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December 22, 2009

Should You Prepare Your Own Tax Returns?

It’s not as hard as you might think.

Ministers can prepare their own tax returns. While ministers’ taxes present several unique rules, these rules are not complex. Unfortunately, many people confuse uniqueness with complexity. With a little effort most ministers should be able to comprehend these rules sufficiently to prepare their own tax returns. The information provided in my 2010 Church & Clergy Tax Guide, together with IRS Publication 17 (Your Federal Income Tax), should be all you need in most cases. Of course, some ministers will prefer, for a variety of reasons, to have someone else prepare their tax returns. If that is your choice, be sure you select someone with experience in the preparation of ministers’ tax returns (preferably a tax attorney or a CPA). You may wish to share a copy of the 2010 Church & Clergy Tax Guide with the person you select.

Before you hire a tax preparer

Before deciding to have someone else prepare your tax return, consider the following:
  • More than half of all income tax returns prepared by paid preparers contain errors, according to an IRS study. What were the most common mistakes? Failing to claim the standard deduction; entering dollars and cents in the area for dollars; failing to claim (or incorrectly stating) the amount of a refund; failing to total the multiple entries on Schedule C; filing a Schedule SE even though net self-employment earnings are less than $400; using the wrong filing status (joint, head of household, etc.); and failing to check the age/blind box.
  • Paid preparers are subject to a penalty of $1,000 per return (or 50 percent of the income they earned for preparing the return, if greater) for any understatement in taxes that is due to an “unreasonable position,” which is defined by law to mean a lack of a reasonable basis. IRC 6694. As a result, competent paid preparers generally avoid overly aggressive positions when completing ministers’ tax returns.
  • The IRS has established a Return Preparer Program that can trigger audits of all returns prepared by certain return preparers who intentionally or negligently disregard federal tax law (code, regulations, and rulings). Ministers and church staff should be cautious when dealing with nonprofessional or “mail-order” return preparers, especially those who promise significant tax savings or are not attorneys or CPAs. See IRS Internal Revenue Manual § 4.11.51.

5 tips on selecting a tax preparer

Let’s assume you’ve decided to have your tax return prepared by a professional. The next step is to find someone who is experienced and competent in the preparation of ministers’ tax returns. Here are some tips to help you find such a person:
  • If possible, stick with a CPA or tax attorney.
  • Try to use someone local.
  • Find other ministers in your community who have their tax returns prepared by a professional, and ask questions. Who do they use? Are they pleased? What is the cost? How many ministers’ tax returns does the person prepare?
  • Call CPAs listed in your telephone directory: ask if they prepare ministers’ tax returns and, if so, ask how many they prepare.
  • When you find one or more possible candidates, consider asking a few simple questions that should be answered easily by anyone with any experience in handling ministers’ tax returns. Here are a few examples: (1) Are ministers employees or self-employed for Social Security purposes? Ministers always are self-employed for Social Security purposes with respect to their ministerial income. (2) Can I claim my housing allowance exclusion in computing my self-employment taxes? Absolutely not—ever. (3) If I report my church wages as an employee, are my wages subject to FICA taxes? The answer is never. (4) If I report my church wages as an employee, are my wages subject to income tax withholding? No, unless a minister elects voluntary withholding. (5) What is the minister’s housing allowance? The portion of a minister’s salary designated in advance by an employing church for housing expenses. This amount is not taxable in computing a minister’s income taxes to the extent it is used to pay housing expenses and does not exceed the home’s fair rental value.
Persons who are familiar with ministers’ taxes should be able to answer all of these questions knowledgeably.

This article will appear in the January/February 2010 issue of Church Law & Tax Report. Subscribe to receive more timely, helpful information to keep your church safe, legal, and financially sound.

Richard Hammar is an attorney, CPA, and best-selling author specializing in legal and tax issues for churches and clergy. A graduate of Harvard Law School, he is the author of more than 100 books, including Pastor, Church, & Law and the annual Church and Clergy Tax Guide. He also writes the Church Law & Tax Report and has contributed to numerous journals and publications.

Related Tags: IRS, Richard Hammar, tax

Comments

I like the questions/answers author Hammar has included which we can use to assess the competence of prospective tax return people

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