One Church Receives an Unexpected Tax Bill

A church in Mount Vernon, Washington, thought it didn’t owe taxes. But that changed after a recent state audit, when the state said the church owed $180,000 in back taxes and penalties, according to a TV news station.

The church charges admission to a small amusement center. All profits support the church’s ministry. Previously, the church thought that since these admission fees supported the ministry, taxes were not owed. The state’s department of revenue disagreed, although it lowered the amount owed to $58,000 after reviewing the case and waived all penalties and interest if the church can commit to paying.

The church is now racing to raise the money, hoping the community and members can help cover the costs.

Michael Batts provides a comprehensive, easy-to-understand analysis of how unrelated business income, and the possible taxes owed from it, works for churches in a recent Church Law & Tax Report article (now offered as a download). In part of the article, he explains:

Unrelated business activities in a church may include:

• Operating a public restaurant;
• Operating a revenue-generating parking lot;
• Selling non-religious items in a bookstore (such as computers, cosmetics, and popular secular books);
• Providing administrative services to other unrelated organizations for a fee;
• Conducting travel tours that are not adequately religious or educational in nature; or
• Selling advertising in the church's newsletter.

A church is permitted to conduct an insubstantial amount of unrelated business activity. If a church engages in a substantial amount of unrelated business activity, the church could lose its tax-exempt status under Section 501( c )(3) of the Internal Revenue Code.

Besides useful analysis, Michael includes numerous hypothetical examples from church situations to illustrate how different rules do—or don't—apply. Nearly every church will benefit from the insights offered in Does Your Church Owe Taxes on Alternative Revenue?

A New Look for the Managing Your Church Blog

Welcome to the Managing Your Church blog—we're glad you stopped by.

If you came looking for TheYourChurchBlog.com, you're still at the right place. We've made a few changes, though, as you probably already can tell. We've slightly adjusted our name to better reflect the nature of what we cover. We've also unveiled a new look. Don't worry, though—you can still count on the same quality content and conversation on church management and leadership topics that matter to you. Whether it's law, tax, finance, safety, staff, or office issues, we're here to help.

As you can see from the site's new tagline, we hope our information, resources, and insights help church leaders keep their churches safe, legal, and financially sound. Join the conversation today!

Best,

Matt Branaugh
Editor

One Solution to Education Cutbacks

Editor's Note: As a follow up to our posts, "What's a Congregation Worth?" and "Church Giving on the Rebound?" we came across this article by Dave Staal on our sister site, BuildingChurchLeaders.com (Dave also played an integral role in the development of our Reducing the Risk resource). It's a timely read as the back-to-school season arrives:

Our local newspaper ran a front page story that examined a local church's financial turmoil. Faced with a steep drop in giving that began years ago, the article detailed how leadership made changes to cope with this crisis in order to keep the doors open and serve those who attend.

One of their changes deserves more than glancing consideration. Specifically, the church has eliminated staff positions and covers important tasks with volunteers. Not a groundbreaking strategy, I know. But cut and paste this situation outside the church walls and you'll see a timely opportunity to make a difference in others' lives—an idea worth a second look for any church.

To start, consider this prediction: Your state has cut the K-12 education budget and further cuts appear in the budget currently under consideration. Like the church in the news, local administration will need to make changes to cope with these steep drops while keeping doors open and serving the children who attend school.

I make no claims to understand the particulars of state and local education budgets. But I do claim to care about the impact on children.

More safe predictions: As your local schools deal with budget cuts, services will begin to dwindle and disappear. Support staff positions will face elimination. Class sizes will increase. Programs will go away. Activities will stop—especially as the number of adults serving children decreases.

Can you see the opportunity?

Your church can provide much-needed, sure-to-be-appreciated volunteer assistance to a school. Imagine the impact of a school, and the community it serves, recognizing your church as a solution to problems. The greatest resource a church can share with a community is love, as delivered through the active involvement of those who attend.

"Do people really notice?" you ask.

Click here to continue reading "One Solution to Education Cutbacks" on BuildingChurchLeaders.com.

When Someone Disrupts the Church Service

The feature article this week on ChurchLawAndTax.com, a sister site of ours, looks at the delicate balance between ministry and safety. In "Dealing with Dangerous People," we go deeper into how church staff and lay leaders should approach an individual who may pose a threat to the church.

The article is timely for a number of reasons, including an incident last week in which an intoxicated man disrupted a church service in Louisville, Kentucky.

The types of threats addressed in the ChurchLawAndTax.com article include:

• Someone armed with a weapon;
• Someone under the influence of drugs or alcohol;
• Someone violating a restraining order from a custody battle;
• Someone with anti-Christian sentiments.

Our piece includes guidance regarding how to approach someone who is acting suspiciously with the right words, gestures, and, if necessary, physical contact.

ChurchSafety.com, our sister site, offers the following electronic resources for local churches to address the question of confronting disruptive--or potentially dangerous--individuals and how to train staff and lay leaders to respond:

• Confronting Gun Violence at Church

• Protecting Your Church From Crime and Violence

• Dealing with Dangerous People

Fraudulent Calls to Churches

Churches often receive calls for financial help. The most difficult part of these conversations is determining the honesty of the person on the other side of the phone line.

When churches in Florida received a call from a man claiming he needed financial assistance to travel to be with his dying child, a dozen churches called their County Sheriff’s Office fraud hotline, according to a CBS news station. Other churches and individuals gave money to the man without knowing that he was lying. Fortunately, the man has been arrested.

Dan Busby, president of the Evangelical Council for Financial Accountability (ECFA), says that creating a policy may protect against this: “Your church would be wise to establish criteria for individuals who may receive assistance. It should also adopt policies on how benevolence funds should be disbursed. A board-approved benevolence fund is an excellent way to handle gifts for needy individuals.”

Setting up a benevolence committee may also be helpful, according to Rod O’Neil, author of Guide to Benevolence Giving for Church and Family. A sample protocol for a church's benevolence program written by O’Neil is offered for free by BuildingChurchLeaders.com.

Another way to respond to calls for financial help is to find programs in your church and the community that might help the caller, Andy Bales says in Christianity Today. Long-term help that comes from being in a community may be what the individual needs the most. Bales writes:

As the manager of several church benevolent funds over the years, I realized that no matter how many safeguards I put up to make sure the funds were dispensed to people truly in need, I could have spent $1 million and not made a dent in the need.

People experiencing homelessness and poverty need a caring community. The scriptural basis for this is the story in Acts of Peter and John healing the lame man. The men respond to the beggar's request for funds not by giving him money but by giving him a better gift: the gift of healing.

People need permanent help in becoming strong. They need a connection with Jesus Christ and a faith community.

Social Media Background Checks

Editor's note: Mike McCarty is an "Ask the Expert" on our sister site ChurchSafety.com and the founder and CEO of Safe Hiring Solutions, a professional provider of background checks for churches, nonprofits, and other organizations and individuals. Recently Mike posted an article on his blog site discussing the pros and cons of using social media sites for background checks. Because of his expertise in this area and the timely nature of the topic, we are making his article available as a guest post here for our readers.

How many of us have narrowed our hiring decision to a single candidate and then done a Google search of the applicant's name and bounced from Facebook to YouTube to Twitter and the blogosphere to see what else we can learn?

The internet is the Wild West 2.0, a wide open, unregulated, and unfiltered expanse of 160+ million blogs, 80,000 new blogs daily, 550 million Facebook users, 67 million MySpace users, 41 million LinkedIn users, 490 million YouTube users logging 92 billion (that's a 'b'—billion!) YouTube views per month.

An organization would be crazy not to peek into the social media window.

The benefits of social media background checks are obvious:

• Documents due diligence. Reduces negligent hiring and negligent retention.


• Gives glimpse into applicant's head. We get an unvarnished look inside the head of an applicant that reveals their thoughts, opinions, hobbies and interests.


• Unfiltered character check. People have applied the "what happens in Vegas, stays in Vegas" principal to social media. Nobody is looking but friends, right? Twitter and Facebook can provide a quick way to know if your prospective youth pastor is posting nude photos online.

• Too much information. May contain photos of applicant that reveals age, race or a disability; or postings might be related to personal religious beliefs or ethnicity. You may be learning and seeing information that cannot be the legal basis for a hiring decision.


• Legal implications of social media screening.


• Discrimination: If a decision not to hire is based on race, ethnicity, nationality, marital status, religious preference or age.


• Privacy: Yes, even on the internet there can be a reasonable expectation of privacy since most social media sites require "friending" for access.


• Authenticity: This could be a huge obstacle with common and even not so common names. How do you know the social media sites belong to your applicants? There are many, many people with the same names. Google yourself to see what I mean.

• Cisco Systems sued after one of their attorney’s blogged about two opposing lawyers who had sued Cisco.


• Georgia School Dist. sued after they terminated a teacher who had a photo of herself drinking a glass of wine on her Facebook page. It was a vacation photo from Italy.


