A significant portion of clergy audits include Schedule C and Form 2016. The Schedule C is a one-page tax schedule used by self-employed to report their business income and expenses on their personal federal income tax return. Form 2016 would report ministry related expenses as an employee of the church.
The good news is that according to the IRSâ€™ latest statistics, approximately 75 percent of all personal income tax returns selected for audit are conducted through â€ścorrespondenceâ€ť with the taxpayer. For self-employed business owners, these correspondence audits are usually narrow in scope and limited to providing information on specified types of income or expenses.
IRS correspondence audit could include Schedule C and Form 2106. This audit would request business and ministry vehicle mileage logs, or perhaps supporting documents used to substantiate business travel and/or entertainment expenses and other ministry related expense. The key point to realize in a correspondence audit is that the IRS typically focuses on documentation types of requests and does not inquire into technical tax law authorities, which govern the treatment of income and expense events.
The bad news is that the remaining 25 percent of IRS personal income tax audits fall into the more extensive â€śfieldâ€ť audit category. Field audits involve situations where the IRS comes to the taxpayerâ€™s home, place of business or other designated location for an extended period. The purpose of the audit will be much broader than a correspondence audit and likely require significantly more time, effort and tax expertise.
When clergy become subject to a correspondence or field audit, it is highly recommended that they contact Clergy Financial Resources. While it may not be necessary for the clergy tax professional to conduct all aspects of audit, engaging a tax professional offers numerous advantages, such as the following:
1. Gauging the scope of the audit or, if the scope is unclear, provide the initial contact with the IRS auditor to clarify and possibly influence the scope of the audit.
2. Assisting in quantifying areas of potential tax exposure and, where advisable, become proactive in disclosing errors to avoid the imposition of IRS penalties;
3. Actively asserting reasons why the business ownerâ€™s treatment of income and deductions is proper under the law.
4. Identifying areas of missed opportunities where deductions were inadvertently omitted or, in the alternative, capable of being accelerated.
5. Determining whether the IRS auditorâ€™s requests are unreasonable and worthy of being curtailed.
Further, depending on the facts, the IRS may also impose discretionary penalties, the most frequent of which is the 20 percent â€śnegligenceâ€ť penalty. Although most penalties can be waived if the mistakes are attributable to reasonable causes, consideration should be given to the incremental costs to fight a penalty waiver battle, which could be in excess of the penalty amount itself.
IRS audits are never fun. But if you maintains reasonably accurate records and treats the auditor with professionalism, the pain and disruption can be minimized.
Clergy Financial Resources
Clergy Financial Resources is a national accounting and finance organization serving churches and clergy since 1980. They have an unparalleled tax expertise on the complex issues associated with clergy tax law, clergy taxes, clergy compensation and church payroll. Clergy Financial Resources is a valuable resource for clergy, churches and denominations.