The Ten Most Litigated Tax Issues

What church leaders should know.

Richard R. Hammar, Attorney, CPA
Bio
Church Finance Today

The Ten Most Litigated Tax Issues

What church leaders should know.

Richard Hammar

Each year, the National Taxpayer Advocate is required to identify the ten tax issues most often litigated in the federal courts. The following chart shows some the top ten issues for 2007, and their application to church employees. Most litigated issuesExplanationApplication to churches and church staff
Definition of taxable income.The tax code’s definition of taxable income is broad, and includes several items that are often overlooked. IRC 61.
  • Is an honorarium taxable?
  • Is a “love gift” taxable?
  • Is the personal use of a church vehicle taxable?
  • Is the forgiveness of a church loan taxable?
Frivolous issues penalty.The IRS can assess a penalty of up to $25,000 against a taxpayer who takes a frivolous position on a tax return. IRC 6673.
  • A church employee asserts a “tax protestor” defense to paying taxes (i.e., the income tax is unconstitutional, or ministers are not required to pay taxes).
Failure to file penalty.Taxpayers who fail to file their tax return by the due date are subject to a penalty. IRC 6651.
  • A minister erroneously believes that he is not required to pay income taxes, so he does not file a tax return.
Business expenses.Ordinary and necessary business expenses incurred in performing one’s job are tax-deductible (or, they can be reimbursed by an employer). IRC 162.
  • A church fails to report nonaccountable reimbursements of a pastor’s business expenses as taxable income.
  • A pastor claims a deduction for several business expenses on his tax return that he is unable to substantiate.
Accuracy related penaltyThese include negligence, substantial understatement of taxes, and substantial misstatement of the value of property. IRC 6662 and 6664.
  • A pastor deducts her housing allowance in computing her self-employment tax liability.
  • A pastor has not paid self-employment taxes for several years based on a mistaken belief that he filed a timely exemption application.
Relief from joint and several liability for spousesGenerally, both spouses are each responsible for paying the full amount of any tax and penalties due on their joint return. However, if one spouse qualifies for innocent spouse relief, he or she may be relieved of all or part of the joint liability. IRC 6015.
  • A church employee and her husband were divorced last year. The IRS is asserting the couple’s last joint tax return failed to disclose substantial amounts of income. The IRS is attempting to collect back taxes and penalties from the church employee.

This article first appeared in Church Finance Today, June 2008.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold 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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