IRS Releases Latest "Dirty Dozen" Tax Scams

Each year, the Internal Revenue Service releases the top twelve tax scams that individuals, nonprofits, churches, and businesses should watch for and avoid. The newest list, issued by the IRS this month, reveals the latest "dirty dozen":

• Identity Theft
• Phishing
• Return Preparer Fraud
• Hiding Income Offshore
• "Free Money" from the IRS and Tax Scams Involving Social Security
• False/Inflated Income and Expenses
• False Form 1099 Refund Claims
• Frivolous Arguments
• Falsely Claiming Zero Wages
• Abuse of Charitable Organizations and Deductions
• Disguised Corporate Ownership
• Misuse of Trusts

The IRS' full list includes full descriptions of each scam and warning signs to observe. For more help with taxes for churches and pastors, check out the 2012 Church & Clergy Tax Guide.

Weighing Outreach to Sex Offenders

Churches and ministries that interact with sex offenders face numerous challenges, as our national research in 2010 revealed. A recent case in Florida involving Matthew 25 Ministries, an organization devoted to working with sex offenders, underscores the complex nature of these challenges.

Four years ago, the group leased residences in a development to house recovering offenders, only to quickly learn the state doesn’t allow convicted offenders to live within 1,000 feet of a nearby public school bus stop. The organization attempted to get the bus stop relocated. Then it tried to convince neighboring families to move. Eventually, the management company overseeing leases in the development notified 25 families of possible eviction if they weren't out by a certain date.

Lawsuits followed, leading to a recent decision from a federal judge that “both the ministry and [the leasing management company] were guilty of discrimination on the basis of familial status,” our sister website ChristianityToday.com reports.

What can churches and ministries take away from this story?

First, any church or ministry that decides to develop an outreach to a high-risk group of people needs to thoroughly research local, state, and federal laws that may affect how and where they do it. The absence of this knowledge may ultimately undermine an otherwise well-intentioned effort, or unintentionally expose the ministry to significant legal and risk management liabilities.

Second, while all of the details aren’t entirely clear, this story serves as a powerful reminder of how churches and ministries must work carefully and lovingly whenever wading into potentially heated disputes with those in their local communities. In this case, it's not clear why a decision was made to pursue eviction notices, but it appears that move pushed the matter into a lengthy legal entanglement.

And third, the call to serve those who have committed offenses that society deems unforgivable likely will not find flexibility, much less sympathy, from their local communities. As ChristianityToday.com later notes:

Prison Fellowship vice president Pat Nolan said the situation is far broader than Matthew 25 or sex offenders, illustrating the difficulties any ministry that works with an unpopular constituency faces. "It's a 'not-in-my-backyard' problem."

What adds another twist to the complexities of this issue is that similar mentalities exist inside local churches as well. Of the nearly 3,000 respondents in our 2010 research, 45 percent said they believed the presence of sex offenders in a church would present “a big problem” to address. While 38 percent said they believed sex offenders could be rehabilitated, a nearly equal number (37 percent) said they weren’t sure, and the remaining 25 percent said no. And with respect to sexual problems, a quarter of churches provided no ministry or counseling, while 49 percent only refer people to outside programs and counselors.

And yet, in the same survey, 80 percent also said sex offenders should be allowed to attend church with appropriate supervision and limitations in place.

In other words, many church leaders understand the need for God’s redeeming love and grace in the lives of those who have committed offenses that society prefers to outcast and ignore. But many aren't certain offenders can be fully healed, and what the outreach looks like, how it’s done, and by who, remains ambiguous, and possibly contentious, for many.

The hardest part? If churches or groups like Matthew 25 Ministries don't do it, who will?

For churches looking to evaluate the integration of sex offenders in their congregations, check out Sex Offenders in the Church and Juvenile Offenders in the Church, two downloadable training resources that include sample policies and agreements.

Congress Extends Payroll Tax Holiday Through 2012

Congress on Friday voted to extend the payroll tax holiday through December 31, 2012, adding an extra $20 per week on average to paychecks for 160 million workers.

President Obama previously pledged to sign any extension into law once it was passed.

The payroll tax cut involves a 2-percent reduction in employee withholdings for Social Security. The holiday was originally passed toward the end of 2010 for the 2011 year; just before it expired on December 31, 2011, a temporary extension through February 29, 2012, was passed.

With the extension now approved for the remainder of 2012, employers, including churches, need to make certain they're meeting withholding requirements. Employees who are eligible for Social Security should have 4.2 percent withheld, as well as 1.45 percent for Medicare, for a combined 5.65 percent on each paycheck. Ministers are self-employed for Social Security with respect to their ministerial services, so their combined withholding rate for Social Security and Medicare is 13.3 percent.

