Our Fraud Awareness in the Church series continues as we look at Individual Payments: Contractors and Benevolence. We asked churches to respond to these statements:

“Before paying an individual as an independent contractor, our church applies IRS compliant tests to determine if the payee qualifies as an independent contractor.”

“Our church has written a policy to direct benevolence payment activity.”

With two notable exceptions, tax-exempt organizations are not to transfer assets or make payments to individuals.  The two exceptions are Contractor payments — reasonable compensation for services provided the organization, and Benevolence payments — to individuals who are the target of the organization’s exempt purpose (rent assistance, etc.).  Outside of these two exceptions, all other payments are looked upon with a degree of skepticism by the IRS.

Survey Results: Surprisingly, 40% of the respondents do not go through a formal employee vs. contractor test.

Key: Embezzlers tend to shy away from reporting their theft to the Government. If ALL payments to contractors are screened and a 1099 prepared, a fraud loophole is closed.

Another area particularly vulnerable to fraud is benevolence.  Again, 40% of the churches do not operate under a written benevolence policy.

Key: Benevolence funds are one of the few accounts where payments to individuals are not suspicious.  (Fraudsters are very aware of this fact.)

Double Key: Part of the benevolence policy should be to NEVER give funds directly to the people being helped.  Make payments directly to 3^rd parties. (Utility company, landlord ,etc.)