Wednesday, March 5, 2014

Designating Housing Allowances - A "Must Do" Step for the Church

Ministers performing qualifying ministerial services may have a portion of their compensation designated as a housing allowance pursuant to Section 107(2) of the Internal Revenue Code.  (Terminology varies interchanging such words as housing, parsonage, rental or manse depending on the culture of the church.  The Internal Revenue Code and Regulations refer to it as "rental allowance".)  Within certain limitations, this portion of a minister's compensation is not subject to federal income tax. 

Internal Revenue Regulation 1.107(b) requires that in order to be "rental allowance", the amount must be designated as such pursuant to an official action taken in advance of the payment of the allowance by the employing church or other qualifying organization. Two cases decided in 2013 remind us of the critical need to properly designate housing or rental allowances.

In Ricky Williams v. Comm., pro se TC Summary Opinion 2013-60, the minister entered into an employment contract with his church.  The initial contract provided for a housing allowance for a period of six months.  Any provision extending beyond the six months would have to be formally decided at a later date.  The church never revisited this issue, so none of Reverend Williams' future compensation was designated as housing.  During an examination of his 2007 Form 1040, Rev. Williams asserted that over $33,000 of his compensation should be considered as housing allowance.  The IRS disagreed, so off to court they went.  The court ruled that Rev. Williams could not claim the housing allowance, since the church had never formally designated an amount as housing allowance after the initial six month provision.  Therefore, for 2007, no housing allowance existed.  Rev. Williams produced a new employment agreement dated in 2012 that included the housing allowance provision, but the court reiterated the requirement of having the designation prior to receiving the funds. The 2012 employment agreement was too little, too late.

In Donald L. Rogers, V. Comm., TC Memo 2013-177, Rev. Rogers' church paid his mortgage payments and utilities directly rather than pay him an allowance for the expenses.  Despite making the payments directly, the church failed to formally designate the payments as payments made pursuant to IRC Section 107.  Lacking the formal designation, the court agreed with the IRS that the payments represented taxable compensation to Reverend Rogers. 

Many churches are lax in their housing allowance designations.  I recommend that housing allowance designations be approved every year and be approved by either the appropriate committee, the board of directors or by a high ranking employee that has specifically been granted the authority to make the designations on behalf of the church or other qualified organization.  Remember the designation has to be done prior to the payment of the allowance, so beware of late designations or of designations that attempt to reclassify prior payments.  In this area, it pays to do it well and do it early in order to provide the maximum benefit to the minister.

Cautionary Note:  In Freedom From Religion Foundation, Inc. v. Lew, 112 AFTR 2d 2013-7107, the court ruled that IRC Section 107(2) is unconstitutional.  This ruling makes the housing allowance, but not the provision of a parsonage, unconstitutional.  The judge delayed the mandate for the IRS to enforce the ruling until the conclusion of the appeals process.  The government has appealed the decision to the 7th Circuit Court of Appeals.  Therefore, the future fate of this tax provision is in the hands of the U.S. Department of Justice and the 7th Circuit Court of Appeals.


Wednesday, January 22, 2014

Connect With Me At The 2014 Texas Ministry Conference

People often ask me about my speaking schedule, so in 2014 I am resolving to write posts to update you on where I will be and when.  I am honored to speak at many great conferences during the year and I am always excited to have the opportunity to catch up with people that have joined me on my blog. 


February 20th I will be at speaking at the Texas Ministry Conference in Houston, Texas.  The conference is held at Champion Forest Baptist Church and is hosted by Church Supplies and Services, Inc.  This year I am co-presenting with my husband, Frank Sommerville, on issues involving facilities usage, the legalities to consider with foreign activities as well as our general tax and legal update.  However, we are just a small part of this conference.  Consistently year after year the conference provides a great slate of speakers and topics and offers something for everyone in church administration.  In fact, there are so many great topics, that I encourage my churches to take several people in order to take advantage of all the information available. 


You can register at www.TexasMinistryConference.org or call toll free 888-350-3264.  First time attendees will be entered in special drawings to be held during lunch.  I hope to see some of you in Houston in February!

Wednesday, January 15, 2014

New IRS Form 8822-B Requires Action By Virtually All Organizations


In an effort to update its records, the IRS is requiring any organization or entity that obtains an employer identification number (EIN) to report to the IRS a change in the "responsible party" within 60 days of that change.  This change is reported using Form 8822-B, Change of Address or Responsible Party - Business.  This is a good thing as it helps to provide assurance that critical communications from the IRS will not be directed to a person who is no longer associated with an entity.  However, in its efforts to update contact information, the IRS is requiring virtually every entity to provide current information.


Who is a "Responsible Party"
Currently the application for an EIN requests the name and identifying number of the "responsible party".  This is defined to be as the person who has a level of control over, or entitlement to, the funds or assets in the entity and the disposition of its funds and assets.  This is a fairly general definition and may actually apply to multiple people within an entity.  However, when applying for the EIN, an entity is only required to list one responsible party.  In essence, this is listed as the primary contact for the entity and provides assurance that mail sent from the IRS will be directed to someone with enough authority to deal with the issue at hand. 


