For the overwhelming majority of non-for-profit organizations, a favorable determination letter from the Internal Revenue Service (the “IRS”) is invaluable and provides myriad benefits. Obtaining such a letter requires hours preparing IRS Form 1023, Application for Recognition of Tax Exemption (the “Exemption Application”), legal fees, and up to 180 days waiting on a response from the IRS (even longer if the IRS has questions). Organizations that qualify as churches, integrated auxiliaries, and conventions or associations of churches (collectively, “churches”), however, are afforded special recognition under the Internal Revenue Code (the “Code”) and are not required to submit an Exemption Application to qualify for tax exemption. A church that meets the requirements of section 501(c)(3) of the Code is automatically deemed to be tax exempt under section 508 of the Code and is not required to apply for and obtain recognition of tax-exempt status from the IRS.
Even though churches are not required to apply for tax-exempt status, many churches choose to do so for a variety of reasons. A church contemplating whether to submit an Exemption Application should carefully consider the implications of such a filing. Because this is not a one-size-fits-all type of determination, some of the most common issues are set forth below to assist an organization in making an informed decision.
1. Exemption from Filing Form 990
A significant benefit of operating as a church is the exemption from annually filing Form 990, Return of Organization Exempt from Income Tax (the “Annual Return”). The Annual Return requires an organization to, among other things, (a) describe its most significant activities, governance structure, and policies; (b) disclose compensation information about certain of the organization’s highest paid officers, employees, and others; (c) provide a statement of revenue and expense and a balance sheet; and (d) disclose whether the organization is related to other non-profit or for-profit organizations, and, if so, whether the filing organization entered into certain transactions with those related organizations. Organizations that do not file an Annual Return for three consecutive years automatically lose their tax-exempt status.
An organization classified as a church is exempt from filing the Annual Return with or without a determination letter from the IRS. For those churches that choose to apply for a determination letter, Line 10 of Part I of the Exemption Application asks whether the applicant is “claiming to be excused from Filing Form 990.” Churches generally check “Yes” to this question to avoid triggering this annual filing requirement. Because churches are not required to file annual returns, they also are not subject to automatic revocation of exemption for failure to file.
2. Exemption Application
A benefit of filing an Exemption Application is that the church will appear as an organization eligible to receive tax-deductible charitable contributions on the IRS Business Master File (the “IRS Master File”) and certain other publications, like GuideStar’s charitable organization database. A church relying on the automatic exemption may not appear in the IRS Master File or in GuideStar, which may impact whether certain donors are comfortable making a contribution and whether the church is eligible to participate in certain fundraising programs (see Section 5, below). In addition, religious organizations that don’t fit neatly within the traditional notion of a church may consider submitting an Exemption Application to confirm that church status is appropriate.
For a church that has been operating for several years, preparing the Exemption Application can be tedious and expensive because each applicant must disclose detailed information about its operations and activities, finances, and officers and directors, including compensation data of certain highly-paid individuals. In addition, churches should keep in mind that the entire Exemption Application, including all attachments and any correspondence with the IRS, must be made available to any interested member of the general public.
3. IRS Audits
If a church member or other donor is audited by the IRS, he or she must establish and bears the burden of showing that each donee organization meets the requirements of section 501(c)(3) to support the deductibility of his or her contributions. A church that has relied on the automatic exemption may not be able to easily provide such verification to a member under audit. Such a church generally will be required to submit documentation to show that it possesses the characteristics generally attributed to churches, such as a distinct legal existence, a recognized creed and form of worship, a definite and distinct ecclesiastical government, and a formal code of doctrine and discipline, among others. A church, however, that has obtained a determination letter likely won’t need to go through such an exercise and should be able to confirm its exempt status by providing a copy of its determination letter to a member under audit.
4. R-1, Temporary Nonimmigrant Religious Workers
A church seeking to sponsor a foreign national as a minister or in another religious occupation in the United States must include, among other information, a valid determination letter with the church’s Form I-129, Petition for a Nonimmigrant Worker (“R-1 petition”). In other words, a church relying on the automatic exemption typically is not eligible to sponsor a foreign national because it does not have a determination letter to submit with its R-1 petition. Churches have protested this requirement, but the U.S. Citizenship and Immigration Services (“USCIS”) is unwavering and has stated the following in response to criticism:
USCIS recognizes that the IRS does not require all churches to apply for a tax-exempt status determination letter, but has nevertheless retained that requirement in this final rule. A requirement that petitioning churches submit a tax determination letter is a valuable fraud deterrent. A determination letter represents verifiable documentation that the petitioner is a bona fide tax exempt organization or part of a group exemption. Whether an organization qualifies for exemption from federal income taxation provides a simplified test of that organization’s nonprofit status. See USCIS, Religious Worker National Stakeholder Engagement, 4 (July 2011).
Accordingly, churches should be aware of this requirement before entering into employment discussions with a foreign national and before submitting an R-1 petition to USCIS.
5. Google Ad Grants, Amazon Smile Eligibility, and Matching Gifts Programs
Tax-exempt organizations, including churches, may qualify for a Google Ad Grant. A Google Ad Grant recipient receives $10,000 of in-kind advertising every month from Google Ads, an online advertising service from Google. To verify an applicant’s tax-exempt status, Google currently confirms that each applicant is listed on GuideStar’s charitable organization database. GuideStar obtains information from the IRS Master File, IRS Forms 990 and 990-EZ, and the nonprofits themselves. A church that has not applied for recognition of its tax-exempt status likely will not appear in GuideStar’s database and, at least initially, will not be eligible for a Google Ad Grant. A church interested in being listed in GuideStar’s database, therefore, must reach out to GuideStar and provide additional information to confirm its tax-exempt status (click here for more information on this process). In addition, an applicant for a Google Ad Grant must agree to abide by Google’s program policies, which includes a non-discrimination policy which may not align with certain churches’ religious beliefs.
AmazonSmile is a program in which Amazon donates 0.5% of the price of eligible AmazonSmile purchases to charitable organizations selected by customers. An organization wishing to participate in this program must register with Amazon. Like Google, Amazon currently uses GuideStar to verify that each applicant is qualified under section 501(c)(3) of the Code and requires that each applicant affirm its non-discrimination policy (click here for more information).
Many large companies encourage philanthropy among employees by operation of matching-gift programs. Each employer sets forth specific requirements for eligible charitable organizations, and it is common for employers to use a third party to verify that recipient organizations are eligible to receive tax-deductible contributions. Accordingly, churches that do not appear in the IRS Master File or in GuideStar’s database often are not eligible to participate in these programs, since their tax-exempt status cannot be readily confirmed.
6. State and Local Taxes
A determination letter can be helpful when a church applies for an exemption from local real estate transfer taxes, property taxes, or sales and use taxes. Such exemptions may be available to churches without a determination letter; however, a church applying for these exemptions likely will need to provide additional evidence of its church status to local and state agencies.
As illustrated by the above discussion, whether churches should apply for recognition of tax exemption is a church-specific inquiry. The decision will depend on a church’s current and proposed activities and its ultimate goal in submitting an Exemption Application.
The attorneys in the Tax-Exempt Organizations Group at Quarles & Brady regularly assist churches in thinking through these issues and are happy to discuss whether submitting an Exemption Application makes sense for your organization. If you have any questions concerning the subject matter of this update, please contact: