A few weeks ago I mentioned that I’m being audited by the IRS. The case is ‘almost closed’ although there are still some minor paperwork issues to be handled. Hopefully everything will be settled by August. As it turns out, everything was ‘proper and in order’ with my 2006 return but I did learn some important lessons.

First, I was selected for the audit by an IRS computer because my charitable giving was too high. Before you think I’m boasting, let me explain. If you are a minister, you claim a large portion of your salary as housing allowance, which means the part of your income that is deemed ‘salary’ is pretty low.

For example, if you make $40,000 per year and you claim $25,000 per year as Housing Allowance, your effective Salary is only $15,000 per year. But if you tithe (or more) off the full $40,000 and give, let’s say, $5,000 to your church then the IRS ‘sees it’ as if you are giving away $5,000 of your $15,000 salary – which, as you can imagine, raises some flags. (Full disclosure, you pay some taxes on the housing allowace but if it’s done right, you generally don’t pay state or federal tax on the part of your salary you deem as housing. Full disclosure 2: I’m a big fan of paying taxes. I love the benefits of living in America and the roads/schools/etc. that my taxes pay for. I just don’t believe in paying more than you should).

My situation aside, its an interesting commentary on American generosity when the IRS computers raise flags when someone gives away more than 10% of their income! I guess since the average American gives less than 3% of their income to charity it’s justified. Sad.

Second, I learned that the IRS can ask you for copies of your charitable giving statements (the forms that churches send out at the end of the year) and the canceled checks to back it up. I had the giving statement in my files…it was the canceled checks that gave me the problem. Fortunately, my bank and our church keeps scanned copies of the checks but it took some digging.

Third, I was audited for stuff on my 2006 return that I didn’t even claim. For example, I was audited for medical expenses. I had claimed zero medical expenses in 2006. The IRS computer chose to audit me on medical expenses because its a common issue where people cheat. Just thought you’d like to know.

Finally, I had a great sense of dread when the IRS audit documents arrived at my house but I had no sense of fear. Honestly, as soon as I read the paperwork I knew it was going to be a major pain and I dreaded having to produce all the canceled checks and documents in questions but I knew that I had nothing to fear. And this ‘lack of fear’ has nothing to do with my confidence in my own financial prowess. In fact, I’d give myself a grade of C+ when it comes to financial management. So why wasn’t I afraid of the IRS audit?

I was completely in unafraid of the audit because I knew I had done absolutely nothing wrong! I knew that no matter how much the IRS would poke around in or question my return that everything was proper and in order. And again, this is not to brag on my financial acumen but rather I knew I had done nothing wrong because since my days at Saddleback Church in the late 90s, I have willingly submitted my financial management to an outside firm – the #1 clergy financial management firm in America (you can read about Clergy Advantage by clicking here).

Because I had allowed a trusted adviser to manage my salary, housing allowance, retirement and tax documents I knew that I was in the clear no matter how many questions the IRS asked. In fact, as soon as I received the IRS audit papers, I called Clergy Advantage, faxed over the documents and entrusted them with the full process (I still had to find canceled checks and other paper work but they did the heavy lifting).

Why do I tell you all of this….well, one day you might be audited (apparently, ministers are audited at a higher rate than the general public because of the housing/salary issues I mentioned above). So, if you don’t have your financial house in order, an audit can be a major distraction. I want to spend as much time as possible focused on ministry! Also, a lot of pastors I know live in fear when it comes to their taxes. Clergy taxes are confusing and if you are trying to use ordinary tax software to handle the ‘extraordinary needs’ that arise from being a minister you may be in trouble.

And the final big lesson I want to share…get people around you who are good at the areas where you are weak! I’m weak when it comes to personal financial issues so I’ve made a point to bring folks like Clergy Advantage around me. I’m weak when it comes to a whole bunch of other issues too so I’ve tried to find trusted advisers that I can call on. Don’t be afraid to pay for good advice. In the case of Clergy Support, the advice is very inexpensive (maybe your church will even provide it for you) and they are great. But the old saying is true…beware of cheap advice, you may get what you pay for!

I hope these lessons are beneficial to you!

Nelson

P.S. If you do call Clergy Advantage, please tell them I recommended you. I need all the good will with them I can get!

© Nelson Searcy. All Rights Reserved.

About Nelson Searcy

Nelson Searcy is an experienced church growth strategist, pastor, church planter and coach, consulting with churches around the world. As founder of Church Leader Insights and the Renegade Pastors Network, he has personally trained more than 3,500 church leaders in over 45 denominations through live events, seminars and monthly coaching. Nelson is also the Founding and Lead Pastor of The Journey Church, with locations across New York City and in Boca Raton, FL. Nelson and his church routinely appear on lists such as “The 50 Most Influential Churches” and “The 25 Most Innovative Leaders.” He is the author of over 100 church growth resources and 18+ books, including The Renegade Pastor: Abandoning Average in Your Life, Ministry and The Difference Maker: Using Your Everyday Life for Eternal Impact, and At the Cross with the People Who Were There. He and his wife, Kelley, have one son, Alexander.