My wife and I suffered through an IRS tax audit a few years ago. It was not fun.
We learned a lot during that season. The biggest lesson was to save receipts in an organized way. You can’t claim what you can’t prove. You can’t prove what you can’t find.
Our practice of shoving receipts all together in boxes came to an end.
Save everything. Keep it organized.
I spent a lot of time trying to justify my housing allowance. It all checked out only because we eventually found enough receipts.
What do you need to save?
To justify a housing allowance in the event of an IRS audit, pastors should keep documentation showing both (1) that the allowance was properly designated by the church and (2) that the allowance was actually spent on eligible housing expenses. The burden of proof is generally on the minister.
Essential Documents to Keep
1. Church Housing Allowance Resolution
Keep a copy of the church board minutes, annual budget, employment agreement, or other written documents that designated the housing allowance before the beginning of the year (or before the allowance was paid). The designation should be in writing and approved by the church.
Most churches start working on this in November and include it in their December board meeting notes. Employees should have their approved totals before January. Adjustments can be made throughout the year but must be clearly documents.
2. Mortgage or Rent Records
- Mortgage statements
- Rent receipts
- Settlement statements from a home purchase
- Property tax statements
These help prove housing-related expenditures.
3. Utility Bills
Save statements for:
- Electricity
- Gas
- Water
- Sewer
- Trash service
- Internet (if part of household expenses)
- Home phone service
Utilities are generally considered housing expenses.
4. Homeowners Insurance
Keep annual insurance declarations and payment records. Insurance premiums are generally includable for housing expenses.
5. Repair and Maintenance Receipts
Examples:
- Plumbing repairs
- HVAC repairs
- Roof repairs
- Painting
- Lawn care
- Appliance repairs
Keep invoices and proof of payment.
I save everything, even small purchases. I even have receipts for a single outlet cover. Everything purchase adds up if you are being audited.
6. Furnishings and Household Items
Receipts for:
- Furniture
- Appliances
- Curtains and blinds
- Rugs
- Home décor items
- Cleaning supplies
These may qualify as housing expenses when used in the home.
7. Bank and Credit Card Statements
These provide a secondary audit trail supporting the receipts and invoices. The IRS commonly accepts bank statements, canceled checks, and credit card records as substantiation.
8. Housing Expense Worksheet
Maintain a spreadsheet listing:
- Date
- Expense description
- Amount
- Category
Many pastors update this monthly. This makes year-end calculations much easier and provides a clear audit trail.
9. Fair Rental Value Documentation
Since the housing allowance exclusion cannot exceed the fair rental value of the home (furnished, plus utilities), keep documentation supporting that value, such as:
- A realtor’s opinion
- Comparable rental listings
- Property management estimate
- Online rental market analysis
Recommended Retention Period
A good practice is to keep housing allowance records for at least seven years along with the related tax returns. Many church tax professionals recommend retaining electronic copies indefinitely if possible.
Simple Year-End File Checklist
For each tax year, pastors should have a folder containing:
✅ Housing allowance resolution/board minutes
✅ Mortgage or rent statements
✅ Property tax statements
✅ Insurance records
✅ Utility bills
✅ Repair and maintenance receipts
✅ Furnishings/appliance receipts
✅ Bank or credit card statements supporting expenses
✅ Housing expense spreadsheet
✅ Fair rental value documentation
You can save physical or digital copies.
Funny Note: Include clear descriptions on transactions using PayPal, Zelle, Venmo, etc. We had to go through and define three years’ worth of them. I can’t tell you how much time spent trying to figure them all out. Most had no description.
My daughter has her lawn mowed each week. It’s more convenient for us to pay the guy and for her then to repay us.
She thought it would be funny to describe the regular Venmo transactions in crazy ways, like “Purchase of dolphin food.” Imagine trying to explain to an IRS agent that you have never sold dolphin food. They do not have a sense of humor.
Final thought: Save every document/receipt in an organized way. It might not feel necessary today but will matter very much if you are ever audited.
Check out our housing allowance calculator HERE.