• NJ Restaurant sued after firing two employees for negative postings about the restaurant on their MySpace pages.

No doubt there is information on prospective employees' social media sites that could be critical to a hiring decision. However, it is a legal minefield that requires wisdom in discerning the extent of its use. Reputable background screening firms no longer include social media screenings as part of the background check process because the Fair Credit Reporting Act requires these companies to provide accurate information. Based on the fact that it's difficult to validate the identity and authenticity of individuals' social media pages, these sites are not considered accurate means for ascertaining valid screening information.

How about your church? Are you conducting social media background checks? Have you denied hiring an applicant because of social media postings? Comment and let us know what you've learned.

This article originally appeared on SafeHiringSolutions.com and was used with permission.
To learn more about the legal implications of using social media for churches, see the downloadable resource Using Social Media Safely on our sister site ChurchSafety.com.

If an Embezzler Confesses

In some church embezzlement cases, a person who has stolen church funds will voluntarily confess—usually out of a fear that he or she is about to be caught. Often, the embezzler will confess in order to prevent the church from turning the case over to the IRS, the police, or to a CPA firm. Embezzlers believe they will receive better treatment from their own church than from the government. And, in many cases, they are correct. Indeed, it is often astonishing how quickly church members will rally in support of the embezzler once he or she has confessed—no matter how much money was stolen from the church. This is especially true when the embezzler used the funds for a “noble” purpose, such as medical bills for a sick child.

In these situations, many church members demand that the embezzler be forgiven. They are shocked and repulsed by the suggestion that the embezzler—their friend and fellow church member—be turned over to the IRS or the police! But is it that simple? Should church leaders join in the outpouring of sympathy? Should the matter be dropped once the embezzler confesses?

These are questions that each church will have to answer for itself, depending on the circumstances of each case. However, before forgiving the embezzler and dropping the matter, church leaders should consider the following points:

1. A serious crime has been committed, and the embezzler has breached a sacred trust. At a minimum, the church should insist that the embezzler:

• Disclose how much money was actually taken.
• Make full restitution by paying back all embezzled funds within a specified period of time.
• Immediately and permanently be removed from any position within the church involving access to church funds.

TIP: Closely scrutinize the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. Is it a realistic amount? Is it consistent with the irregularities or discrepancies that originally aroused suspicion in the first place? If in doubt, consider hiring a local CPA to review the amount the embezzler claims to have stolen.

2. In many cases the embezzler will insist that he or she is not able to pay back the embezzled funds. The money has been spent. This presents church leaders with a difficult decision, since the embezzler has received unreported taxable income from the church. The embezzler should be informed that the embezzled funds must be returned within a specified time (or that he or she must sign a promissory note promising to pay back the embezzled funds within a specified period of time).

The embezzler should be informed that failure to agree will force the church to issue him or her a 1099 (or a corrected W- 2 if the embezzler is an employee) reporting the embezzled funds as taxable income. This is not a vindictive gesture on the part of the church, because failure to do so would subject the church to a potential penalty (up to $10,000) for aiding and abetting the substantial understatement of taxable income under section 6701 of the tax code. In other words, if the embezzler does not return the funds, and the church does not report it, the church could be punished.

TIP: Ordinarily, an embezzler’s biggest problem will not be with the church, or even with the local prosecutor. It will be with the IRS for failure to report taxable income. There are only two ways to avoid trouble with the IRS: 1) the embezzler pays back the embezzled funds, or 2) the church reports the embezzled funds as taxable income on a 1099 or corrected W-2.

3. Church leaders must remember that they are stewards of the church’s resources. Viewing the offender with mercy does not necessarily mean that the debt must be forgiven and a criminal act ignored. Churches are public charities that exist to serve a religious purpose, which means they are funded entirely out of charitable contributions from persons who rightfully assume their contributions will be used to further the church’s mission. These purposes are not served when a church forgives and ignores cases of embezzlement.

This article is adapted from Church Law & Tax Special Report, Foxes in God’s Storehouses: What Church Leaders Need to Know about Embezzlement. For help in responding to a real or suspected case of embezzlement at church, check out ChurchSafety.com's We've Been Embezzled, a training resource designed for churches.

Before You Hire, Pick Up the Phone

Editor's Note: The following is an excerpt from What They Didn't Teach You in Seminary, a new book by James Emery White (Baker Books, a division of Baker Publishing Group, 2011):

I saw him at a church conference. He lit up the stage. He was one of the most electric worship leaders I had ever seen. Young, handsome, talented. I went after him. I had to be a bit discreet—it felt a bit like stealing. He was, after all, serving at another church. But that just added value to his stock, particularly considering the church he was at. So the covert seduction began.

