TaxProf Blog

Ellen P. Aprill (Loyola-LA; Academic google) and Lloyd Hitoshi Mayer (Notre Dame; Academic google), Churches of the 21st century and the Federal Tax Law:

Federal tax treatment is important for churches, the term the IRS uses for all types of religious congregations, including synagogues, mosques and temples. However, the most significant federal tax provisions for churches and certain closely related entities are not what the public and commentators often assume. Income tax exemption and the ability of donors to deduct contributions, the benefits that receive the most public attention, in fact provide surprisingly little benefit to churches as a whole or to most individual churches. In addition, their status as tax-exempt organizations under section 501(c)(3) of the Internal Revenue Code places a variety of burdens on them. The charges include limitations on lobbying and a ban on any involvement in campaigns for public office.

At the same time, churches enjoy special tax benefits not afforded to other section 501(c)(3) organizations, including other types of tax-exempt religious organizations. These special benefits make church status attractive. Those benefits include exemption from filing IRS Form 990, an annual information return that, with the exception of the names and addresses of major donors, is also publicly available. Also, the IRS cannot initiate any audit of a church unless it complies with a series of procedures.

These advantages limit oversight of churches by the IRS, the media, and the public. They create an incentive for religious organizations that share some traits commonly found in churches to seek church status. Two recent IRS grants of church status have drawn strong criticism from the media and members of Congress. At the same time, a series of developments, such as the loss of membership, the expansion of virtual worship, and recent Supreme Court jurisprudence on free exercise, have created new challenges for churches and their tax treatment.

In response to all of these developments, this article recommends changes to the IRS’s longstanding approaches to defining “church” and certain church-affiliated entities. These changes would replace a court-developed definition of church and limit the definition for conventions or associations of churches to those of a single denomination. The changes to the definition will clarify the distinction between non-church religious organizations and churches. Updating the understanding of “church” to reflect the 21st century realities of virtual participation and the increasing diversity of faith communities will also improve IRS oversight.

This article also recommends that the GAO undertake a renewed study of campaign involvement by section 501(c)(3) organizations in general. This study will clarify whether all 501(c)(3) organizations, including churches, are in fact violating this prohibition in ways that go beyond sporadic, minor, and often unintentional footsteps.

In the opinion of the authors, the recommended changes would benefit churches and the public because they take into account both current realities and current concerns. In doing so, they would not only provide churches with welcome guidance, but would also increase public confidence that churches are not abusing the special privileges they enjoy under federal tax law.

editor’s note: If you would like to receive a weekly email every Sunday with links to faith posts on the TaxProf Blog, please email me here.