The national deficit will grow by another $126 billion over five years as a result of the extension. Supporters of the extension said employees will not see lowered Social Security benefits in the future as a result of the reductions, although in recent weeks, debate about that has grown.

17 Ways the Church May Become Accountable to the State

Should the IRS form an advisory committee to oversee church tax law? Is the clergy housing exclusion constitutional? To what extent should churches be accountable to the government for the way in which they operate? These are three of the seventeen issues the year-old Commission on Accountability and Policy for Religious Organizations are wrestling with.

The commission, formed last year by the Evangelical Council for Financial Accountability, is chaired by Michael Batts, the managing shareholder of Batts Morrison Wales & Lee, an Orlando-based accounting firm serving nonprofits. Batts, along with ECFA President Dan Busby, also a member of the commission, outlined the issues and touched on key points during a virtual Town Hall meeting on February 17, 2012. They covered questions such as whether legislation is needed to curb perceived abuses of the clergy housing allowance exclusion, and if rules for determining the reasonableness of nonprofit executive compensation should be tightened.

The issue of compensation is what triggered the original investigation by Senator Charles Grassley (R-Iowa) of the Senate Committee of Finance, and led to the formation of the Commission on Accountability. “The Grassley Six” as they were called, referred to six high-profile ministers whose lavish lifestyles raised red flags about the reasonableness of their compensation and the questionable use of their nonprofit status.

According to Batts, “It’s not necessarily the amount or nature of compensation, but the process used to establish compensation and to ensure it is reasonable”—this is what the commission’s interest is. “Process and amount are related,” he said. “If the process in determining the amount of compensation isn’t based on comparable data, then the amount could indeed be unreasonable.”

The commission is evaluating what that process should look like—what information should be used to establish reasonable compensation, and how a church or nonprofit should document their decisions. Churches have long relied on resources like the biannual Compensation Handbook for Church Staff, which provide a national sampling of independently gathered data, to determine reasonable compensation packages for clergy and church employees.

Issue No. 17—the question of whether churches should have more freedom to engage in political expression—will be the last, and according to Batts, the most controversial one to be resolved. The commission won’t release its report on this final issue until 2013, well after the nation has determined its new political leaders. A report covering the first 16 issues will release later this year.

A majority of the issues the commission is addressing relate to both churches and the broader nonprofit sector. Issue No. 9, for instance, looks at questions being considered on Form 990, which would require organizations to disclose the specific location and activities they’re engaged in. For humanitarian and religious organizations that send individuals to high-risk, politically sensitive areas, disclosing their locations could endanger lives and undermine the organization’s objectives. Similarly, in the U.S., social agencies, such as domestic violence shelters, would also be at risk of putting clients in harm’s way if they were required to reveal the locations of their facilities.

“The IRS asked for additional input in this area,” said Batts. “As of now organizations are not required to include this information about location." The commission is reviewing the extent that these types of questions pose a "life safety" issue for nonprofits and religious organizations.

Panelists representing religious groups from a variety of faiths, the broader nonprofit sector, and the legal community were named last September to three advisory groups that also are providing input on the issues. The commission encourages church leaders, members, and other concerned citizens to submit their input on these issues by March 31, 2012.

Editor’s Note: Dan Busby, Michael Batts, and Richard Hammar serve as editorial advisors for the Church Management Team’s Church Law & Tax Report, Church Finance Today, and related resources, all published by Christianity Today—a global media ministry. All three serve on the Commission on Accountability and Policy for Religious Organization.

Commission on Financial Practices Seeks Input from Churches

A little more than a year ago, Sen. Chuck Grassley (R-Iowa) asked the Evangelical Council for Financial Accountability to oversee an independent commission tasked with evaluating several financial and tax matters related to churches and nonprofit ministries. The goal: Determine whether more oversight—possibly administered through new legislation and regulation—is needed to curb any abuses and to foster clearer communication and relations between the Internal Revenue Service and religious organizations.

The formation of the Commission on Accountability and Policy for Religious Organizations came just as Sen. Grassley's office completed a three-year inquiry into the financial practices of six media ministries.

One year later, the commission is taking input from churches and ministries as it works to develop recommendations for Grassley. One method is through an online form available through March 31; the other was through a live, 90-minute town hall meeting broadcast online last week. Church leaders are invited to participate.

Among the areas the commission seeks input:

• The formation of an IRS advisory committee;
• Housing allowances for ordained ministers;
• IRS notification of a new church;
• Church examinations and oversight;
• Audit protection for church leaders;
• Love offerings;
• Debt-financed income;
• Charitable contribution deductions;
• Voluntary standards compliance (similar to an organization like ECFA);
• Prohibiting excess benefit transactions in exchange for exempt status;
• Penalties for excess benefit transactions;
• The "rebuttable presumption" protection;
• Compensation studies;
• Political speech and religion.

