On May 17, 2010, the IRS began revoking the tax-exempt statuses of nonprofits that failed to file three consecutive annual returns (Form 990-N, 990-EZ, or 990-PF).  As a result, as many as 300,000 nonprofits may lose their tax-exempt status, effectively shrinking the nonprofit sector by 25%.

On July 26, 2010, the IRS released a guidance on filing relief for Form 990-N and 990-EZ filers in danger of losing their tax exemptions.  However, this one-time relief is ONLY available to small organizations whose filing deadlines fall on or after May 17, 2010, and before October 15, 2010.  (All returns filed under this program are due no later than October 15, 2010.) 

These events beg the question:  Why is it important to preserve an organization’s tax-exempt status? 

A nonprofit organization has numerous benefits that will help it to survive economically.  There are also benefits to the contributors, which make a donation to the organization more attractive.  Some of the benefits of being a nonprofit organization include:

• Exemption from paying federal income tax.
• May receive tax-deductible gifts.
• May receive tax-deductible contributions.
• Eligibility to receive grants from foundations.
• Contributions to a nonprofit are tax deductible for donors to the organization.

Protecting the organization’s tax-exempt status is vitally important to a nonprofit organization.  But, what happens to a nonprofit that loses its exemption?  What happens if a donor gives to a charity that has lost its exemption?

Contact the Church Law Group at 972-444-8777 to find out the answers to these questions and more!

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Every week, your church preaches and teaches about the nature of grace, the need for forgiveness of sin, to treat one another with love, and many other similar biblical concepts. The church positions itself as a place that models those concepts.  However, putting those ideas into real-world practice is often easier said than done.  In particular, many churches struggle with dealing with known criminals, especially registered or convicted sex offenders, who come to church services and intermingle with the church’s congregation, attend classes, and seek to volunteer.

We know of many churches that have been faced with this issue and there have been a range of responses.  Some churches have taken a strict, no-tolerance view and will not allow sexual offenders to come onto church property or become members.  At the other end of the spectrum, many churches appear to have not thought about the issue and do not have any policies or procedures regarding registered or convicted sex offenders or criminals.

Some middle-ground approaches allow sex offenders to come to church, and perhaps even participate in events, so long as the individual has agreed to follow the church’s adopted policies and procedures. Examples of guidelines that have been adopted by churches include one or more of the following:

• Require known registered or convicted sex offenders to submit an updated, comprehensive background investigation to verify the nature and number of any prior convictions;
• Create a special application questionnaire to learn more about the person beyond his or her criminal background, such as personal references, job history and stability, whether the person appears to be in a stable family and work environment, or whether there are any psychological counseling or drug therapies the person may be involved in;
• Create a special committee or appoint a specific church official to review pending membership or visitor applications and determine what restrictions, if any, to place on the person;
• Segregate such person into special worship services, classes, or study groups where they are not interacting with the rest of the congregation;
• Appoint a mentor or sponsor to help the person get acclimated to the church and/or to follow them around;
• Place restrictions on the person’s membership activities, such as not allowing them into areas where children or youth congregate, the use of certain bathrooms only, attendance of certain Sunday School classes only, or allowing them to walk from the parking lot to the sanctuary and back only;
• Put the person on a probationary membership where they are severely restricted in their church activities, but those restrictions are loosened after various milestones are reached over a period of time;
• Not allow the person to volunteer for certain church missions or programs;
• Have the person agree, in writing, that church officials may notify any and all persons that the church deems necessary of the person’s background;
• Require the person to meet with a designated committee of church official on a scheduled basis to assess the person’s state of mind and/or compliance with guidelines as set out by the church; and
• Have the person agree to a Code of Conduct that might include apologizing to prior victims and agreeing to follow certain Christian standards of living.

There is no easy or quick answer to this issue and the church will have to decide where it stands.  When the church adopts its policies and procedures, it will need to make sure that they are closely followed, and the church should review their effectiveness from time to time.  With proper planning, every church should be able to mold a solution that accommodates all concerns and desires, that allows for effective ministry, and that honors God.

The Church Law Group wants to hear from you!  What are your thoughts on allowing registered sex offenders to attend your church?

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April 1st marks the beginning of National Child Abuse Prevention Month.  Help raise awareness among your church staff and volunteers on how to keep S.T.O.P. child abuse now!

S.T.O.P. is a program that has been developed by David Middlebrook in his work with churches, many of which do not have an effective program to safeguard the children in their care.  S.T.O.P. is a simple, yet effectual, tool that can be implemented by any church, regardless of the size.  This program will allow a church to take the necessary steps in protecting its childcare program from infiltration by child molesters, as well as knowing how to respond should the unthinkable occur.

S.T.O.P. stands for:

SCREEN:  Screening all employees and volunteers so that you may weed out any persons who are potential predators or who may raise a “red flag” in terms of their suitability to work with children.

TRAIN:  Training all employees and volunteers in how to recognize signs of abuse, avoid incidents of abuse, and report abuse.

OPERATE:  Learning how to operate with safety and efficiency is crucial for any childcare facility.

PLAN:  Churches should integrate a response plan into their church system before any allegation of abuse occurs. 

David Middlebrook’s S.T.O.P program can be found in more detail in The Guardian System.  This award-winning book has recently been re-released in a convenient electronic version that is now available for purchase.  Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about preventing or reporting child abuse, or if you are interested in the purchasing your copy of The Guardian System.

