funding foreign activities - shelby...

Funding Foreign Activities(Course #E965)

Presented by: Rodney Smith, CPA CFEPSK LLP Audit Partner

©2018 Shelby Systems, Inc.Other brand and product names are trademarks or registered trademarks of the respective holders.

FUNDING FOREIGN ACTIVITIES

Learning objectives for this session:

Identify risks when providing funds for foreign activities

Consider best practices for mitigating risks

Determine when to seek outside counsel and / or engage a third-party agent

FUNDING FOREIGN ACTIVITIES

The church must maintain discretion and control over use of funds, including deputized support.

Conduit transactions provide no tax benefit to the donor, and could actually expose the church to revocation of its tax-exempt status.

Bypassing mission sending agencies can expose the church and missionaries to adverse legal and tax consequences.

DEPUTIZED SUPPORT TESTS

The donor must intend to benefit the charity.• No earmarking – only a preference may be

specified.

The church must exercise discretion over the use of the funds.• Cash flow should be based upon budgets / actual

support and ministry needs, not amount of donations.

Presenter

Presentation Notes

Grass roots fundraising by the missionary or worker can be controversial, because the donors are led to believe the sponsoring organization is a mere clearing house, and all funds earmarked for the missionary will automatically be allocated that way. If that IS the case, then the donor cannot receive a charitable contribution deduction. The donor must make the contribution “to” or for the use of the “charity” – not the individual missionary. Does the donor understand that the charity can redirect the funds to another missionary or for other expenses related to accomplishing the defined mission? In other words, there is a control test and an intended benefit test.

CONDUIT TRANSACTIONS

The funded activity is not a ministry of the church.• Even though the “mission” may be

consistent with that of the church…

The recipient of the funds is not accountable to the church.• Consider the motivations of those involved.

Presenter

Presentation Notes

A Church in Oklahoma regularly sends workers (staff, missionaries and volunteers) to Honduras, and many of the workers are repeat visitors and have established relationships with some church and community leaders. The Church supports a local church in Honduras and ministers to families by providing English classes, Bible study classes, medical and dental care, job training, and life skills. One of the volunteers has become interested in the higher education of many of the children who can’t afford tuition at a well-thought-of school in the community. The school is one of several in Central America that is funded and operated, in part, by an organization based in Texas. This organization was formed by immigrants from Central America. They want to be able to develop children from their homeland into leaders – ones that can effect radical change for the next generation. However, the Texas organization is not a tax-exempt organization, nor is the school in Honduras. The interested volunteer writes a $10,000 check to his Oklahoma Church (expecting to receive a charitable contribution credit) and instructs the Church to send the money to the school in Honduras. The funds are intended to cover tuition costs for some of the children that the Church ministers to in Honduras.

CONDUIT TRANSACTION

TYPICAL SCENARIO WITH ACTIVITIES LIMITED TO THE FOLLOWING:

New missionary couple is faced with raising support for a foreign assignment. Because of some perceived bias, they are reluctant to work through a

denominational agency. Research reveals that certain independent agencies charge 8% to 15% of support for

administration. The couple approaches home church or another church and asks if they will act as

sponsor and / or agent to collect and forward funds to avoid the admin fee. Support comes from some combination of:

Church members Friends, family, and members of other churches Church budget or a church fund restricted for mission efforts

Church sets up a restricted fund for this couple. Donations to this fund are acknowledged as charitable contributions. All support that is credited to this account is forwarded on a monthly basis. Communications from missionaries about their efforts are informal and / or only go

to the donors, usually by email – assuming no safety concerns.

CONDUIT TRANSACTION

BASIC ELEMENTS MISSING FROM THE TYPICALSCENARIO:

There is no written ministry agreement outlining the expectations for the parties involved.

No considerations for registration or reporting to domestic or foreign government agencies.

The Church does not monitor or ask for an accounting of the use of the funds.

The Church does not communicate to donors and the missionaries that the support funds could be used for other mission efforts. (Oftentimes the Church, donors, and missionaries would believe this is not allowed.)

CONDUIT TRANSACTION

COMPLIANCE ISSUES Conduit transactions should not be acknowledged as

charitable contributions. Compliance with laws and regulations can be cost

prohibitive. The Church does not have the wherewithal to hold the

missionaries accountable for their efforts. The Church staff does not have the requisite skills to

administer such an initiative.

Conduit transactions should be avoided!

DEPUTIZED SUPPORT

ADMINISTRATOR’S CHECKLIST Develop a written policy. Routinely communicate to donors and missionaries:

Gifts are irrevocable, can’t be refunded or transferred, and the donor must intend to support the broad mission efforts of the Church.

The Church will exercise discretion and control over the use of the funds. Any designation by the donor for a particular missionary or mission project is only considered a preference.

Excess funds can and will be utilized to support various mission efforts at the Church’s discretion. Any reporting about the status of a missionary’s fundraising goal is solely for informational

purposes. It is not an indication of money set aside for that particular missionary.

The Church and missionary should execute a written ministry agreement outlining expectations.

The Church should commit to a predetermined amount of support based on the missionary’s budget and then hold the missionary accountable for the use of the funds.

If a support fund established for a missionary is over-funded or under-funded, the Church will only adjust the amount of support given to the missionary primarily based upon needs, not necessarily based upon level of support.

FLYING SOLO?

The trend is to skip denominational and mission-sending agencies.

• A byproduct of denominational disputes?