Why does this affect so many entities?
The complication enters the picture with the direction from the IRS that if the "responsible party" has changed prior to 2014, then the entity must file the Form 8822-B no later than March 1, 2014.  Prior to January 2010, the term "responsible party" did not exist.  Therefore, it can be presumed that if an entity obtained its EIN prior to January 2010, it should file the Form 8822-B by March 1, 2014 to declare its "responsible party".    If an entity gained its EIN after January 2010, then it should check its application to see who was listed as the "responsible party" to determine if the filing is required.  For the future, entities should understand that the "responsible party" must be updated in the event the listed party leaves the entity. 


Form 8822-B
The form is used for both updating the "responsible party" for an entity as well as updating the address for an entity.  It may be obtained at www.irs.gov for download.  Contact your CPA or attorney, if your entity needs assistance in determining its reporting requirements.





Thursday, May 9, 2013

May 15th Filing Deadline Draws Close

As May 15th draws near next week, I want to remind our nonprofit organizations of two important deadlines. 

Forms 990, 990-EZ & 990-N
For calendar year returns, Forms 990 and 990-T need to be filed by the 15th or properly extended.  If an organization is extending Form 990-T, then it should deposit via EFTPS any tax that is due with the return to avoid late payment penalties and related interest. If the organization has less than $50,000 of gross income and less than $200,000 in fixed assets, it should file its Form 990-N by May 15th.

Form 5578
Another deadline often overlooked is the deadline for private schools that do not file Form 990 or Form 990-EZ to file Form 5578.  Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt from Federal Income Tax is also due by May 15th for schools with a calendar year end.  This return is generally required to be filed by churches that operate schools as a direct part of their activities or by church affiliated schools that do not have a Form 990 filing requirement. 

The Form 5578 certifies that the school (church) has satisfied the applicable nondiscrimination requirements as detailed in Revenue Procedure 75-50.  In general these requirements are:

  1. The governing documents contain the proper prohibition against discriminating as to admission or employment on any of the protected grounds other than based on religious discrimination;
  2. The school's handbook and other documents should also contain similar language;
  3. The school maintains records that indicate the racial make up of the student body, teaching faculty and administrative faculty; and
  4. The school/church has publicized its nondiscrimination policy using either the appropriate radio or televsion medium.  (Internet does not qualify to meet this requirement.)  There are some exceptions to this rule, but they are very narrow and do not apply to many church operated schools. 
Form 5578 may be downloaded from the IRS website at www.irs.gov. Failure to file can result in an IRS inquiry and failure to comply with Revenue Procedure 75-50 can result in revocation of the school's tax exempt status. 

Monday, March 18, 2013

Want To Buy A Raffle Ticket?

When the Form 990 was redesigned in 2008, the form was rewritten to gain additional information regarding an organization's gaming activities.  Gaming activities have to be separately reported in Part VIII of the form and in some instances, greater detail is required through Schedule G associated with the return. 

With this additional information required, we are finding that many organizations are conducting some sort of gaming activity that previously was buried as a part of a fundraiser, such as a gala, dinner or golf tournament.  What most organizations do not realize is that state laws always govern any type of gaming activity.  While most people understand that state laws may regulate professional gaming activities, they fail to realize that state laws also regulate gaming activity that is carried out as a part of a fun filled event conducted by a nonprofit organization or a church. 

At this point, I will apologize to all of my followers that are not from Texas.  I have been asked to specifically blog the Texas rules for raffles.  Realizing that some of my readers are from other states, I encourage everyone to do a little digging and determine how your state may be regulating raffles and determine if your organization is in compliance with the applicable state statutes.

In 1999, Texas passed The Charitable Raffle Enabling Act that allows for charitable raffles to be conducted by qualifying organizations.  However, there are strict rules to be followed, if an organization desires its raffle to be covered by the act.

What Is A Raffle
In general, a raffle occurs any time someone pays for the chance to win a prize. Qualifying organizations are allowed to conduct two raffles each year that comply with the state law. 

Who Can Conduct a Raffle In Texas
An organization has to be a qualified organization:
  • An association organized primarily for religious purposes that has been in existence for 10 years;
  • A voluntary EMS that does not pay its members;
  • A volunteer fire department that does not pay its members; and
  • A nonprofit organization that:
    • is at least three years old;
    • elects its governing body;
    • has 501(c) tax exemption;
    • has members;
    • does not distribute its income to its members; and
    • does not participate in political campaigns.
Any other organization is prohibited from conducting a raffle in Texas.