In the end, I got him. I was elated. Buckle your seat belts, church growth world—it’s time for warp speed! I had just nabbed the up-and-coming worship leader at one of the nation’s most prestigious megachurches.

In less than twenty-four months, he had been removed from ministry and placed under church discipline. He eventually left the ministry, and to the best of my knowledge, he has never served in a church since.

Not long afterward, I interacted with the senior pastor of the church from which I had procured my wunderkind. He graciously asked how my new hire had worked out, and I had to sheepishly tell him that, well, he didn’t.

I told him the whole story. After I was done, he said, “I’m not surprised. We had been having issues with him for months. Just before he left, I had entered into some pretty serious conversations with him attempting to confront the very kinds of things you have had to deal with. I was deeply concerned that he went to another church before we could work through anything.”

And then he said words that have haunted me and instructed me ever since:

“Why didn’t you just pick up the phone and call me?”

• Because I thought I was pulling off a coup on another church and getting some top-notch talent, and I didn’t want my effort botched.
• Because I had quietly bought into the idea of other churches being the competition, and this was just the blood and sweat of the contest.
• Because I was blinded by the person’s talent and never really considered exploring his character the way I should have.
• Because I wanted to bottle up that particular church’s success and add it to our own.
• Because the person in question told me things that were derogatory about the church he was leaving and its leadership and flattered me about the differences my leadership provided in contrast.

I have seen individuals at Mecklenburg Community Church who were confronted with character issues and subsequently removed from leadership simply flee to another church.

Within weeks, they are platformed or placed into leadership. I have seen staff who were within a hairsbreadth of being let go for incompetence quickly leverage Meck’s reputation and lobby themselves into a new position at another church.

Why does this happen? Sadly, because other pastors may wrestle with the same dark junk I do. And it’s a darkness akin to generational sin, being passed on to others. A single poor staff hire can devastate most churches, squandering kingdom resources and setting back progress for months if not years. And if the issue at hand is sexual, such as someone engaged in serial
affairs, then the damage in allowing them to move to another church is unthinkable. […]

Somebody needs to say it, no matter how uncomfortable, no matter how out of synch it is with the culture of church world: pastors and leaders of churches, please call the pastors and leaders of other churches.

When you want to hire one of their staff, call the pastor first. No, they don’t want to lose their key players, but most will tend to be honest about those who aren’t. And most will also welcome a true God-calling of someone away from their church, knowing that it means God has something in store for them as well. And if they work hard to have the person stay and they stay, well, maybe they were supposed to stay! Let’s just openly welcome God into the process and trust him with its outcome.

Call other pastors and leaders when new members come your way—particularly those who spew venom or criticism on their previous church situation—before you fast-track them into leadership or put them on a platform. The other pastor may very well say, “We tried very hard to work with them on some very difficult issues, but in the end, they just fled. The issues remain unresolved. You may be able to serve them and redeem them in ways we could not, but you need to know the cloud under which they left.”

Or they may simply say, to your relief, “Great folks. Hated to see them go. You’ve got some real winners there—you should feel comfortable moving forward with them in any way needed.”

I know the rules about what you can and cannot say regarding employee reference calls, such as things related to background checks and credit history. This isn’t about violating federal guidelines.

Yet the point remains: we must talk to each other.

Why? Because the church matters. Not just your church but every church. If what we are leading truly is the hope of the world, then let’s treat it that way. I think that means it’s worth at least a phone call.

Excerpted from What They Didn’t Teach You in Seminary by James Emery White (Baker Books, a division of Baker Publishing Group, 2011). Used by permission. All rights to this material are reserved. Material is not to be reproduced, scanned, copied, or distributed in any printed or electronic form without written permission from Baker Publishing Group.

Churches: Get Your I-9s in Order!

If an immigration agent came to your church, would you have the paperwork on hand to verify that all of your employees are eligible to work?

More and more employers are discovering the answer to this question the hard way. According to a July issue of The Kiplingler Letter, "The feds are cracking down on employers with paperwork audits. With just three days' notice, immigration officials swoop in to check the I-9 forms that firms must file attesting to the eligibility of new employees to work in the U.S. Both the number of audits conducted and the amount of fines collected are way up…even technical errors, such as lack of a ZIP code on an address, are prompting fines."

