Understanding Tax-Exempt Status: Must Churches Follow All IRS Rules if They Do Not Apply for Tax-Exempt Status?

  1. Church & Nonprofit
  2. Understanding Tax-Exempt Status: Must Churches Follow All IRS Rules if They Do Not Apply for Tax-Exempt Status?
tax-exempt status
Church & Nonprofit

Churches enjoy a unique status under the federal tax code. Non-profit organizations generally must apply for tax-exempt status with the Internal Revenue Service (IRS). As long as those organizations fall under one of the exempt categories in 501(c)(3) of the federal tax code, they are tax exempt. However, under 508(c)(1)(A) of the federal tax code, churches automatically receive tax-exempt status without applying for that status. In other words, unlike other non-profit organizations, churches are exempt from applying for tax-exempt status and are automatically considered an exempt organization simply by virtue of their status as a church.

IRS Regulations Still Apply to Churches

Many people misunderstand the tax code’s automatic recognition of the tax-exempt status of churches as freeing churches from the governance of the IRS. This is simply untrue. An exemption from applying for tax-exempt status does not free churches from IRS regulations or the federal tax code. Likewise, whether a church chooses to incorporate or not, it is still subject to the tax code. Declining to apply for recognition of nonprofit status will not free your church from the restrictions of federal tax laws.

A recent decision in a California federal court reinforced the fact that churches are subject to the federal tax code. The IRS issued a subpoena to a Christian ministry in California to investigate ministry activities. The ministry filed a motion to quash the subpoena, arguing that the IRS had no authority to investigate it, as it was exempt not only from filing requirements but also from any IRS investigations or oversight.

In its decision, the court summarily rejected the ministry’s argument and closely followed previous court decisions. The court found that a mere exemption from applying for recognition of tax-exempt status does not free it from other obligations under the federal tax code. Therefore, the IRS had the broad investigative authority to determine whether a church owes taxes, even though the church need not apply for tax-exempt status or file tax returns. The court plainly stated that the ministry’s arguments were frivolous and had no basis in law.

Renouncing 501(c)(3) Status can be Detrimental

Adopting the position that a church is not subject to the tax code could have significantly damaging consequences for many, if not most, churches. These negative repercussions may include:

  • The net incomes of churches becoming subject to federal, and in many cases, also state, income taxation
  • The loss of the ability of donors to deduct charitable contributions to the church on their federal income tax returns
  • The loss of various other exemptions, such as property tax exemptions, sales tax exemptions, unemployment tax exemptions, registration of securities exemptions, and exemptions under state charitable solicitation laws
  • Churches becoming subject to specific provisions of anti-discrimination laws from which they are currently exempt, such as the Americans with Disabilities Act, various federal and state employment discrimination laws, and rules concerning fringe benefits
  • The loss of the protections available under the Church Audit Procedures Act
  • The inability to establish or maintain 403(b) tax-sheltered annuities
  • Loss of protections under local zoning laws and loss of preferential mailing rates
  • In some cases, a loss of protections for the housing allowances of ministers and exempt status for ministers who opt out of Social Security

Call Us Today and See How We Can Help

The attorneys and staff at Provident Law have years of experience in advising churches and other religious organizations about tax laws and other federal and state laws that affect their operations. We can evaluate your situation, present your options, and help you make the decisions that are right for you. Call us today at (480) 388-3343 or visit our website and learn more about how we can help.

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