What Must the Organzation Do
The qualifying organization must follow a few rules:
  1. They must have possession of the prizes that are offered.
  2. Prizes may not be cash or items converted to cash.  (It is thought that this does not prohibit gift cards as long as they cannot be readily converted to cash.)
  3. If the organization purchases the prize, its value cannot exceed $50,000.
  4. It must print tickets that include the name & address of the organization, the price of the ticket, the date the prize will be awarded and a general description of each prize that is valued at more than $10.
  5. Tickets may only be sold by members or authorized representatives.  They may not be sold by compensated staff.  You also cannot pay someone to plan and conduct the raffle.
  6. The raffle cannot be advertised statewide or through paid advertisements.  This means that it cannot be advertised on the organization's website as this would be considered as "state wide."
Penalties & Enforcement
Conducting an illegal raffle is issue for the organization's local district attorney.  It is a Class A misdemeanor for conducting an illegal raffle and a Class C misdemeanor for participating in one.  This means that the people actually conducting the raffle are at risk and should take seriously the above rules.

In essence, an organization cannot have an unplanned raffle or a spur of the moment raffle.  Complying with the above rules take care and consideration.  Therefore, organizations and churches should prepare policies and procedures to guide any type of activity that can be construed as a "raffle". 

Tuesday, March 5, 2013

IRS Expands Worker Reclassification Program

As if the IRS hasn't already given a huge gift to employers with the creation of the worker reclassification program in 2011, it has now topped off that gift with a big red bow. 

In 2011, the IRS provided a means to allow employers to reclassify workers from independent contractors to employees in a fairly simple process with a very low cost.  The effective cost was approximately 1% of the worker's compensation in the year previous to the reclassification.  Compared to the fact that the traditional cost of reclassifying a worker was 10 to 15% of compensation for three years, the new program provided an easy and cost saving mechanism for solving worker classification issues.  (See my post in October of 2011 for the original details of the program.)  In December of 2012, the IRS expanded the program through Announcement 2012-45 and 2012-46. 

Announcement 2012-45 expands the program in the following manner:

Originally the program stated that if the employer was undergoing an IRS exam, it was not eligible for the program.  Now the employer will be eligible to participate in the program as long as the exam is not classified as an employment tax exam.  It also clarifies that an employer that is a part of a controlled group must look to the entire group of employers when determining this criteria.  Employers that are contesting a reclassification issue in court do not qualify for to participate in the program.  Also, an employer is still ineligible if it is going through a DOL exam or a state employment exam. 

Additionally, participation in the program no longer extends the statute of limitations on the Forms 941 that include the reclassification.  All employment returns will maintain their natural statute of limitations.

Announcement 2012-46 went on to temporarily expand the program in an even greater manner:

Under the original program, the employer has to have properly filed all Forms 1099-Misc for any workers that it desires to reclassify as employees.  If the employer failed to file the required forms in the previous 3 years, it is not eligible for the reclassification program.  The IRS has alleviated this requirement for persons who apply to the program through June 30, 2013.  This means that even if an employer did follow the law in reporting a worker as an independent contractor, it may still participate in the program through June 30, 2013.  The amount assessed in this settlement program is higher than the regular settlement program as it assesses an amount equal to approximately 3.2% of the compensation paid in the previous year.   There is a graduated penalty assessed for the nonfiling of the required Forms 1099-Misc.  In addition, the employer must file all outstanding Forms 1099-Misc for the past three years. 

This program is truly a gift to those employers who have misclassified workers.  It provides a clean slate going forward as opposed to a potentially large tax assessment for each of the past three years.  The IRS reports that nearly 1,000 employers have participated in the program to date.  However, from experience, I know there are many more employers that need to participate in this program.  If a church or nonprofit has fallen prey to bad employment classification habits, now is the time to break them and move forward into a new arena of better compliance as well as less monetary risk to the organization.

Friday, June 15, 2012

Compensation - The Final Step is a Two Step

1) Determine the required withholding on all forms of compensation and
2) Determine the proper reporting of all compensation and benefits.

I am finally completing this series.  I am to the step that most people are accustom to working with in order to do payroll.  While most organizations do complete this step in regards to cash compensation, few seem to complete it correctly in regards to noncash compensation.

Some items of noncash compensation are not subject to withholding while others are.  IRS Publications 15, 15A & 15B all deal with properly reporting compensation and fringe benefits.  Since we now know what items the organization is providing to its employees, it should be fairly easy to determine any withholding requirements.  (Remember that ministers are not subject to any mandatory withholding of federal income tax, so adding their benefits to payroll is fairly simple.  Also, ministers are not subject to FICA/Medicare, so this also simplifies this process for their compensation.)

If an organization is using a payroll service, then it is best to remember that its payroll reports are generally prepared very quickly at the end of the quarter or the end of the year.  Therefore, it is necessary to communicate with the service prior to the end of any reporting period.  Otherwise an organization may find that it is necessary to amend payroll reports that have already been submitted to the IRS and the Social Security Administration in order to properly report some items of compensation. 

Several items require special reporting on the Form W-2, so be specific about the benefits that are provided and review the instructions for preparing the Form W-2 each year.  For example, dependent care benefits are reported in a separate box on the Form W-2 even though the benefit is not taxable to the employee if provided through a qualifying plan. 

In summary, the number one area that can result in an IRS inquiry and/or in the assessment of monetary penalties is payroll reporting.  Therefore, each organization should review all payroll filings carefully to determine if the proper amount of tax has been paid and if all items of compensation have been properly reported.