August Tax Alert

The  Internal  Revenue  Service  warned taxpayers   to   avoid   misrepresenting   their income  on
returns  in order  to improperly claim tax credits.
“Taxpayers   should   not   falsify   their income  or other  information  on their  tax returns to
improperly claim tax credits,” IRS Commissioner John Koskinen said in a Feb. 12 news release
(IR-2016-23). “Misrepresenting facts is cheating and taxpayers are legally responsible for all the
information reported  on their tax returns.”
In  an  effort  to  maximize  refundable credits,  some  taxpayers  inflate  the  income reported
on their returns, the IRS  said.
“This scam involves inflating or including income   on   a   tax   return   that   was   never
earned, either as wages or as self-employment income,” the release said. Such  illegal scams can
lead  to significant  penalties  and interest and  possible  criminal  prosecution,  the  IRS
Falsifying income to claim tax credits is on the IRS’s annual “Dirty Dozen” list of tax scams for
the 2016 filing season.
Abusive Tax  Shelters. Abusive tax shelters are still a problem for taxpayers and the IRS, the  IRS
said  in  warning  the  public  about falling for such scams.
“These   schemes   can  end  up  costing taxpayers more in back taxes, penalties and interest  than
they  saved  in the first  place,”
Koskinen said in a Feb. 16 news release   (IR-2016-25)
Tax   structures   have   evolved   from relatively simple domestic and foreign trust arrangements
into  sophisticated  strategies that use financial secrecy laws    offshore and availability of
credit cards from foreign banks, the  Internal   Revenue   said.   It  cautioned people    that
if   an   arrangement    “uses unnecessary  steps  or a  form  that  does not match its substances,
then that arrangement is an abusive scheme.”
The IRS also said trusts  are commonly used  in abusive  structures,  which  “promise reduced
taxable income, inflated deductions for  personal  deductions  for personal expenses, reduced (even
to zero) self- employment  taxes,  and  reduced  estate  or gift transfer taxes.” Questionable
trusts rarely deliver the promised tax benefits, the news release said.
Another abuse involves misuse of small captive insurance companies. Promoters help the owners of
closely held entities to create captive insurance companies  onshore or offshore and cause the
creation and sale of the captive insurance policies to the closely held entities, the IRS said.
High premiums and fees prevail, and the promoters help taxpayers “continue the charade from year to
Frivolous   Tax   Arguments.   The  IRS  also warned taxpayers against using “frivolous tax
arguments” to avoid paying taxes.

Promoters       of       frivolous      schemes
encourage taxpayers to make “unreasonable and outlandish” claims to avoid paying the taxes they
owe, the Internal Revenue Service said in a Feb. 17 news release (IR-2016-27). “These arguments are
wrong and have been thrown out of court and have been thrown out of court. While taxpayers have the
right to contest their tax liabilities in court, no one has the right to disobey the law or
disregard their responsibility to pay taxes.”
The IRS on Feb. 17 also released the 2016 version of “The Truth about Frivolous Tax Arguments,” a
document that outlines common frivolous tax claims.   Examples include contentions that taxpayers
can refuse to pay taxes on religious or moral grounds by invoking the First Amendment, and that the
only “employees” subject  to federal income tax are employees of the federal government.

Email  Schemes. The IRS renewed a consumer alert warning taxpayers to be on guard against email  schemes
after  seeing a 400%  increase  in phishing  and malware
incidents so far this tax season.
The fraudulent emails are designed to trick taxpayers into thinking the messages are official
communications from in the Internal Revenue Service or others in the tax industry, including tax
software companies, the IRS said in a Feb. 18 news release (IR-2016-28).
Such phishing schemes often ask taxpayers to  confirm  their  personal  information  or personal
identification number (PIN), or for information  related  to refunds, filing status or transcript
“This dramatic jump in these scams comes at the busiest time of tax season,” Koskinen said. “Watch
out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at
the very time they work on their   taxes.”
The  emails  direct  people  to  websites designed to look official, such as that
asks for Social Security numbers and  other
personal information. The sites may also have malware that can infect taxpayers’ computers and give
fraudsters access to personal files, the release said.
“While  more  attention  has  focused  on the  continuing  IRS  phone  scams,  we  are deeply
worried this increase in email schemes threatens more taxpayers,” Koskinen said.

