Avoiding an Audit
By Richard R. Hammar
January 1, 1995
How likely are you to be audited?
Ministers who report their income taxes as employees, earn less than $100,000 per year, do not have excessive itemized deductions, and do not claim any "audit triggers," have an audit risk of about 1 percent. This is close to the overall audit risk for all taxpayers. There are about 500,000 ministers in the United States, meaning that 5,000 of them could be audited each year.
Of course, some regions have higher audit risks. The audit rate is highest in the IRS Western region (Alaska, California, Hawaii, Idaho, Nevada, Oregon, and Washington).
Since moving is not much of an option, here are eight tips for all ministers to reduce your risk of being audited--or lower your penalties if you are.
1. Report income taxes as an employee.
The Tax Court recently ruled that a United Methodist minister in North Carolina could not report his church compensation as a self-employed professional for federal income tax purposes. The Court concluded that the minister was an employee for income tax purposes.
The evidence is mounting--taxpayers who report their income taxes as self-employed workers face a far higher audit risk than do those who file as church employees. According to the most recent IRS data, the chances of a self-employed taxpayer being audited are as much as 400 percent greater than for an employee with the same income. The lesson is clear--if you report your income taxes as a self-employed person, you are asking for IRS scrutiny.
Why are self-employed taxpayers a target? Government statistics demonstrate that the "voluntary tax compliance rate" of self-employed persons is a dismal 13 percent compared with a 99 percent rate for employees covered by mandatory tax withholding.
2. Pay self-employment ...
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