Monday, August 18, 2014

Tax Court Sends Reminder of Documentation Rules

In a recently released decision, the Tax Court has reminded us of the importance of adequately documenting business expenses for mileage, travel and meals.  In Marcus O. Crawford, TC Memo 2014-156, the Court upheld the disallowance of Mr. Crawford’s business expenses for mileage, travel and meals due to inadequate documentation of the business purpose.  While the ruling deals with deductions claimed on Mr. Crawford's tax return, its theory applies to all documentation for these common expenses incurred by any church or nonprofit.  

Mr. Crawford operated a side business in addition to being a full time employee for another company.  The disallowed deductions related to his side business and were claimed on his Schedule C.  To support his deductions for mileage, meals and other travel expenses, Mr. Crawford provided his calendar with various notations as to places, names, activities or miles.  For his meals and entertainment expenses, he presented a spreadsheet indicating the place, the date, the amount and the business purpose.  (Sounds pretty good so far, right?) However, the IRS was not satisfied with the documentation and disallowed the expenses.  The Court and the IRS agreed on the following deficiencies:
  •  Documentation inaccurate:  Mr. Crawford's calendar proved to be inaccurate.  Entries on the calendar were in conflict with other independent documentation.  Since some of the entries were determined to be inaccurate, it was determined that none of the entries were reliable. 
  • Documentation vague or ambiguous:  Even if the calendar notations had been deemed reliable, the notations were determined to be too vague or ambiguous to support the business purposes.  The mileage entries did not clearly indicate the business purpose.  The Court refused to assume that the mileage notations were automatically associated with the business activities.  Other notations just listed someone's name with no other information to support the business activities. 
  • What was paid:  Invoices and confirmation print outs were presented to document travel expenses.  However, the Court could not determine if Mr. Crawford had paid for the expenses or if his employer had paid for the expenses or what were final expense amounts.  Once again challenging Mr. Crawford’s credibility, the IRS determined that some of the invoices had been paid for with a credit card that was reimbursed by Mr. Crawford’s employer. 
  • Lack of notated business purpose:  For receipts that were deemed credible, there was no business purpose noted on the receipt to clearly indicate the business purpose of the trip.
  • Business purpose too generic:  The spreadsheet presented to support the meal and entertainment expenses contained most of the required elements.  However, the business purpose was consistently listed as “interview/team training”.  Since some of the meals were only for Mr. Crawford, the documentation was suspect.  For those involving other people, the spreadsheet did not contain adequate documentation as to who was involved and the business relationship. 

In reviewing the Crawford case, I felt a certain déjà vu.  As a part of our IRS Compliance Reviews, we review expense reports as well as the documentation of a church/nonprofit organization’s credit card expenses.  We consistently find weaknesses in the documentation of these types of expenses.  Some of the weaknesses align with the Crawford case.  Consider the following:
  • Documentation vague, ambiguous or generic:   Use of the word “ministry” as the business purpose is not a sufficient business purpose and is as insufficient as Mr. Crawford’s “interview/team training”.   Another common one for churches is “hospitals” without any detail as to where the staff member actually traveled. 
  • Question as to what was paid:  Reservation confirmations are not always proof of an expenses.  Additionally, clarification of who has paid for an expense is vital to the reimbursement process.  Care needs to be taken to determine the actual payer of an expense prior to reimbursement by the church/organization and to reimburse for the final expense amount.   While normally not intentional, I have seen instances of expenses reimbursed that were originally charged on a corporate credit card. It is always a good practice to request original receipts be turned in for any reimbursement or for any credit card charge. 
  • Lack of any business purpose:  In regards to meals, just listing who was at the meal does not fulfill the documentation requirements.  The business connection of the person must be clearly established as well as the business purpose for the meal. 
  • Conflicting or unclear documentation:   It was determined that Mr. Crawford was reimbursed by his employer for some of the expenses that he claimed on his Schedule C. If a minister or other staff member is involved with a business or ministry outside the church, it is important to be able to determine the correct business associated with an expense. While the church or organization may gain an intangible benefit from a person's outside activities, it does not create a justification for the payment of the expenses of the outside business.  

Over time it is easy to fall into sloppy documentation habits.  Leaders of nonprofit organizations have many competing demands for their time and spending time documenting business expenses is tedious.  However, proper documentation of expenses is not only required by the tax law, it is critical to avoiding other undesirable consequences.  This is especially true of these three common expense areas.  In a separate blog post, we will review the consequences of poor expense documentation habits to both an organization and to the individuals involved.  In the meantime, it is time to review your organization's accountable expense reimbursement plan not only as it is written, but also as it is executed.  

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 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 for download.  Contact your CPA or attorney, if your entity needs assistance in determining its reporting requirements.