IRS WARNS AGAINST FALSIFYING INCOME, OTHER COMMON TAX SCAMS
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 IRS.gov 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.
SOCIAL SECURITY – AMERICA’S BIGGEST SCAM
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.
PULPIT FREEDOM SUNDAY AND DANGERS THAT MAY ENSUE
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
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 www.cmtc.org 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.