The church must assume the responsibility to learn and comply with the laws and regulations in the foreign country.• Beware of agencies that are merely acting as clearing

houses.

FOLLOW THE MONEY

Church US Agency

Ministry Agreement

Foreign Agency MissionaryAccountability

FLYING SOLO

Church US Agency

Foreign Agency

Foreign National

PAYMENTS TO FOREIGN NATIONALS

Where are the services rendered? In other words, which country’s tax rules are relevant, and in what order?

If a foreign pastor visits the USA using a tourist visa, he or she cannot be compensated for speaking in a church.

If the foreign pastor has some kind of work visa, they are considered a nonresident alien.

PAYMENTS TO NONRESIDENT ALIENS

Personal presence test In the USA less than 30 days for entire calendar year, then

there are no US tax rules invoked as long as the income test is also passed

Except for pastors from Mexico or Canada, they can be in the USA for less than 183 days in a calendar year and still avoid US tax implications

Income test If less than $3,000 is paid in a calendar year, then no US tax

rules apply If more than $3,000 is paid, go to “IRS-Form City”


Payments in excess of $3,000 in a calendar year Withhold 30% of the payment for taxes, unless A treaty changes the rate, or The nonresident alien may qualify for exemption under treaty

Church must file IRS Form 8233 at least 10 days before payments are made

IRS Form 8233 requires the nonresident alien to have a taxpayer ID number - obtained by the nonresident alien by filing form W-7

If the 8233 is not timely filed, or the personal presence or income test is not met, the nonresident alien can fill out Form W-8ECI to determine if a treaty allows for a lower withholding rate


Church withholds any amount from payments Issue Form 1042-S with IRS and give copy to nonresident alien Send withheld amounts to IRS along with the original Form

1042-S

Accountability: In any event, the Church must require supported ministers outside of the USA to account for the use of the funds received

PAYMENTS TO FOREIGN NATIONALS

If a church supports a non-US citizen working without a work visa that is serving outside the USA, then no reporting is required in the USA.

Accountability rules still apply. The church must still determine if the compensation

was reasonable for the locale. The church must determine if the foreign country

requires registration, tax withholding, and / or payroll or other regulatory reporting.

FLYING SOLO

Church US Agency

Foreign Agency US Citizen

PAYMENTS TO US CITIZENS

Missionaries that are US citizens owe federal income and payroll taxes on their worldwide income unless a tax treaty applies. (US Foreign-earned income exclusion may apply.)

Like any worker, the church must determine status of the missionary – employee or contractor. If an employee, then determine if minister or non-minister, use Form W-2, and...

The church may need to register as an employer in the foreign country and may need to set up a foreign tax-exempt entity as well.

PAYMENTS TO US CITIZENS

If missionary workers are contractors, then use Form 1099-MISC.

Again, determine regulatory and reporting obligations for the foreign country.

Consult with lawyers, accountants, and insurance agents in host country to determine risk management strategies.

Remember: Deputized fundraising rules apply –discretion and control of donations is critical for compliance.

TOTALIZATION AGREEMENTS

To avoid double taxation of income with respect to social security taxes, the US has entered into agreements with several other nations. A current list can be found on the IRS website:

https://www.irs.gov/individuals/international-taxpayers/totalization-agreements

https://www.irs.gov/individuals/international-taxpayers/totalization-agreements

ANTI-TERRORIST RULES

If the church is sending funds to a foreign country and the bank account is owned by the church, then the church must report to the US Treasury Department annually.

Submit Form TD F 90-22.1 by June 30 following any year in which the account is open.

Check suspected terrorist lists published by US State Dept and US Treasury Dept before each payment is sent.

Funds falling into the hands of terrorists can result in criminal charges against the church.


U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/guidelines_charities.pdf

Introduced in 2002 and updated in 2005

http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/guidelines_charities.pdf

US DEPT OF TREASURY GUIDELINES

Governing documents should Delineate the charity’s basic goals and purposes Define the structure of the charity, including the composition

of its Board / Committee and how members are selected and replaced

Set forth requirements concerning financial reporting and accountability and practices for solicitation and distribution of funds

State that the Charity shall comply with all applicable local, state, and federal laws and regulations


Independent oversight body with transparency about members’ compensation (if any) and relevant relationships. Keep detailed records, yet make every effort to maintain privacy.

Similarly keep detailed records about key employees, while still maintaining privacy.

Adopt and approve a budget. Have an independent audit by a CPA firm if annual

revenues exceed $250,000. Solicitation policy should clearly state mission.


Maintain records of all cash receipts and disbursements with proper substantiation.

Make disbursements by check or wire, whenever possible.

Disbursements in the form of currency should be limited to smallest increments sufficient to meet the immediate needs or specific projects.

Document programmatic verification when supplying resources and services.

Collect and maintain basic information about grantees.


Financial Industry Regulatory Authority has developed an OFAC Search Tool to aid in searching for sanctioned and blocked persons

https://ofac.finra.org/#/

https://ofac.finra.org/#/

Rodney Smith, CPA CFEPSK LLP Audit Partner

[email protected]

As a partner with PSK LLP, Rodney Smith, CPA serves churches and religious organizations across the nation. Prior to joining the firm in 2004, Rodney garnered 16 of years of experience

as a Controller/CFO in the private sector for an entrepreneurial group of companies. Currently, his practice

emphasis is in the area of nonprofit auditing and consulting. This includes fraud prevention and best practices for policies

and procedures, particularly for churches and ministry organizations.

mailto:[email protected]