Editor's Note: ECFA President Dan Busby and Commission Chair Michael Batts are Editorial Advisors for Christianity Today's Church Management Team. Richard R. Hammar, senior editor of Church Law & Tax Report, Church Finance Today, and ChurchLawAndTax.com, all published by Christianity Today, is a member of the commission.

Extension of Payroll Tax Holiday Appears Likely

Congress appeared close late Tuesday to passing an extension of the payroll tax holiday through December 31, 2012, for millions of workers. A bill may be finalized Wednesday and put before President Obama for signature by the end of the week, the Associated Press reported.

The payroll tax cut involves a 2-percent reduction in employee withholdings for Social Security. The holiday was originally passed toward the end of 2010 for the 2011 year; just before it expired, a temporary extension through February 29, 2012, was passed.

Employers, including churches, need to make certain they're meeting the requirements of the temporary extension, withholding 4.2 percent for employees who are eligible for Social Security and 1.45 percent for Medicare, for a combined 5.65 percent on each paycheck. Ministers are self-employed for Social Security with respect to their ministerial services, so their combined withholding rate for Social Security and Medicare is 13.3 percent.

With an extension, these rates will continue through December 31, 2012, putting $20 into an average worker's paycheck each week, the Associated Press reported. The national deficit will grow by another $100 billion, but lawmakers have previously said employees will not see lowered Social Security benefits in the future as a result of the reductions.

Check ManagingYourChurch.com and Church Finance Today for additional updates.

How Did Giving Go in 2011 at Your Church?

My church's annual meeting took place a couple of Sundays ago. We're a modest bunch—about 125 in weekly attendance and a general budget of about $375,000.

God has done some remarkable things in our midst during the past year, despite our size (or perhaps because of it?). He has used a strong staff and lay leadership to cast a vision that integrates our church's presence into the surrounding community and provides an open, inviting environment, especially for young families.

And the people who attend have faithfully respond. Giving in 2011 for the general fund exceeded budget by 24 percent. Meanwhile, a capital campaign, launched in late 2010 to fund a building expansion in response to the growing number of young families in our midst, raised 94 percent of our church's $250,000 goal—well ahead of schedule.

And yet our church, which uses a congregational structure for making its decisions, acted in what I consider a prudent manner, passing a 2012 general budget at the annual business meeting that measures 2 percent less than in 2011.

How did giving go at your church in 2011? What are the prospects for 2012? Our annual State of the Plate survey is underway, and I hope you'll share what your church experienced. I pray you saw God move in small and big ways, and I pray you'll share how your church has responded to challenges inside and outside the building.

By taking 15 minutes today, you'll receive--for free--more than $125 in resources offered by our team, as well as Maximum Generosity and the Evangelical Council for Financial Accountability, the survey's other sponsors.

The past two years, we've received thousands of responses. The results become informative and educational for church leaders as they seek to understand giving trends at other churches, as well as the ways churches have responded to ups and downs. Get started now.

Appeals Court: No Housing Allowances for Two Homes

A federal appeals court ruled Wednesday that the ministerial housing exclusion in the Internal Revenue Code is indeed limited to a single home.

The ruling overturns a split Tax Court decision (Driscoll v. Commissioner, 135 T.C. No. 27 (2010)) in which the lower court had ruled that the minister could exclude allowances paid to him for both his primary home and a lake home.

The lower court had based its ruling on its determination that the phrase "a home" can mean more than one home. Not so, said the 11th Circuit Court of Appeals on Wednesday. In an opinion that reads more like a grammar lesson than a court ruling, the appeals court ruled that "a" is, in fact, singular.

The appeals court decision restores the state of the law to what it was widely understood to be before the Driscoll case—one home.

It is possible that Driscoll could further appeal the matter, although we consider it unlikely. We will continue to closely monitor the case for that possibility.

A new update on this development is available atChurchLawAndTax.com. Watch for future updates in Church Law & Tax Report.

This update first appeared in The Nonprofit Watchman, a service of Batts, Morrison, Wales & Lee, P.A. Reprinted with permission.

Trademarking the Church

Editor’s note: Two stories that garnered recent, widespread media attention have put the spotlight on churches and trademarks. Mars Hill Church in Seattle recently sent a cease-and-desist letter to another church over the use of a name and logo similar to its own; in Chicago, a church’s trademark for a ministry has been challenged by Adidas, the athletic apparel company. We asked attorney Brock Shinen, who represents Copyright Solver and other faith-based organizations across the country, to address how churches should handle such situations.

