FAQ

1. What Is a Church?

2. Why don’t churches have to file the Form 990 like other tax-exempt organizations? Does it have to do with the separation of church and state?

3. Wouldn’t requiring churches to file the Form 990 lead to government intrusion on religion?

4. Wouldn’t filing a Form 990 be a lot of work for churches, especially the small ones?

5. My church holds an annual budget meeting, and the pastor presents pie charts showing where the church spends its money. Isn’t this transparency good enough?

6. My pastor told me that I need to trust him or her. Shouldn’t I trust my pastor?

7. If it is true that transparency would increase giving, why aren’t more churches already transparent?

8. Why isn’t the Evangelical Council for Financial Accountability enough?

 1. What Is a Church?

The term “church” is not defined in the Internal Revenue Code or IRS regulations, but the IRS has developed 14 criteria that it uses to determine whether an entity is a church. For better or worse – we think for worse – this definition has been accepted by most Christians. The 14 criteria are:

(1) a distinct legal existence;

(2) a recognized creed and form of worship;

(3) a definite and distinct ecclesiastical government;

(4) a formal code of doctrine and discipline;

(5) a distinct religious history;

(6) a membership not associated with any other church or denomination;

(7) an organization of ordained ministers;

(8) ordained ministers selected after completing prescribed studies;

(9) a literature of its own;

(10) established places of worship;

(11) regular congregations;

(12) regular religious services;

(13) Sunday schools for religious instruction of the young; and

(14) schools for the preparation of its ministers.

Foundation of Human Understanding v. Commissioner, 88 T.C. 1341, 1358 (1987). It is not necessary that all of the criteria be satisfied, and the IRS has left itself considerable discretion to consider “other facts and circumstances which may bear upon the organization’s claim for church status.”

Whenever the IRS or a court is considering whether an entity is a church, it is necessary to analyze each of the 14 criteria, which requires an intrusive inquiry into the nature of activities, religious practices, and religious beliefs of the purported church. We believe this intrusive inquiry constitutes “excessive entanglement” – entanglement that could be easily avoided if churches were not given special preferences in the Internal Revenue Code.

2. Why don’t churches have to file the Form 990 like other tax-exempt organizations? Does it have to do with the separation of church and state?

As John Montague argues in his article “The Law and Financial Transparency in Churches: Reconsidering the Form 990 Exemption,” the exception churches have from filing the Form 990 is mostly an historical accident perpetuated by lobbying from church leaders. The Form 990 was originally instituted to monitor the unrelated business activities of tax-exempt organizations during the 1940s, and the law requiring organizations to file it exempted a number of organizations, including churches.  Since then, all exceptions to the Form 990 have been removed except for the one for churches, and all organizations – including churches – are subject to the unrelated business income tax. If churches had been operating unrelated businesses during the 1940s, there is no question that they would have to file the Form 990 today.

There is no constitutional impediment to extending the Form 990 filing requirement to churches. The Supreme Court has repeatedly held that routine regulatory interaction requiring no inquiries into religious doctrine does not violate the Free Exercise Clause. In response to a 1987 request from Congress, IRS attorneys submitted a statement to Congress considering whether requiring churches to file the Form 990 would be prohibited by the Constitution. The IRS concluded that it would not.

3. Wouldn’t requiring churches to file the Form 990 lead to government intrusion on religion?

Actually, removing the special exceptions for churches in the Internal Revenue Code would lead to less government intrusion on religion. As it currently stands, the IRS must determine whether an entity is a church, and doing so involves an extensive inquiry into the doctrines, beliefs, forms of worship, governance, leadership, and other significant aspects of each church under examination (see FAQ 1 above). If, instead, churches were treated the same as all other organizations, IRS inquiries into church dealings would be limited to financial examinations.

Religious leaders who oppose requiring churches to file the Form 990 base their arguments on far-fetched conspiracy theories suggesting that the information on the Form 990 will enable the government to persecute Christians. We find these arguments preposterous.

If the government were interested in persecuting Christians, the lack of information from the Form 990 would be scant protection. Indeed, the National Council of the Churches of Christ in the USA annually publishes the Yearbook of American and Canadian Churches, listing contact and other information about every church in the country. Moreover, most churches have websites that list extensive information about their leadership and membership.

