited the family members were excess benefit transactions.
The charges included department store purchases, car repairs, food purchases, hotel
charges, clothing purchases, etc. Except for the charges the family proved up related to
attending a seminar, the credit cards charges were excess benefit transactions. Since no
records were kept, all costs related to their cell phones were excess benefit transactions.
The family kept no mileage logs, so all vehicle costs were excess benefit transactions.
The church provided multiple homes to the pastor and paid some expenses related
to the home owned by the minister. Since the church provided more than a single
parsonage, the fair rental value of the additional homes was an excess benefit transaction.
Even the satellite TV charges and phone charges at the minister's home were excess
benefit transactions. The IRS also asserted the sanction for the security systems charges
related to the minister's home.
One family member wrote a church check for a computer. Since he could not
produce the actual receipt, the IRS imposed the sanction in the amount of the check.
The church also paid a private investigator to follow a daughter-in-law. Since this
was a personal expense, the sanction was imposed.
The church paid a lawyer to advise a family member regarding her network
television appearance. This payment was an excess benefit transaction.
SUGGESTIONS
Here are my suggestions to avoid the sanctions imposed above:
1. Adopt a qualified accountable expense reimbursement plan.
2. Have the plan reviewed by a professional tax adviser.
3. Follow the qualified accountable expense reimbursement plan.
4. Have the expense reports reviewed by an independent party for appropriateness
and documentation.
5. Hire independent finance people and give them the authority to question any
transaction.
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6. Hire an outside tax adviser to audit whether the W-2 includes all taxable income.
7. Review all fringe benefits to determine whether they are taxable.
Perhaps we need to write a letter to the IRS!!!
Saddened