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A pastor is paid a $400 "car allowance" each month. The church treasurer assumed that the pastor spends at least this much for the business use of his car, and so she does not report the allowances as income on the pastor's W-2. The pastor does not report the allowances as income on his tax return. The IRS audits the pastor, and claims that he, and members of the church board, are subject to intermediate sanctions as a result of an "automatic" excess benefit transaction.

Take the quiz first, then read the article for all the details.

1. A church uses an accountable reimbursement arrangement for the reimbursement of its senior pastor's business-related transportation, travel, entertainment, and cell phone expenses. The church only reimburses those expenses for which the pastor produces documentary evidence of the date, amount, location, and business purpose of each expense within 30 days. By the end of the year the church has reimbursed $4,000 of expenses. This arrangement constitutes an excess benefit transaction exposing the pastor to intermediate sanctions.
   True or False
   
   
2. A church pays its senior pastor an annual salary of $45,000 this year. In addition, it reimburses expenses the pastor incurs for the use of his car, out of town travel, entertainment, and cell phone use, but does not require substantiation of the amount, date, location, or business purpose of reimbursed expenses. Instead, the pastor provides the church treasurer with a written statement each month that lists the expenses incurred for the previous month. The treasurer then issues a check to the pastor for this amount. This is an example of a non-accountable reimbursement arrangement. Assume that the church reimburses $5,000 under this arrangement this year, and that the amount is reported as taxable income by the church on the pastor's Form W-2 for this year. This arrangement constitutes an excess benefit transaction exposing the pastor to intermediate sanctions.
   True or False
   
   
3. A church pays its senior pastor an annual salary of $45,000 this year. In addition, it reimburses expenses the pastor incurs for the use of his car, out of town travel, entertainment, and cell phone use, but does not require substantiation of the amount, date, location, or business purpose of reimbursed expenses. Instead, the pastor provides the church treasurer with a written statement each month that lists the expenses incurred for the previous month. The treasurer then issues a check to the pastor for this amount. This is an example of a non-accountable reimbursement arrangement. Assume that the church reimburses $5,000 under this arrangement this year. The church did not report the $5,000 as taxable income on the pastor's W-2 in the year it was paid, and the pastor did not report it on his tax return (Form 1040) for that year. The church treasurer assumed that the pastor had "at least" $5,000 in business expenses, and so there was no need to report the non-accountable reimbursements as taxable income. This arrangement constitutes an excess benefit transaction exposing the pastor to intermediate sanctions.
   True or False
   
   

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