There has been a sea of changes over the past few decades regarding how the government regards churches. Church administrators who are relying on outdated legal information may not only be exposing themselves to tax issues, but they may also be missing out on benefits and tax exemptions that the government has recently made available to them.
Congress and the IRS have taken a keen interest in the activities of nonprofits and churches after years of abuse of regulations and loopholes by parties who are not lawfully entitled to benefits. This abuse resulted in the enactment of section 4958 as well as the Exempt Organizations Executive Compensation Compliance Project (“the Project”). The Project resulted in numerous compliance check letters being sent to thousands of organizations. Many of the examinations that opened with the Project are still going on today. The Report found that there were significant reporting issues, and issues with compliance with federal laws. Violations of tax laws uncovered by the Project have resulted in millions of dollars in fines.
Some of the main compliance issues faced by churches include failure to record activities properly, taking bad advice from the government, church nurseries, changes in the legal definition of a minister, and changes to tax withholdings and deposits.
Churches that participate in a significant number of non-exempt activities are at risk losing their tax-exempt status. The United States Supreme Court has ruled that a single nonexempt purpose, if substantial in nature, could preclude an organization from qualifying as a 501(c). These days, with reductions in congregation size, churches must engage in various other activities to stay afloat, including renting out facilities, bake sales, or running a food service during non-religious events. Churches can engage in these activities, but they must be handled so as to be related to the church’s charitable purpose.
Many churches rely on the advice of IRS employees. In 2011, The Court ruled that the advice of IRS employees is not binding on the agency. This means that every church should seek the advice of an attorney or certified public accountant, as necessary.
Church nurseries must be outfitted with cribs that are compliant with federal code. Insurance companies also often require organizations to be compliant with these regulations. This means that churches should not accept donated cribs for use in their nurseries. It is even risky to donate these cribs to the needy, as it can jeopardize a church’s tax-exempt status and expose it to liability in the event of an injury in one of the cribs.
In 2012, the Supreme Court questioned whether someone calling themselves a “minister” was enough to confer a tax-exempt status. The ruling turned out to be favorable to religious organizations. Even if most of a minister’s duties are clerical and educational, they may still be considered a minister under the law. You do not need to be devoted to religious ministry exclusively to be legally considered a minister.
Finally, all employees of the church must have taxes withheld, and they must be paid to the IRS electronically using the Electronic Federal Tax Payment System. Most churches must pay payroll taxes on a monthly basis. There are fees for deposits that are made late to the IRS.