When a Church Embezzler Confesses
Embezzlement is a relatively common occurrence in churches.

Editor's Note: Forbes recently published the article "Fraud Thriving In U.S. Churches, But You Wouldn't Know It," showing that many churches don't report fraud when it happens to them. Here's what to do if a person confesses to embezzling church funds.

Often, [when confronted], the embezzler will confess in order to prevent the church from turning the case over to the IRS, the police, or to a CPA firm. Embezzlers believe they will receive better treatment from their own churches than from the government. And, in many cases, they are correct. Indeed, it is often astonishing how quickly church members will rally in support of the embezzler once he or she has confessed–no matter how much money was stolen from the church. This is especially true when the embezzler used the funds for a "noble" purpose, such as medical bills for a sick child.

In these situations, many church members demand that the embezzler be forgiven. They are shocked and repulsed by the suggestion that the embezzler–their friend and fellow church member–be turned over to the IRS or the police! But is it that simple? Should church leaders join in the outpouring of sympathy? Should the matter be dropped once the embezzler confesses?

These are questions that each church will have to answer for itself, depending on the circumstances of each case. However, before forgiving the embezzler and dropping the matter, church leaders should consider the following three points:

  1. A serious crime has been committed, and the embezzler has breached a sacred trust. At a minimum, the church should insist that the embezzler:
    • Disclose how much money was actually taken.
    • Make full restitution by paying back all embezzled funds within a specified period of time.
    • Immediately and permanently be removed from any position within the church involving access to church funds.

    TIP: Closely scrutinize the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. Is it a realistic amount? Is it consistent with the irregularities or discrepancies that originally aroused suspicion in the first place? If in doubt, consider hiring a local CPA to review the amount the embezzler claims to have stolen.

  2. In many cases the embezzler will insist that he or she is not able to pay back the embezzled funds. The money has been spent. This presents church leaders with a difficult decision, since the embezzler has received unreported taxable income from the church. The embezzler should be informed that the embezzled funds must be returned within a specified time (or that he or she must sign a promissory note promising to pay back the embezzled funds within a specified period of time).

    The embezzler should be informed that failure to agree will force the church to issue him or her a 1099 (or a corrected W-2 if the embezzler is an employee) reporting the embezzled funds as taxable income. This is not a vindictive gesture on the part of the church, because failure to do so would subject the church to a potential penalty (up to $10,000) for aiding and abetting the substantial understatement of taxable income under section 6701 of the tax code. In other words, if the embezzler does not return the funds, and the church does not report it, the church could be punished.

    TIP: Ordinarily, an embezzler's biggest problem will not be with the church, or even with the local prosecutor. It will be with the IRS for failure to report taxable income.

    There are only two ways to avoid trouble with the IRS: (1) the embezzler pays back the embezzled funds, or (2) the church reports the embezzled funds as taxable income on a 1099 or corrected W-2.

  3. Church leaders must remember that they are stewards of the church's resources. Viewing the offender with mercy does not necessarily mean that the debt must be forgiven and a criminal act ignored. Churches are public charities that exist to serve religious purposes, which means they are funded entirely out of charitable contributions from persons who rightfully assume their contributions will be used to further the church's mission. These purposes are not served when a church forgives and ignores cases of embezzlement.

    TIP: The federal Employee Polygraph Protection Act prohibits most employers from requiring (or even suggesting) that an employee submit to a polygraph exam. Employers also are prevented from dismissing or disciplining an employee for refusing to take a polygraph exam. However, there is an exception that may apply in cases where an employee is suspected of a specific act of theft or other economic loss, and the employer has reported the matter to the police. Even so, the employer must still follow very strict requirements to avoid liability.

    Therefore, a church should never suggest or require that an employee submit to a polygraph exam–even in cases of suspected embezzlement–without first contacting a local attorney for legal advice.

Adapted from "Handle Financial Theft at Church," an exclusive web-only article on ChurchLawAndTax.com. Read the entire article on ChurchLawAndTax.com–members have full access to this article.

To learn more about protecting your church's finances, check out the eBookEssential Guide to Internal Controls for Churches.

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This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

Comments

Displaying 1–2 of 2 comments

Cassie Wilkerson

January 28, 2014  2:08pm

There are two laws any church must follow. The first law's per faith then second the civil society that enables society liberties their faith. First Law is forgiveness and repent of the act: to repent is more then prayer but also may include recover action against injured party: Fee: (repayment duration, time and proposed action if failure. Activity: Physical time and duration service that has measure need to church activities without access further crime, and Punishment: This is serving authority outside church it can be served with mercy or severity). Per these arrangements a covenant must be signed and witnessed agreement terms (absolution sought, condition for absolution, commitment of absolution or etc.) - "covenant" is like the documentation of the crime, offer solutions and punishment ordered this too is done in second law as criminal records - a report to civil society an order for condition of reform it is a transparency of absolution all parties. Second is the physical law of society. Again read the action without (police, court or jail) this is IRS correction but penalties are paid upon both parties for absolution these are corrective fees. Other option is the service of crime required reported (is the theft due threat, engage other illegal activity or supports harm) these condition vary placing charges is it the best interest and removes a more negative situation. Punishment the crime (testimony, legal council &plea of mercy) per ever crime is the severity of punishment those pursuing this can request lesser time, fee or community service but if the act misaligned and critical damages are done then it is per their council provided self or by law allowing trust in civil society. The law is that (faith, religion and the church) serve civil society well to educate, demonstrate and issue God's will (know thy law, obedience thy law, reform to thy law & service thy law) and it is trust that must confer back to civil society allowing society the physical law serve under alignment of God's will. Remember the U.S. government foundation of law governance was formed per our founding fathers over half held formal seminary degrees and understood their purpose serve society the laws of God's obedience enables his will that society may issue the civility of God's will. ""I hope this helps per chairman's of deacons from legal limbo?"" Best suggestion is forming a church order of policy how these events as a future prevention order of operations such as bylaws.

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Jane Doe

January 16, 2014  4:04pm

If the embezzler has been reported to the Chairman of Deacons or other elder body, does this cover all the legal obligations of the person who discovered the embezzlement? If the elder to whom it was reported chose to close the "holes" that were allowing the theft, but not to report the theft to the church as a whole, are the discoverer and elder in any kind of legal limbo?

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