Transparency In Ministry

According to the Tax Guide for Churches and Religious Organizations, the IRS may conduct civil tax inquiries and examinations of churches under IRC section 7611. The IRS may only initiate a church tax inquiry if the Director, Exempt Organizations, Examinations, reasonably believes based on written statements of the facts and circumstances, that the Church:

1. may not qualify for the exemption; or
2. may not be paying tax on an unrelated business or other taxable activity

In November 2007, the Senate Finance Committee issued a letter of inquiry to six prominent televangelists asking for a number of specialized documents and reports relating to board governance, compensation and ministry operations.

Based on various news releases, four of these evangelists are responding or are committed to respond to Senator’s Grassley’s inquiries. Senators Grassley and Baucus have defended their positions on “why” they would like to evaluate this information.

However, under the Tax Guide for Churches and Religious Organizations, the IRC section 7611 provides examples of how/when an inquiry are appropriate.

Is it appropriate for the Senate Finance Committee to solicit selected information from the televangelists and churches?

Post your comment.

Posted by Becky DaVee

In our series of ordinary and necessary expenses, churches and ministries should document lodging and certain incidental expenses (such as cab fares) by receipt and/or other contemporaneous records that include the business purpose of the trip.

If proper documentation is not received by the church/ministry for expenses paid by the church/ministry on the behalf of an individual, the IRS would deem those expenses paid by the ministry as income to the person that incurred the expense. If the ministry does not identify those expenditures without proper documentation and either demands repayment or classifies them as compensation to the individual, the transaction becomes an “excess benefit transaction” and would be subject to an excise tax of from 25% to 200% payable by the individual.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting marketing or recommending to another party any transaction or matter addressed herein.

For more information about excess benefit transactions, please contact us.

IRS Revenue Ruling 2007-41 issued June 1, 2007 examines prohibitions for political campaign intervention by churches, ministries and other charities. The ruling provides scenarios to illustrate considerations that should be made in determining whether a 501(c)3 organization has participated in a political campaign for a candidate running for public office.

Additional information for churches and other exempt organizations is included plus a copy of IRS Publication 1828. If you have any questions, please don't hesitate to contact us.

Religious organizations (excluding churches) with annual gross receipts exceeding $5,000 are required to apply for tax-exempt status. To be a 501(c)(3) organization, an organization should submit Form SS-4 Application for Employer Identification Number (EIN), prior to submitting Form 1023. Organizations need an EIN # when opening a bank account and this identification number is utilized in reporting payroll and other information.

See Form SS-4 and instructions.

After the organization has an EIN #, religious organizations should file a Form 1023.

During 2006, Form 1023 (the Form) was significantly revised requiring additional information to be supplied. The following represent some of the significant revisions to the Form:

1. User fee has been incorporated as Part X of the new form, instead of a separate form. (User fee is based on average annual receipts)

2. SS-4 application no longer included in Form 1023.

3. Limited liability corporations added as a type of organization to apply for exempt status.

4. Questions about compensation and financial transactions with officers/directors, certain employees and independent contractors.

5. Filing a separate Form 872-C not required, included in Part X.

6. Schedule E added for organizations not filing the Form within 27 months after formation.

Form 1023 is due with 27 months of the entity’s legal formation. If the Form is not filed within 27 months of formation, the form’s effective date is based on the postmark date to the IRS.

The IRS will provide a written acknowledge after receiving Form 1023. If additional information is needed, the Form will be assigned to a specialist and the organization will be contacted.

If the IRS determines that the religious organization qualifies for exempt status, a “determination letter” is issued by the IRS. The letter will classify the organization as a public charity or as a private foundation. This document should be maintained with the other corporate documents of the organization.

If the IRS denies the organization’s application for exempt status, the IRS will send the organization a letter explaining their position and the organization’s appeal rights.

For a copy of Form 1023 go to Form 1023 and see instructions.

Churches are not required to file Form 1023, but more and more churches are considered filing and obtaining the determination letter.

Need help? Contact us.

The Internal Revenue Code recognizes certain entities to receive tax-exempt status – meaning they are exempt from filing/paying federal income taxes. Churches and religious organizations are included in this category. These organizations are generally eligible to receive tax-deductible contributions.

What is a 501(c)(3) organization? According to the Form 1023 instructions, a 501(c)(3) organization must be organized and operated exclusively for one or more exempt purposes.

To be organized the entity must either be:
1. a corporation

2. a trust

3. unincorporated association

The organizing document (ie., articles of incorporation if you are a corporation) must limit the organization’s purpose(s) and permanently dedicate its assets to exempt purposes.