4. Wouldn’t filing a Form 990 be a lot of work for churches, especially the small ones?

Not necessarily. Congress and the IRS recognize that filing a Form 990 can be a burden for smaller organizations, so smaller organizations do not have the file the same form as larger organizations. Organizations whose gross receipts are normally $50,000 or less may file  the e-Postcard, which asks for only a few pieces of information such as the organization’s address and principal officer, and it should take no more than 5 minutes to complete. Organizations with gross receipts of less than $200,000 and total assets of less than $500,000 need only file a Form 990-EZ, a simpler and shorter form than the full Form 990.  Moreover, there are many small nonprofits in this country, and small churches should be just as capable of filing information returns as other small nonprofits.

5. My church holds an annual budget meeting, and the pastor presents pie charts showing where the church spends its money. Isn’t this transparency good enough?

No. Would you invest in a business after watching a two-minute presentation by the owner during which he showed you one pie chart based on undisclosed financial statements that had not been audited? We hope not – such a decision would be imprudent and, we would argue, bad Christian stewardship.

The degree of transparency we seek is the bare minimum that most people would expect before committing to donate thousands of dollars and hundreds of hours of time to an organization. It is not asking too much to expect that the entire budget be disclosed to the congregation, including details about building expenses, individual salaries, giving by the church to external sources, and the various categories of expenditures that all other tax-exempt organizations are required by law to disclose. Nor is it asking too much to expect that this information be provided to the congregation under penalty of perjury (as the Form 990 is) or that the church’s finances be regularly audited by independent auditors.

6. My pastor told me that I need to trust him or her. Shouldn’t I trust my pastor?

Maybe. If all pastors could be trusted, the lives of tens of thousands of young children would not have been shattered at the hands of molesting priests and other pastors, and churches would be immune from the financial scandals that seem to plague them. As it turns out, not all pastors can be trusted.

Although we would like to tell you that you can trust your pastor, his or her reasoning is specious. Furthermore, it is troubling that he or she would decline to answer your questions, appealing to some sort of biblical command or Christian duty to “trust the pastor.” That makes us suspicious – maybe he or she is hiding something. Try turning the tables: why won’t your pastor trust you with this information?

We believe it is wrong for a pastor to resort to hiding information from his or her congregation while instructing congregants: “You need to trust me.” This is manipulative, and it is bad for the Church. For the reasons explained in our discussion of why churches should be transparent, we think transparency is a biblical and moral imperative.

7. If it is true that transparency would increase giving, why aren’t more churches already transparent?

There are a variety of reasons why many churches lack transparency. Charitably, we think the primary reason may be that church leaders are unsophisticated in financial matters and do not understand the many advantages to transparency. They do not realize that research on giving shows that more transparency increases donations; instead, they see only the cost and headache of filing IRS Forms.

A second important reason is that many pastors fear the consequences of financial disclosure. What will lay people say about the pastor’s salary? About how much money the church really gives (or doesn’t give) to missionaries? We think that if there is any truth to these fears – as there no doubt is at some churches – that is all the more reason to favor transparency. Churchgoers should have a voice in how their donations are used.

Finally, a more nefarious reason why some churches are not transparent is that the pastors and other church leaders have something to hide.

Of course, it is important to note that some churches are already very transparent and that, on average, those churches do receive more donations from their congregants than churches that are not transparent.

8. Why isn’t the Evangelical Council for Financial Accountability enough?

In the first place, very few churches join the ECFA. As of the end of 2012, only about 150 churches were members of the ECFA – out of 330,000 churches in the United States.

Second, even if many churches were joining the ECFA, because the ECFA is only an accreditation agency, it cannot do anything to hold accountable those churches that do not join. And it is unreasonable to expect that churches where financial impropriety is widespread will ever join the ECFA.

Although the ECFA would probably argue that potential congregants should prefer to join a church that is a member of the ECFA, its utter failure to attract churches renders this argument impractical. Moreover, even if large numbers of churches were to begin joining the ECFA, there are strong reasons to believe that many would opt out and that very few of their congregants could be persuaded to care about ECFA accreditation. Some of that sociological research is summarized in John Montague’s article “The Law and Financial Transparency in Churches.”

Advertisements