Tax Abuse

Abuse of the Tax Code is Wrong

In the past there were abuses of the tax code in situations where individuals formed organizations, claimed church status, did not file for it, and made or claimed to have made charitable contributions to such organizations. The new evaluation systems of the IRS (14 Points) and recent revenue rulings limiting the percentage of AGI to charitable organizations are the result of such abuses. The new systems and revenue rulings have worked effectively in ending the abuses of the 70's and 80's, and the cause of exempt status organizations has been well served by the new methods of regulation.

Classification as a Church

Classification as a church necessitates thoughtful consideration and planning by the organization's founders. The IRS has created guidelines to assist in the definition of "church." Clearly there are constitutional issues here where the IRS would normally be prohibited from making such clear decisions one way or another. However, one must understand the position of the IRS and the government, in that abuses could threaten the fair and appropriate tax assessment and collection processes.

Disagreements on exempt status:

Disagreements and misunderstandings can be easily avoided by allowing the IRS to make the designation. Even if a church is classified as a religious organization (exempt just the same), the only difference would be that that exemption would not be automatic, and there would be a filing requirement timeline and yearly filing requirement. Oftentimes th3 IRS will grant a temporary ruling on the tax-exempt status of an organization for a period of two years, and then make a permanent ruling after reviewing the operations of the organization.

The task of the IRS is not to prevent anyone from practicing religious beliefs or establishing tax-exempt religious organizations or churches, but rather to enforce the established laws governing this section of the tax code.

Form 1024:

Form 1024 is Application for Exemption, which is the form a new (non-church) organization MUST file to be considered by the IRS for exemption. There are time limits imposed upon organizations for filing if they wish consideration for the past year regarding the privilege to issue tax-deductible receipts. Arguments over privileges and rights are unnecessary because as a matter of public policy and benefit to society, when the government encourages the financial support of tax-exempt entities by allowing charitable donations to be made which are tax-deductible for income tax purposes, there must be some accountability on the part of the organization to prove its societal benefit.

This is the first distinction the founders of a new religious organization must face and decide: is the new organization a Church or a Ministry. Both may be considered tax-exempt, but the process differs greatly in how the exempt status is gained and whether there is a yearly filing requirement. Because of the use of the 14 Points by the IRS many new organization founders are confused and anxious about the classification of their new entity. Such anxiety is not necessary.

Any organization may allow the IRS to make the classification of the organization as to either a church or religious organization - ministry and all anxiety is resolved. Churches and religious organizations are usually allowed a wide and generous exclusion from strict involvement by the government. Sometimes church/religious organizations feel threatened by government inspections. This is not to be feared. The books of account of churches and religious organizations are not exempt from audit by the IRS. Any books of account which deal with income and expenditures are available to the IRS upon request within the guidelines established by the IRS.

IRS suspicion:

Unless the IRS has sound reason for suspicion of improper financial activities by a religious entity, its records are confidential. One would wonder why any financial records would need to be considered secret. Because the government, in effect, financially supports tax-exempt organizations, it has a justifiable right to inspect financial records. Whenever there are benefits granted, there are responsibilities involved. Churches and religious organizations should be willing to provide substantiation for any of their financial activities to the government as a matter of public good and appreciation for the favorable treatment of religious entities in the United States of America. It is not the same elsewhere in the world, and the U.S. has traditionally been warmly disposed to religion and religious activities.

Many individuals who start congregations believe they are starting churches, when in fact they are "having church services," and the organization itself does not "qualify" as a church for IRS purposes because it may not meet the tests for all exempt entities. The IRS, back in the early 80's, designed a list of 14 Points. As the Commissioner of the IRS at that time was Jerome Kurtz, his name became attached to the points, and the list was referred to as Jerome Kurtz's 14 Points. His name has since been dropped, but the 14 Points still remain the test of classification of a new organization as a church. No new organization would have all 14 points and no set numbers of points are required for the classification of church for any organization. The IRS looks for sincerity of purpose and whether the new organization is "organized and operated" for an exempt purpose and meets the other tests required for exempt status regardless of classification.

There are other purposes, such as education, philanthropic, scientific, and a few other classifications that an organization may be organized and operated to achieve. Religion is only one such classification.

I am not an attorney and I am not advising anyone now in any specific issue, I sincerely wish to help ULC ministers avoid difficulties and have the proper classification so that they can begin and/or continue their religious work which should benefit society as a whole rather than a private interest.

It is necessary for the successful operation and classification of a new religious organization that the founders understand what is expected of new organizations.
Both classifications (church or ministry) may be exempt from Federal taxation if they are "organized and operated" for an exempt purpose, which in this case would be religion and comply with a few additional requirements made of all exempt organizations.

Organization and Operation:

The "organized and operated" for an exempt purpose test is the first test of an organization's founding document. Secondly, there must be a provision that prohibits all political activity especially involving legislation of any sort. Clearly, churches have been involved in political activities at times; however, they risk the loss of their exempt status for doing so. It is ethically wrong for any exempt organization to become involved in any legislation or campaigning either for or against any individual or cause. Any tax-exempt organization that does so is inviting the IRS's action to revoke its exemption. IRS exemptions can be pulled at any time. Any religiously held motivation for intervention into politics or legislation is of no matter. The law is clear. If an exempt organization strongly feels it has to say something and experiences some compelling need to become involved, it should relinquish its exempt status and be free to do as it pleases.

When the government pays (and it does so by granting exempt status by which individuals are given incentives - charitable deductions - for giving to certain organizations), it has a right to set the rules.

An exempt organization must also have a provision which states that, upon the dissolution of the organization after all of the debts of the organization are paid, the remaining funds, if any, shall be donated to another recognized exempt organization.

A provision must be included in the organization's operations that "no part of the net may inure to the benefit of any private individual(s)." What this means is that the organization must serve the public good, or a portion of the public which may ascribe to its beliefs and practices, and not serve the private interest of any one or more persons.  No one person or group of persons, especially founders or family members, may benefit from the activities of the organization, aside from benefiting, to a certain degree, on the same basis as any others such as in reasonable compensation for services commensurate with the duties performed. It simply cannot serve a private benefit or provide "special" benefits to the founders, their families, or others.

Additional Reading:

Because tax law and be difficult and changed every year the ULC catalog offers various minister and church tax guides.