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One ministerial newsletter, for example, warns members that in order to avoid excessive benefit excise taxes and penalties each church "will have to come within the 'safe harbor' spelled out in the new law." It goes on to advise that the law requires pastors to have their total compensation approved by an independent board or compensation committee, obtain the services of an outside consultant, and fully document the basis on which salary amounts are determined.
While it may seem that I am merely an insignificant voice crying in the wilderness, I must set the record straight on what is becoming hysteria over ministerial compensation by presenting the following facts. All are provable and documented:
FACT: The Taxpayer Bill of Rights 2 does not contain any provisions for the setting of salaries. Period. It does contain a measure allowing the IRS to impose excise taxes to punish nonprofit organization board members and executives from engaging in "excessive benefit transactions," in which an individual receives benefits far in excess of the value of services they actually provide to the organization. This includes excessive salary, low- or no-interest loans, bargain sales of assets, etc.
FACT: The Taxpayer Bill of Rights 2 does not address ministers, churches, or evangelists specifically. It is directed to nonprofit organizations in general and includes churches. But the major intent was to police the actions of large nonprofit organizations. This legislation is a direct result of now retired Rep. J.J. Pickle's 1993 Congressional hearings on nonprofit abuses in the aftermath of the United Way private inurement scandal.
FACT: The IRS has not yet written regulations to govern the Taxpayer Bill of Rights 2, and probably won't have them ready until the end of the year. The IRS has issued notices in the Internal Revenue Bulletin (96-39) announcing the law change and the rulemaking process. I spoke personally with Ms. Phyllis Haney, who is the primary author of the regulations. She told me there is no official IRS guidance as of this date regarding the setting of salaries.
The misinformation being presented to denominational and ministerial groups comes from a House Ways and Means Committee Report which accompanies the Taxpayer Bill of Rights 2. It reports committee findings and directs the IRS to establish a "rebuttable presumption of reasonableness" which provides for three principles: (1) the organization should have salaries set by an independent board or, if the board is not independent, an independent committee; (2) the board should base its findings on the report of an independent consultant or offer from another organization competing for the services of the employee, and (3) a detailed documentation of the procedure and reasoning used at arriving at the rate of compensation paid. This was a committee report, or advice to the IRS. IT IS NOT INCLUDED IN THE LAW!
IRS attorney Phyllis Haney told me that the IRS is considering other safe harbors and will include some measure to protect churches from an onerous burden. She told me it is not the IRS' intention to burden churches, and that she is aware that most churches cannot meet the rebuttable presumption of reasonableness.
In addition, IRS Exempt Organizations Division Director Marcus Owens has directed any key district office considering imposing intermediate sanctions to coordinate those actions through his office while regulations are being written.
To nervous nonprofit managers Owens said, "You don't have to take extraordinary steps" to comply with the new law, just use "good business judgement." He stressed that the keys to applying good judgement are going to be in the form of documentation. He recommends having employment agreements in writing and making sure all tax reporting documents are filed on a timely basis.
"The advice from the Service," Owens said, "is to simply not rush into enormous effort here to try to comply with rules that have not yet been written ... simple business judgement and good documentation of that business judgement will take you as far as you need to go." In the meantime, Owens said, IRS enforcement efforts will be directed toward the obvious offenders.
MY PREDICTION: The IRS will develop a safe harbor for churches or in some way exempt them from the salary setting requirements.
MY ADVICE: Seriously question the motive and intent of any practitioner using fear and misinformation as a means of getting your business for products and services you don't need. There is no place for manipulation in the Kingdom of God!
David R. Allison, D.Min.
Church Government and Administration Consulting
Post Office Box 1071
Tuscaloosa, Alabama 35403
Telephone: 205/333-8672 Facsimile: 205/339-1581
Have a problem? E-mail me.
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