This disturbing news should prompt churches to examine the way they handle employment eligibility forms. Does your church have I-9 forms for all appropriate employees? Are all forms maintained for the correct amount of time? Richard Hammar gives a refresher on I-9 forms in Pastor, Church, & Law, Vol. 3: Employment Law (Christianity Today International, 2007):

The Immigration Reform and Control Act made all U.S. employers responsible to verify the employment eligibility and identity of all employees hired to work in the United States after November 6, 1986. To implement the law, employers are required to complete Employment Eligibility Verification forms (Form I-9) for all employees, including U.S. citizens. Every U.S. employer must have a Form I-9 in its files for each new employee, unless:

• The employee was hired before November 7, 1986, and has been continuously employed by the same employer.
• Form I-9 need not be completed for those individuals:
*providing domestic services in a private household that are sporadic, irregular, or intermittent;
*providing services for the employer as an independent contractor (i.e. carry on independent business, contract to do a piece of work according to their own means and methods and are subject to control only as to results for whom the employer does not set work hours or provide necessary tools to do the job, or whom the employer does not have authority to hire and fire); and
*providing services for the employer, under a contract, subcontract, or exchange entered into after November 6, 1986. (In such cases, the contractor is the employer for I-9 purposes; for example, a temporary employment agency.)

Unlike tax forms, I-9 forms are not filed with the U.S. government. The requirement is for employers to maintain I-9 records in their own files for three years after the date of hire or one year after the date the employee's employment is terminated, whichever is later. This means that I-9 forms need to be retained for all current employees, as well as terminated employees whose records remain within the retention period.

For more guidance on how immigration laws affect churches, check out Immigration Law and the Church, a Feature Report from Church Law & Tax Report.

Surge in Copper Theft Continues for Churches

A surge in U.S. copper thefts has continued throughout the summer.

“We've had copper robberies since forever, but we've seen a spike so far this summer," says a police officer in a recent Reuters article. Fueling more thefts: the rising value of copper during the summer. Since we last wrote on copper theft in late May, the price of a pound of the industrial metal has gone up around $31—from around $412 to $443.

Churches are a major target for these thefts.

“In the first six months of 2011, we have had 679 claims involving theft of copper,” says Patrick M. Moreland of Church Mutual Insurance Company. “Damage from these claims is approximately $5.6 million.” Compared to the first six months of 2010, this is a 36% increase in claims, and a 30% increase in cost of damage.

Every day at least one—typically more than one—copper theft claim is reported to Brotherhood Mutual Insurance Company. “Replacing a four- or five-ton air conditioner costs $3,500 to $5,000, far more than the value of the scrap metal inside,” says Laura Brown of Brotherhood Mutual.

Both insurance companies say outdoor air conditioning units are the most popular item targeted by copper thieves.

After three of its air conditioning units were stolen, one Kentucky church had to temporarily close due to the heat, according to a news station. The temperature in the sanctuary reached 93 degrees.

A couple at another church may not be able to hold their wedding service in the church’s sanctuary after air conditioners were destroyed by copper thieves, according to Fox News in Phoenix.

We previously recommended placing a cage or fence around air conditioning units, but Guide One Insurance is even more cautious: “Install heavy gauge steel cages to enclose your air conditioning units,” Melany Stonewall of Guide One advises. “The heavier the gauge of steel, the longer it will take to cut. Do not use standard chain-link fencing, as it can be cut quickly. These cages also should be designed to allow for proper air circulation and access for maintenance of the unit.”

This advice is timely. At the Phoenix church, its air conditioning units were stolen twice in one month. The church used chain-link fences to surround the units, but Dumpsters were used to climb over the fence and another fence was cut through.

Another prevention technique is technology, which is becoming more popular. In Fort Myers, Florida, “Officials with local alarm companies say the sales for [alarms placed inside air conditioning units] are skyrocketing,” according to a local NBC news station.

A church in Arkansas is planning to use an alarm after copper thieves targeted it throughout the past five years. Even after it “built a wall, padlocked the gate, and even topped [the air conditioning unit] with barbed wire, it was still no match for criminals,” according to a news station in Little Rock, Arkansas. “That's why they've upgraded security, putting in a pressure switch. It's a silent alarm that alerts police when a line is cut in hopes of catching the thieves red handed.”

An interesting way to guard air conditioners in some states is to paint the air conditioner, according to the news station in Arkansas: “There is a law in place [in Arkansas and other states] that prevents scrap dealers from purchasing painted copper. Police say you can paint yours as a deterrent.”

Another new tip we discovered for preventing copper theft is to be aware that some thieves pose as professional workers. You can ask a worker to show photo identification, which is always provided to workers in professional companies.