Church Tax Benefits

Church Tax Benefits

October 16, 2023
Church Tax Benefits
Under the federal tax system, organizations that qualify as
As a result, these organizations may not provide the IRS
“churches” under Internal Revenue Code (IRC) Section
with any financial details about their operations unless they
170(b)(1)(A)(i) receive more favorable tax treatment than
are subject to the UBIT. IRC Section 6104(d)(1)(A)(ii)
other tax-exempt organizations. For example, the IRC
provides that annual returns that relate to the unrelated
generally subjects churches to fewer filing obligations than
business income tax are available for public inspection.
other tax-exempt organizations, restricts the government’s
Unlike many other tax-exempt organizations, under IRC
ability to conduct church tax audits, and relieves “church
Section 6043(b)(1), churches, their integrated auxiliaries,
plans” of many requirements imposed on tax-qualified
and conventions or associations of churches also are not
retirement plans. This In Focus provides an overview of
required to file an information return when they liquidate,
some of the tax benefits associated with church status.
dissolve, terminate, or experience a substantial contraction
Tax Benefits Shared with Other Tax-
(i.e., experience a significant disposition of assets).
Exempt Organizations
Church Audits Under IRC Section 7611
Churches enjoy many of the same tax benefits granted to
As part of the Tax Reform Act of 1984 (P.L. 98-369)
other tax-exempt organizations under IRC Section
Congress enacted special procedural rules under IRC
501(c)(3). An organization must first qualify as a 501(c)(3)
Section 7611 that govern the audits of churches,
“religious organization” to seek “church” status under IRC
organizations claiming to be churches, and conventions or
Section 170(b)(1)(A)(i). As a 501(c)(3), a church is exempt
associations of churches. The statute provides churches
from the federal income tax under IRC Section 501(a). Like
with procedural safeguards in “church tax inquiries” and
several other tax-exempt organizations, however, churches
“church tax examinations.” The statute does not extend
are subject to tax on their unrelated business income under
these safeguards to (1) criminal investigations; (2) any
IRC Sections 511-514. The unrelated business income tax
inquiry or examination of any person connected with a
(UBIT) is a tax on an organization’s gross income from the
church, such as a contributor or minister; (3) certain
conduct of any trade or business that is regularly carried on
assessments under IRC Sections 6851, 6852, or 6861; (4)
and that is not substantially related to the organization’s
any case involving a willful attempt to defeat or evade taxes
tax-exempt purpose. Under IRC Section 3306(c)(8),
imposed by the IRC; or (5) any case involving a knowing
services performed for 501(c)(3)s are not considered
failure to file a return for a tax imposed by the IRC.
employment for purposes of the Federal Unemployment
Treasury Regulation Section 301.7611-1, Q&A 4, states
Tax Act (FUTA). Churches therefore do not pay the FUTA
that routine requests for information, such as questions
tax on their employees’ wages under IRC Section 3301.
about filing a return, compliance with tax withholding
responsibilities, and supplemental information necessary to
Churches, like some other tax-exempt organizations, can
complete mechanical processing of a return, also are
receive donations deductible by donors. Individual
outside IRC Section 7611’s scope.
taxpayers who itemize their deductions, and corporations
generally may deduct their charitable contributions to
IRC Section 7611 requires the IRS to provide a written
churches under IRC Section 170. Similarly, gifts to
notice to churches, organizations claiming to be churches,
churches are typically deductible for gift tax purposes under
and conventions or associations of churches before
IRC Section 2522, and bequests, legacies, devises, or
beginning a church tax inquiry. A church tax inquiry is an
transfers to churches usually are deductible for estate tax
initial inquest that serves as a basis for determining whether
purposes under IRC Section 2055.
(1) an organization is a church exempt from tax under IRC
Filing Obligations
Section 501(a), (2) is carrying on an unrelated trade or
business (within the meaning of IRC Section 513), or (3) is
Compared to other tax-exempt organizations, churches have
engaged in activities subject to tax. The IRS may only start
fewer filing obligations. Generally, organizations must
a church tax inquiry if an “appropriate high-level Treasury
notify the government that they are applying for recognition
official” reasonably believes, based on facts and
of exemption under IRC Section 501(c)(3) in accordance
circumstances recorded in writing, that the organization
with IRC Section 508(a). Churches, their integrated
may not qualify for tax exemption as a church or may not
auxiliaries, and conventions or associations of churches are
be paying tax on an unrelated trade or business or another
excepted from filing an application for exemption under
taxable activity. IRC Section 7611(h)(7) defines an
IRC Section 508(c)(1)(a). Tax-exempt organizations are
“appropriate high-level Treasury official” as the Secretary
typically required to file an annual return disclosing
of the Treasury or any delegate of the Secretary whose rank
financial information to the Internal Revenue Service (IRS)
is a Regional Commissioner or higher. The IRS
under IRC Section 6033(a)(1). There is an exception for
Restructuring and Reform Act of 1998 (P.L. 105-206)
churches, their integrated auxiliaries, and conventions or
eliminated the Office of Regional Commissioner, replacing
associations of churches in IRC Section 6033(a)(3)(A)(i).
the four-region structure with a taxpayer-type structure. In
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Church Tax Benefits
United States v. Bible Study Time, Inc., 295 F. Supp. 3d 606
examination notice date, subject to specific suspension
(D.S.C. 2018), a district court held that the Tax Exempt and
provisions. If a completed church tax inquiry or church tax
Government Entities (TE/GE) Division Commissioner
examination does not result in revocation, a notice of
holds a rank comparable to the former Regional
deficiency or assessment (as described in IRC Section
Commissioner position and the TE/GE Division
7611(d)(1)), or a request for a significant change in church
Commissioner’s responsibilities “serve the purpose
operations (including the adequacy of accounting
intended by Section 7611(h)(7)’s definition of appropriate
practices), then the IRS generally cannot start another
high-level official.”
church tax inquiry or church tax examination for five years.
If the IRS’s concerns are
Church Plans
not resolved in a church tax
inquiry, the IRS may begin a church tax examination of
Typically, under IRC Section 414(e), a church plan is a plan
“church records” and religious activities. IRC Section 7611
established and maintained by a church, or by a convention
requires the IRS to provide written notice to churches,
or association of churches, to provide retirement, health, or
organizations claiming to be churches, and conventions or
welfare benefits for its employees, which is exempt from
associations of churches before beginning a church tax
tax under IRC Section 501(a). Absent an election to be
examination. After receiving notice, but before the
covered by stricter standards, a church plan ordinarily does
examination begins, an organization may request a
not have to meet many of the requirements in the IRC or the
conference with the IRS to discuss the IRS’s concerns.
Employee Retirement Income Security Act of 1974
(ERISA) that are imposed on tax-qualified retirement plans
Every person (e.g., organization) liable for any tax under
and ERISA employee welfare benefit plans. These IRC and
the IRC is subject to broad recordkeeping requirements
ERISA requirements generally aim to ensure plan solvency
prescribed by the Secretary of the Treasury, or her delegate,
and protect plan participants. For example, a nonelecting
under IRC Section 6001. When a person does not
retirement church plan generally does not have to meet the
voluntarily produce records requested by the IRS, the IRS
minimum participation and coverage requirements in IRC
can obtain these records by issuing an administrative
Section 410, the minimum vesting requirements in IRC
summons in accordance with IRC Section 7602 and may
Section 411, and the requirements in Title I of ERISA
seek judicial enforcement of the summons if the person
governing reporting, disclosure, and fiduciary
summoned remains noncompliant. IRC Section 7611
responsibility. If the nonelecting retirement church plan is a
specifically restricts the IRS’s ability to examine church
pension plan, it is also exempt from the funding rules in
records and religious activities in church tax examinations.
IRC Section 412 and it is not covered by the Pension
IRC Section 7611(h)(4) defines church records as “all
Benefit Guarantee Corporation. However, nonelecting
corporate and financial records regularly kept by a church,
retirement church plans are still subject to the IRC
including corporate minute books and lists of members and
participation, vesting, and funding standards in effect on
contributors,” except for church corporate and financial
September 1, 1974.
records that are acquired pursuant to a third-party summons
Considerations for Congress
under IRC Section 7609 or from any governmental agency.
When drafting legislation providing church tax preferences,
IRC Section 7611’s rules gove
Congress has to account for organizations that seek church
rning church tax
status primarily as a tax-avoidance device or to hide other
examinations provide that the IRS may only review (1)
church records “to the extent necessary” to determine
prohibited activity. Congress also has to balance protecting
the rights of legitimate churches with providing government
liability for, and the amount of, any tax under the IRC and
agencies with sufficient means to eliminate tax-avoidance
(2) religious activities “to the extent necessary” to
schemes and ensure the tax system’s integrity. Congress
determine whether an organization claiming to be a church
also might consider drafting church tax preference
is a church for any period. Courts that have been asked to
legislation to avoid certain First Amendment Establishment
enforce summonses for church records have construed the
phrase “to the extent necessary” to require more than a
Clause challenges. In American Atheists, Inc. v. Shulman,
21 F. Supp. 3d 856 (E.D. Ky. 2014), the plaintiffs sued to
showing of relevance. In United States v. Church of
enjoin the IRS from enforcing church tax preferences. The
Scientology of Boston, Inc. 933 F.2d 1074 (1st Cir. 1991),
plaintiffs argued that church tax preferences improperly
the court explained that the IRS must show that the
summoned materials are “‘necessary’ to the
advanced religion in violation of the Establishment Clause
investigation”—
and that the IRS did not present “any specific facts or
i.e., “will significantly help to further the
legislative intent” showing that the preferences were
purpose of the investigation.” In United States v. C.E.
necessary to protect churches’ rights under the First
Hobbs Foundation for Religious Training and Education,
Amendment’s Free Exercise Clause. Ultimately, the district
Inc., 7 F.3d 169 (9th Cir. 1993), the court held that, to show
court did not reach the merits of the plaintiffs’
that the summoned documents were necessary under IRC
Establishment Clause claim. The court dismissed the
Section 7611,
plaintiffs’ suit for lack of standing because their injuries
the IRS must (1) show that the purposes of its investigation are
were merely speculative and the organizations never sought
proper, and (2) explain how the particular documents, or
tax-exempt status as religious organizations or churches.
categories of documents, (a) fall directly and logically within the
proper scope of those purposes and (b) will help significantly to
Milan N. Ball, Legislative Attorney
further an investigation within the scope of those purposes.
IF12509
Church tax inquiries or church tax examinations must be
completed no later than two years after the church tax
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Church Tax Benefits

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https://crsreports.congress.gov | IF12509 · VERSION 1 · NEW