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The Tarrant County Appraisal District (“TAD”) has agreed to abandon its quest to require disclosure of salaries of all employees of Kenneth Copeland Ministries (the “Church”) as part of a recent settlement agreement.  The settlement centers on TAD’s denial of the Church’s application for religious exemption from certain property taxes.  While applying for property tax exemption, the Church refused to disclose salary information for each of its employees. 

TAD—like many other appraisal districts across the state—uses an application for property tax exemption that was generated by the Texas Comptroller.  The form requires the applicant to identify the name, position and salary for each of its employees.  Once submitted, the application is placed in the appraisal district’s file, which is public record.   As a result, the salaries of all church employees may be viewed by any interested person.  For many years, rather than requiring churches to submit actual salary data for each employee, TAD and other appraisal districts allowed churches to provide either a summary of total compensation of employees or a statement from an auditor that the church’s finances were in proper order.  However, after a recent change in TAD personnel, TAD adopted a very stringent approach of interpreting the form—rather than allowing a summary of compensation or auditor statement as previously permitted, TAD began to require applicant churches to provide a complete disclosure of salaries as to each individual employee. 

The Church filed suit over this issue to protect its privacy, the privacy of its employees, and for the general privacy of all churches.   There is a longstanding concept in our country that the government should not intrude into the privacy of its citizens unless it has a compelling reason.  For example, although individuals are required to submit their salaries to the government when they file their tax returns, the returns are not public record.  Churches are typically afforded an even greater sense of deference by virtue of the religious freedoms granted under the First Amendment to the Constitution as well as the Texas constitution.  For instance, churches do not typically file tax returns, thus the salary information of church employees is never reported in any public manner.  The Church believes that the salary information of all employees should not be of public record just as an individual taxpayer’s salary is not of public record. 

Moreover, the Church believes that it was not within TAD’s governmental authority to request salary information.  Currently, the Internal Revenue Service is the only governmental agency that has jurisdiction to investigate churches and more specifically, the compensation of church employees.  When the IRS investigates a church’s employee’s compensation, they take the actual compensation number and then have qualified executive compensation experts analyze it based upon access to comparable data.  This evaluation of whether the compensation is “reasonable”—as required by the Internal Revenue Code—is not based upon common sense, rather it is determined only after a highly developed fact based investigation. 

During the course of the lawsuit, TAD came to realize that it not only lacked the authority to evaluate compensation, but TAD also realized that it lacks the resources to analyze the salaries of every church employee for each church that applies for property tax exemption.  TAD officials acknowledged that they were requiring disclosure of salaries for which they had no actual use and that they did nothing with the information other than put it in the applicant’s file. 

TAD’s settlement—and concession not to require disclosure of private salary information—is a victory for church freedom, the preservation of religious constitutional protections, and the privacy rights for church employees throughout all of Texas.   We are hopeful that going forward, this suit can be the basis for TAD and all appraisal districts, as well as the Texas Comptroller, to remove the salary disclosure requirement from its forms and to develop a process that allows churches and employee privacy to be protected while simultaneously obtaining appropriate documentation of the exempt purposes of the organization. 

We here at the Church Law Group applaud TAD for taking this matter to heart and allowing church freedoms to be preserved while still doing its job to make sure that exemptions are being properly administered.

Click here to read a recent article from the Fort Worth Star-Telegram.

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The IRS wants to know if your organization is practicing “good governance,” so it recently released its new Governance Check Sheet that its agents will use to gather information about the governance practices of nonprofit organizations, including churches and ministries.   The release of the Governance Check Sheet is helpful to public charities because it gives nonprofit organizations a better idea of what the IRS is thinking and what the IRS considers “good governance.”  This, in turn, will help your organization make important governance decisions and implement important policies and procedures.  Specifically, in the Governance Check Sheet the IRS examines the following issues:

1)  Governing Body and Management: 

• Does the organization have a written mission statement that articulates its exempt purpose?
• Do the bylaws of the organization include information about who has the right to vote, qualifications, etc?

2)  Compensation:

• Does an authorized independent body establish compensation procedures, in advance, for all high level employees?
• Is comparability data used to determine compensation?

3)  Organizational Control:

• Are related family members serving on the Board of Directors?
• Do any directors have business relationships with other directors, officers, or key employees?

4)  Conflicts of Interest:

• Does the organization have a written conflict-of-interest policy?
• Is the policy followed?

5)  Financial Oversight:

• What type of policies and procedures are in place to ensure assets are properly used for exempt purposes?
• How often are financial reports provided to the organization’s Board of Directors?
• Is the Form 990 (if applicable) reviewed by the entire Board of Directors prior to submission?

6)  Document Retention:

• Does the organization have (and follow) a policy for document retention and destruction?
• Does the Board of Directors contemporaneously document its meetings (i.e. minutes) and retain such documentation?

Some have wondered why the IRS is becoming involved in corporate governance issues when its role is really to ensure tax compliance.  However, it appears as though the IRS is reviewing the governance practices of charities to determine the connection between a charity’s tax compliance and corporate governance practices.  The thought is that the better governance procedures that an organization has in place, the more likely that the organization is also going to comply with all applicable tax rules and standards for exempt organizations.

Here at the Church Law Group, we strongly recommend making sure that your organization’s governance documents–including articles of incorporation, bylaws, and other basic policies and procedures–are compliant with state and federal laws, as well as with the current standards for tax-exempt organizations.  Determining the effectiveness of your organization’s governance practices will help ensure the long term success and viability of your organization.  Remember, as Benjamin Franklin stated so long ago, “an ounce of prevention is worth a pound of cure.”  Contact us today at 972-444-8777 to learn more about how the Church Law Group can help you evaluate the effectiveness of your organization’s governance procedures.

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