Q: For the past several years, our church board has not entered our pastor’s housing allowance in the minutes of its meetings. Members of the board recall discussing housing allowances each year, and many can recall the amounts of the allowances for recent years. Our pastor is wondering if he has improperly been claiming a housing allowance for the years when nothing was reflected in the board minutes.
What Does the IRS Require for Documenting a Housing Allowance?
The income tax regulations specify that the designation of a housing allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.”
Although it is best practice for the church’s designation to be in writing, the Tax Court has ruled that an oral designation is sufficient. For instance, in Libman v. Commissioner, 44 T.C.M. 370 (1982), the court found no requirement for the designation to be written. Furthermore, if a church board orally agrees to a specific allowance and neglects to document it in writing, the Tax Court has permitted drafting a written record of the action later, dated to the earlier meeting when the unrecorded action occurred (Kizer v. Commissioner, T.C. Memo. 1992-584).
Key Takeaways from Kizer v. Commissioner:
- The court acknowledged that there was discussion about the allowance, and the board members had a clear recollection of the agreement.
- The recording secretary confirmed the discussion and the intended amount.
- The court emphasized that proof of official action, even if oral, could satisfy the designation requirement.
Can Housing Allowances Be Designated Retroactively?
Under no circumstances can a housing allowance be designated retroactively. If a church board never discussed its pastor’s housing allowance for a particular year, the minutes cannot be amended to insert a reference to an allowance that was not officially adopted in advance.
To illustrate, the IRS issued a private letter ruling that disqualified a pastor’s housing allowance due to the lack of evidence that his employing church had designated an allowance for the year in question. Although the church had designated a $10,000 allowance for the previous year, the pastor claimed an additional $10,000 allowance for the following year based on his “understanding” that the previous year’s allowance applied to future years. The IRS disagreed, emphasizing that there was no official action taken in advance to designate the allowance (IRS Private Letter Ruling 8511075).
Best Practices for Documenting a Housing Allowance
To avoid challenges during IRS audits, churches should follow these best practices:
- Designate housing allowances in advance of each calendar year.
- Record the designation in writing, such as in the board minutes or a resolution.
- Avoid relying on oral agreements or assumptions of continuity from previous years.
Failing to document housing allowances properly can create significant proof issues and may result in disqualification of the allowance. Churches should take proactive steps to ensure compliance with IRS guidelines.
FAQ: Documenting a Housing Allowance
1. Does the IRS require housing allowances to be in writing?
While a written designation is recommended, the Tax Court has ruled that oral designations are sufficient if there is satisfactory proof of official action.
2. Can a housing allowance be designated retroactively?
No, housing allowances must be designated in advance of the year for which they apply. Retroactive designations are not allowed under IRS rules.
3. What happens if a church fails to document a housing allowance?
If a church fails to document a housing allowance, the allowance may be disqualified, and the pastor may be required to pay additional taxes.
4. How should a church properly document a housing allowance?
A church should designate the housing allowance in advance through official action, such as board minutes, a resolution, or an employment contract.
For further guidance on housing allowance documentation, refer to IRS.gov or consult with a tax professional experienced in church matters.
