Maintaining The 501(c)(3)

The following are a few of the points we discuss in The Church Administration “How To” Manual.

What Records Do The IRS Evaluate In An Audit?
A church audit would be a programmatic oriented audit, placing emphasis on reviewing the governing documents and the minutes of the voting members and Board of Directors. In addition to the records mentioned earlier, the IRS would want to see:

  1. The 501(c)(3) exemption ruling letter (if the church has one), or the documentation regarding the churches participation in a group exemption. The “para-church” is required to apply for a “Ruling Letter” by filing an IRS Form 1023.
  2. Samples of any newsletters, publications, magazines, etc.
  3. Financial records, books, ledgers, journals, checks, invoices, etc.
  4. Copies of all Form 990 (if required to be filed).
  5. If the Organization is required to file Form 990 (churches are exempt), the worksheets to reconcile the books with Form 990, and worksheets showing the allocation of expenses.
  6. Retained copies of all employment related federal returns filed for the year under audit (Form 941, W-2, 1099, W-9, etc.).
  7. Employee withholding statements (Form W-4).
  8. Monthly bank statements for the audit period.
  9. Contracts, leases, financial notes of obligation, agreements, etc.

Note: This is only a partial list of what would be reviewed, but is given as a sample of what we write about in our Church Administration “How To” Manual.

What Would An IRS Auditor Look For In Reviewing The Church Records?
The following are only 7 of the 18 points we identify in “The Church Administration ‘How To’ Manual”

  1. Are the business activities of the church conducted in strict compliance with the terms defined in the Articles and By-laws?
  2. Have all business decisions of the voting members and the Board of Directors been recorded in the Minutes of the Board of Directors meetings? Remember, as he has access to the church Bank Accounts, Promissory Notes, loan agreements, and any leases, the auditor will check back in the minutes to see if all were properly executed.
  3. Has excess compensation been paid to those doing the work of the ministry? That is, compensation deemed to be in excess of a reasonable wage. [See the notes on “Intermediate Sanctions” below.
  4. Interest free loans or long standing “advances” to employees are not permitted. Loaning of funds is not a permissible function of an exempt organization.
  5. Related party transactions by the members of the Board would be closely scrutinized to determine if all actions were done at “arms length.” Were values determined by an independent appraiser? Is there documentation of the appraisals on file?
  6. Gifting or sale of donated items to related parties. Care must be taken so no “personal inurnment” occurs. Documentation of appraisals and reporting of all extra income would be expected.
    (Webster’s Dictionary: “Inurnment – to serve to the use or benefit; as, a gift of land inures to the heirs.)
  7. Credit card statements, invoices, and travel agency statements would be examined to determine if there were any personal benefit derived from the expenditure of church funds.

Intermediate Sanctions
In essence, it is going much deeper into the subject of “Self Dealing and doing business at “Arms Length.” The subject of Intermediate Sanctions, and that it is of great importance to the church, is a result of new laws enacted by Congress in 1996. This is a subject of great depth and complexity, and we have written about this, in simple to understand language in our “Church Administration “How To” Manual.”

I believe it is safe to say that most church leaders are unaware of the term, “Intermediate Sanctions,” and the financial penalties the IRS can impose on leaders and key personnel involved in transactions they deem inappropriate. The tax, penalties, and interest are quite severe – up to $10,000.00.

“Cleaning Up” Our Church Records:  We have often been asked to help the church to reconstruct the Organizational Meeting Minute, and other minutes, and there is an easy means to do so – legally.  If the church is facing either a Lawsuit or an IRS inquiry , the missing or incomplete Minutes can be reconstructed by writing several Resolutions  “Ratifying” past actions – so long as it is done BEFORE your records are subpoenaed.  When they are adopted by the Board Members, the Minutes are legally reconstructed, and brought “Up to date.”  Our  Samples – Addendum Manual was written to give you several samples on how to do just that.  If you need further help in this regard, please give us a call, and we will show you how easily this can be accomplished.

 

If you would like more information about similar issues, please consider The Church Administration ‘How To’ Manual.” This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated again in January, 2010, for the 11th time, since its original publication in 1991.

The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE

Copyright © 2003 by Administrative Assistance

 

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