These definitions will help you to have a better understanding of the religious fraud problem (with the exception of the IRS forms, definitions are generally from Wikipedia or www.thefreedictionary.com with some expansions by the Trinity Foundation):
Articles of Incorporation: a legal document that creates a corporation; it is filed with a state by the founders of a corporation and is governed by the laws of the state. The New York Times recently reported that the state of Delaware and a few others provide more secrecy, in many ways, than offshore tax havens such as the Cayman Islands, Switzerland, and/or Luxembourg.
Clergy Housing Allowance: a portion of a minister’s compensation that is designated in advance for housing. It is not taxed in the US or Canada and may be a benefit in other countries as well. It has to be board approved and cannot be retroactive. The minister has to actually spend the money on eligible housing expenses during the year in question.
In order to be classified a clergy for tax purposes, a minister must satisfy each of five separate tests:
- Be licensed or ordained
- Administer the sacraments of the church (weddings, funerals, baptisms, and communion, etc…)
- Be considered a religious leader by the church
- Conduct religious worship
- Have management responsibilities in the church
Conversion has to do with converting donor funds to private funds through means of privately held companies surrounding the non-profit organization. One common example: the head of an organization writes a book and forms a company that sells thousands of copies, sometimes at or close to retail price, back to his or her ministry to be used as “gifts” to donors who give a certain amount. In other words, the left hand sells the book to the right hand for distribution as “gifts” within a lucrative, ready-made market. In many cases these mass sales place the book on the New York Times best-seller list, when in reality there is little public demand for it.
Excessive Compensation: Excessive compensation is an exorbitant or undue amount of anything, such as money, given as payment or reparation, as for a service or a loss (partial definition from www.thefreedictionary.com).
Form 990: A form 990 is a common form submitted to the IRS by public charities and private foundations. All non-profit organizations are required to file except religious non-profits who are exempt under an absolute church exemption. The 990 lists assets, liabilities, revenues, expenses, compensation of officers, and salaries of other high paid employees among other things. It essentially shows where the money goes overall. These forms can be obtained from the IRS, the organizations themselves, and the GuideStar website. But WAIT, before you go looking for these forms, many organizations avoid having to file this form by calling themselves a church. In some cases they may form a small church with relatively few members and place their entire multimillion dollar organization under that small church to get around having to make their financial information public.
Form 990-T: Almost all non-profit organizations (including churches and religious non-profits) are required to report any business income they receive over $1,000 to the IRS. Common examples of business income that non-profit organizations need to report are rental income, investment income, sale of merchandise, advertising income, unrelated debt-financed income, income from partnerships, etc., etc. If the church or organization is carrying on an unrelated trade or business, it must file. The penalty for failure to file is $20 on each person for each day that the failure continues, not to exceed $10,000 on all persons with respect to any one return.
“Integrated Auxiliary” organizations–these are organizations which are related to a church or an organization but are not such organization themselves. As such, they enjoy the same privileges and follow the same requirements (or lack thereof) that the organization or church follows. These organizations can also be misused for the purposes of inurement and/or conversion (see definitions herein).
Inurement: To result; to take effect; to be of use, benefit, or advantage to an individual (from www.thefreedictionary.com) This term is cited frequently by the IRS with regard to non-profit organizations when excessive benefits go to an individual within the organization–i.e. donor money is financing a lavish lifestyle.
Parsonage: the house provided by a church for a its pastor. It is generally tax-free (see clergy housing allowance above)
Prosperity Gospel–Sometimes referred to as the “Health and Wealth Gospel”, it is a theology which proclaims that one’s faith or speech, combined with generous donations to Christian ministries will increase one’s material wealth. Other less complimentary slang names for it include the “name-it-and-claim-it” or “blab-it-and-grab-it” gospel.
Self Dealing: is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting for his own interests rather than for the interests of the beneficiaries of the trust, corporate shareholders, or his clients. Self-dealing may involve misappropriation or usurpation of corporate assets or opportunities. Self-dealing is a form of conflict of interest. In theory, the IRS prohibits self dealing within non-profit corporations.
Shell corporations: A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Shell corporations are not in themselves illegal and have legitimate business purposes. However, they are a main component of the underground economy, especially those based in tax havens. They may also be known as international business company, personal investment companies, front companies, or “mailbox” companies . Regarding the creation of shell corporations, Delaware stands out as providing the least transparency and the most secrecy according to a recent article by the New York Times. The article goes on to state, “In tax circles, the arrangement is known as ‘The Delaware loophole’.”
Skimming–as slang, it is commonly used to describe the avoidance of tax liability by failing to report certain income. However; skimming, as it is used in describing accounting fraud is defined as the theft of cash before it enters a companies accounts (Accounting Fraud and Cover-ups, by Martha Maeda, copyright 2010). It can take place at any point where cash enters an organization, such as a church offering plate, a mail room, a clerk’s desk, a cash register, etc. It can also refer to a device used to swipe and steal a person’s credit card number and information from the magnetic strip.