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."

Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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