Churches should feel confident that it’s right and beneficial to register for trademark protection for their names and logos. A primary objective of trademark law is to eliminate confusion as to the source of goods or services.

A church applying for trademark protection won’t necessarily take away another church’s right to have its name and logo: If a church’s name and logo are unique, trademark protection will be granted. If the name and logo are generic or descriptive, it won’t.

When a church considers registering a name, it should come up with a unique name that truly distinguishes the church from all other churches. The problem is that most churches want to choose from the same few names. Either they want to use generic or descriptive terms (such as Anaheim Hills Community Church), and/or they want names already in use by thousands of other churches.

For Mars Hill Church in Seattle, its “brand” is not common, and it’s not immediately intuitive as a reference to Christianity (unless you know the reference, which most people probably do not), so it works as a unique name. It made the news recently when another church in Sacramento, California, used a similar name and logo beginning in 2007. In that case, under trademark law, the first church to use the name (Mars Hill Church in Seattle, beginning in 1996), is entitled to priority rights. (Editor’s Note: Mars Hill Church in Seattle later indicated its regret for sending a cease-and-desist letter first before contacting the Sacramento church; the Sacramento church kept its name, but changed its logo, satisfying both sides’ wishes and bringing the matter to a close).

Churches should protect their trademarks, which often includes asking others to stop using conflicting marks. Otherwise, we’re asking churches like Mars Hill Church in Seattle to disregard the legal rights they possess (and that disregard, incidentally, causes them to lose their rights).

If a church is on the receiving end of a cease-and-desist letter, it should ask this question: “Does the church that sent the letter have an exclusive legal right to the name?” If the answer is “yes,” then why be offended? Comply. Romans 13 obligates us to submit to government laws like this.

But, there are many circumstances when churches claim rights they do not truly possess, so if a church is adequately informed, that church may righteously dispute a cease-and-desist demand. There is nothing wrong with the recipient of the cease-and-desist letter exercising its legal rights as well.

The Mars Hill Church case shows how trademark issues develop within the ministry community, but major secular organizations are taking an interest in church-trademark behavior as well. A situation pending in Chicago between a church and Adidas, a major athletic apparel company, demonstrates the need for churches to protect their trademarks. In that case, Adidas hopes to take possession of a trademark registered four years earlier by the church. It’s a David-versus-Goliath scenario, because Adidas has the financial resources to strain the church into submission, but the church has the presumption of ownership (based on its existing registration).

If a church is serious about its investment in trademark protection, it should go the length to keep that protection intact. When facing an opponent like Adidas, the outcome is uncertain because of the resource disparity. However, possessing a registered trademark helps level the playing field.

Churches should actively seek protection of trademarks they seriously consider valuable to them. They also need to weigh the benefit of having protection against the cost of securing and maintaining it. Well-resourced secular companies will use their finances to leverage churches into submission, so if a church isn’t prepared for the long-term investment of maintaining a trademark, it should consider whether the cost makes sense at the outset. Alternatively, when a church invests its resources in a “brand,” it has every reason to protect that brand.

For more details of church copyright registration and ownership, check out the Essential Guide to Copyright Law for Churches by Richard R. Hammar.

The Top 7 Paid Positions at Churches

Which positions in the church pay best for men and women?

Results from Christianity Today's biannual survey of 4,600 churches nationwide, which are featured in the new 2012-2013 Compensation Handbook for Church Staff, reveal the top 7 paid positions based on gender.

Male or female, it pays to be the senior pastor. However, male senior pastors typically are compensated more than their female counterparts. Some of this may be explained on the basis of church income, which proved to be the biggest factor affecting compensation and benefits in the study. For example, in churches with male senior pastors, church income (i.e. revenue) averages about $710,000, while church income where women serve as senior pastors hovers at about $487,000. This gap in revenue could explain, in part, why women senior pastors tend to be paid less.

Male executive pastors earn nearly 50 percent more than women in this same role. Additionally, even though women make up 69 percent of full-time children's pastors, men serving in this role full-time earn nearly $12,000 more on average than women.

The gender pay gap closes for solo pastors. Although 92 percent of solo pastors are men (paid an average of $57,452), they earn only slightly more than women solo pastors (paid an average of $54,102).

Across all paid church positions, men are compensated 28 percent more than women holding the same positions. Although factors such as church income may explain some of this disparity in pay, churches need to be mindful of compensating employees fairly and without gender bias.

The 2012-2013 Compensation Handbook for Church Staff provides valuable, detailed data on 13 church staff positions (including compensation levels based on personnel characteristics like years employed, denomination, region, gender, and education).