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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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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Churches that meet the requirements of the Internal Revenue Code section 501(c)(3) are automatically considered tax exempt.  This means that churches are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Even so, many churches seek tax-exempt recognition from the IRS simply because it provides assurance that financial contributions to the church would generally be tax-deductible.

The term church is found, but not specifically defined, in the Internal Revenue Code.  The IRS has compiled a list of certain characteristics that are generally attributed to churches.  They include:

• Distinct legal existence
• Recognized creed and form of worship
• Definite and distinct ecclesiastical government
• Formal code of doctrine and discipline
• Distinct religious history
• Membership not associated with any other church or denomination    Organization of ordained ministers
• Ordained ministers selected after completing prescribed courses of study Literature of its own
• Established places of workshop
• Regular congregations
• Regular religious services
• Sunday schools for the religious instruction of the young
• Schools for the preparation of its members

Recently, the IRS denied several organizations church status when the organizations applied for tax-exempt recognition as a church.  The IRS concluded that the organizations failed to meet the legal definition of “church.”

One of the organizations that applied for recognition as a “church” was denied because its worship services were conducted solely by teleconference.  The IRS concluded that worship by teleconference does not bring people together for worship, and that “sitting at home holding a ‘service’ over the telephone does not meet the more restrictive definition of a ‘church.’”

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Not all nonprofit organizations are tax exempt.  However, the IRS, due to constitutional constraints, gives churches and some religious organizations special exemptions.  These include not being required to file either an application for exemption (Form 1023) or an annual report (Form 990).  Unfortunately, in our current day and age, many financial planners, accountants, and attorneys will not allow their clients to give money to an organization which has not received IRS recognition.  So, while there is no requirement that a church apply for tax exemption, it is highly recommended. 

An organization seeking recognition of exemption as a charitable organization should file Form 1023.  The Form 1023 application includes a description of the purposes and activities of the organization, its fundraising plans, the composition of its board of directors, its compensation practices, and financial information.  The organization’s articles of organization and bylaws and perhaps other documents must be attached.  This application is a significant legal document for an exempt organization, and it should be prepared and retained accordingly.  Every statement made in the application should be carefully considered.

If the IRS agrees that the organization is tax exempt, it will issue a determination letter. This determination letter can serve as proof to a potential donor that a contemplated donation is tax-deductible.  In addition, the letter may serve as proof to state sales tax authorities that the church is tax-exempt and not subject to sales tax.  It may also help a minister who wishes to elect out of the Social Security system as the determination letter provides proof that the organization that ordained him or her is recognized as a church by the IRS.

Has your church obtained tax-exempt status from the IRS?

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