Many Americans, including Clergy rely upon the Government’s retirement system known as Social
Security Retirement. It never  ceases  to  amaze  me  at  the  people, including Pastors and
Ministers who feel that the Federal  Government  can manage  the Pastors’ money better than they
can manage their  own.
Our Government is about 19.3 trillion dollars in debt. If you add in all of the other liabilities
not included in the national public debt and  Social  Security  and Medicare entitlements to which
it is obligated, that amount is quickly approaching $100 trillion. Just the official debt of $19.3
trillion is 553 percent of the  nation’s  annual   income. There   is  not  an  individual   in
America, especially Pastors and Ministers who would be considered financially responsible if their
personal or   Church budget was 553 percent of the income.
How can we, in Godly conscious, allow ourselves  to  pay  into  a  Retirement      System that is
so grossly mismanaged?
The Scam. Social Security Retirement is the only retirement program  in  the  world that  dies
when  the  person  dies.  Once  the retiree  dies,  no  one,  including family  can receive  the
funds  paid  into  the  system.  A spouse  may  draw  a  deceased  husband  or wife’s  retirement
at  a  reduced  rate,  but cannot receive the deceased’s Social Security and their own entitlement. It is a scam.
The Social Security Administration purposely sets the monthly entitlement amount so that the retiree would have to live to be 117 years of age in order to draw out all that had been paid into the system. This does not account for money that is paid in after the retiree begins drawing his or her Social Security Retirement.
The average worker pays into the system for 45 years at an average of $14,400 per year. That is $648,000.00 paid to his or her Social Security Retirement. However, the average retiree only lives 13 years after retirement and only receives an average of $16,300.00. At this calculation the average retiree only receives $211,900.00 of the $648,000.00 he or she contributes to the program. The remaining $436,100.00 goes into Government coffers and is spent without accountability.
Get out while you can.
Opt Out Now. The Federal Government is looking for ways to remove this benefit for Ministers. They do not want to lose this unaccounted cash flow. Just as they have taken away other Clergy benefits, this one will not survive forever and will some be a memory of days gone by.
In order to opt out a Minister must have ordination credentials that are legally recognized. Those credentials cannot be more than 2 years old at the time of filing and the Minister must perform sacerdotal duties.
For the past several years, as Election Day nears, there are some Churches that practice “Freedom Sunday.” They use their pulpits to promote a particular political candidate and/or agenda. With the state that our nation is in, and the fact that Christianity seems to be the only voice that has been silenced, I can understand why this is practiced.
Legal vs. Illegal. From the founding of our nation until 1954, Pastors spoke freely and boldly from their pulpit about the issues of the day, political or otherwise, and about candidates running for office. However, in 1954, one piece of legislation was passed that effectively overturned this freedom. That legislation was The Johnson Amendment.
At what point does the First Amendment end and the Johnson Amendment begin? Many politicians believe Separation of Church and State is the determining factor. However, Separation of Church and State is not in the Constitution or the Bill of Rights. It was a term used by Thomas Jefferson in the Federalist Papers which was supposed to be an explanation of Article I of our Constitution. Jefferson never stated or implied that the Church could not be active in political affairs, but that the State could not be involved in the business of the Church.
Pastoral Compensation Mistakes
As I travel across the USA teaching Church Management and Tax Conferences, some of the most common mistakes I see are those involving Pastor’s compensation. Pastors are not the standard employee working for a standard employer. Pastors are unique in their position and therefore are unique in their compensation.
Churches make several mistakes when computing and reporting the compensation package. I want to focus on the three most common.
The Self-Employment Mistake
Pastors are categorized as dual-status employees. This makes them unique in that they are employees for income tax purposes, but self-employed for Social Security purposes.
The most common mistake Churches make
is that of reporting the minister’s income on a 1099-MISC rather than a W-2. Ironically, many of
these Churches use local CPAs that do not know Church Tax and Accounting Law, which advise them to
erroneously do this. This in turn creates problems for the local congregation with the IRS.
Pastors  should  not  receive  form  1099- MISC.  They  must  receive  the  W-2.  For  tax returns,
their  payroll  must  not  be  reported on  Schedule  C.  It  is  to  be  reported on  the 1040.

The Social Security Mistake
Regardless  of  how  a  local  CPA may instruct  a  Church,   the   Church   must   not withhold
Social   Security,   nor   can   it   pay matching  amounts.  Pastors  are  100 percent responsible
for   their    Social    Security    and the  amount  is  15.3  percent  of  their  income
(including Housing Allowance).
The    Pastor    was    from    a    mainline denomination    in     West     Virginia.     He
approached   me   privately   because   of   his dilemma.   His   denomination   and an IRS agent
told him to have the Church withhold Social Security and report it on a 941. This had transpired
for two years before another agent caught the violation and then began an audit.
Churches must never withhold  Social Security  from  the  Pastor’s  pay,  nor  are  they allowed to
provide an offset. What the Church may  call  blessing  the  Pastor  is  a violation  of IRS  rules
and  regulations  and  may     subject the Church and Pastor to huge penalties.

The Withholding Mistake
Another Pastor in North Carolina came to me on break  to  tell  me  she  had  never filed an income
tax return on her ministerial income – she had been mistakenly   informed that ministers’ income
was  tax-exempt.
A Pastor’s salary is subject to income   tax
– he or she is exempt from having it withheld from his or her pay. A Church should  never withhold
income  tax  from  a  Minister’s  pay unless  the  Minister  has  signed  a voluntary withholding
agreement. This agreement is for INCOME TAX ONLY – not Self-Employment Tax. However, the minister
that enters into a voluntary withholding agreement   solely determines   how   much   Income   Tax
he   or she  wants  withheld.  Those  who  desire  this method should increase their withholding
to offset the SE Tax    or at least a portion of it.
We   do   not   recommend   this.   We recommend  that  every  minister  opt  out  of Social
Security by filing form 4361. However, do  not  attempt   to  file  this   form   yourself. Get
professional help so that you will not be denied. Regardless of how long you have been in ministry,
we know how to get it  approved.

How We Can Help
Ministerial     Compensation     is     a complicated   subject   and  should   only   be performed
by outside, disinterested parties, qualified to compute it. We are that firm. We help thousands of
Churches across the USA in this  and other  complicated  Church/IRS issues.
We are the best firm in America to file the 4361 to opt all ministers out of Social Security and
ease the strain it places on the Ministers’ tax return. You can handle your money better than the
Government. Start today.
Contact   us   at    or    call 800-344-0076    to    register    for    a    Church
Management  Tax  Conference  nearest  you, or contact us to help you get control of  your
compensation  package,  including  opting out of Social Security. You will be glad you  did.