The entity must operate to further the exempt purposes stated in the organizing document.

According to the Tax Guide for Churches and Religious Organizations, an organization seeking to be classified as a 501(c)(3) must meet the following requirements:
1. Organized and operated exclusively for religious, educational, scientific, or other charitable purposes.

2. Net earnings (profits) may not inure to the benefit of any private individual or shareholder.

3. No substantial part of the organization’s activity may be attempting to influence legislation.

4. No intervention in political campaigns

5. Purposes and activities may not be illegal or violate fundamental public policy.

How is a church recognized as a 501(c)(3) organization? Churches that meet the requirements above are automatically considered tax-exempt and are not required to apply for and obtain recognition of the tax-exempt status from the IRS.

HOWEVER….many churches seek to file for exemption and therefore file Form 1023. Why? Certain leadership, members or contributors may want valid documentation that the contributions are tax deductible.

Religious organizations, unlike churches, are required to apply to the IRS for the tax-exempt status if their annual gross receipts exceed $5,000.

How to apply for tax-exempt status? See the next post.

The following is an excerpt from an e-mail from a client who is in the middle of an IRS examination:

Yesterday our auditor was in a talkative mood. He told us that he had just returned from meeting in Washington, D.C. where he was told that the IRS was going to audit "televangelists" this year. He indicated that the target will be those living in expensive homes owned by the ministry and they'd also be looking for other ministry expenses that benefit the minister.

We are posting this "unsubstantiated third party quote" only because it is an IRS initiative that we have expected to occur for several years since Congress passed the Intermediate Sanctions Law. We have speculated that excess compensation could be defined in terms of "excessiveness" or benefits not detailed in the minister's compensation plan --- although the Service may not be successful in their claim.

For all non-profits, we recommend an annual review of transactions between a "control person" and the tax-exempt organization.

Need further clarification of control persons, contact us.

In a recent case ruling by the Oklahoma Court of Civil Appeals, a tax-exempt corporation

excludes any entity wherein any part of its net earnings goes to benefit any private shareholder or individual.

Can you spell "inurement?"

Little Debits are selected information obtained from various sources that provide “user friendly” information for churches and ministries. Enjoy!

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In a recent post from the Church Report, a Texas church received a huge victory in the lawsuit against a county assessor's office. The problem...after the church facility burned, the church was unable to rebuild quick enough before the tax man assessed property taxes and penalities. HUGE tax bill. The churched hired an attorney and the church ultimately won. No taxes were paid.

The congregation's attorney believes religious discrimination may have been a factor in the case initially. "Certain churches face harassment by government officials," he says. "Many times it's churches that are on land the government would rather see a shopping mall on, so they'll harass the church there, or they might get in the way of development."

Interesting thought...Assets are protected by church leadership and the exempt status of the property was maintained. Tax Man cometh...NOT!

Church property is primarily exempt from property taxes, under the IRS code. However...in a recent case reported in a Church Report article dated August 21, 2006,

Texas Church Wins Tussle With Tax-Man, Gets Exempt Status Restored

In typical legislative style, the Oklahoma Legislature passed, and then inadvertently repealed, and then promised to pass again, a bill exempting church construction contracts from OK sales tax. Normally, churches are exempt from OK sales tax. However, if a church undertakes a construction project and hires a contractor who purchases the materials, the contractor has to pay sales tax on the materials. The contractor would naturally pass through this tax in his billings under the contract. Oftentimes, a church will arrange with its contractor for the church to pay for materials directly, thereby avoiding the sales tax burden. This can be a cumbersome process. Enter the OK Legislature riding its white horse...

The bill, SB 1084 - the Omnibus Tax Bill, provided a sales tax exemption for "any person with whom a church has duly entered into a construction contract..." What a great idea! However, in its Special Session the Legislature repealed the entire tax bill and forgot to put this exemption back into the final bill. To add to the confusion, the repeal is not effective until June 30, 2007, whereas the original exemption is effective August 25, 2006. What this means is material purchases by the contractor between August 26, 2006 and June 30, 2007 will be exempt from OK sales tax. If the Legislature fixes its mistake, the exemption should continue. If the error is not rectified, the exemption will expire on June 30, 2007.

Recommendation: The prudent course for church construction contracts may be for the church to continue to pay for the building materials directly until the OK Legislature gets its act together. Updated information will be forthcoming as soon as the Legislature moves. For other state filing requirements...We have answers...contact us!