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Tax Exempt and Government Entities

EXEMPT ORGANIZATIONS

Tax Guide for

Churches & Religious

Organizations

501(c)(3)

Publication 1828 (Rev. 8-2015) Catalog Number 21096G Department of the Treasury Internal Revenue Service www.irs.gov

Congress has enacted special tax laws that apply to churches, religious organizations and

ministers in recognition of their unique status in American society and of their rights guaran-

teed by the First Amendment of the Constitution of the United States. Churches and religious

organizations are generally exempt from income tax and receive other favorable treatment

under the tax law; however, certain income of a church or religious organization may be

subject to tax, such as income from an unrelated business.

The Internal Revenue Service offers this quick reference guide of federal tax law and proce-

dures for churches and religious organizations to help them voluntarily comply with tax rules.

The contents of this publication reflect the IRS interpretation of tax laws enacted by Congress,

Treasury regulations and court decisions. The information given is not comprehensive,

however, and doesn’t cover every situation. Thus, it isn’t intended to replace the law or be the

sole source of information. The resolution of any particular issue may depend on the specific

facts and circumstances of a given taxpayer. In addition, this publication covers subjects on

which a court may have made a decision more favorable to taxpayers than the interpretation

by the IRS. Until these differing interpretations are resolved by higher court decisions, or in

some other way, this publication will present the interpretation of the IRS.

For more detailed tax information, the IRS has assistance programs and tax information

products for churches and religious organizations, as noted at the end of this publication.

Most IRS publications and forms can be downloaded from the IRS website at www.irs.gov.

Specialized information can be accessed through the Exempt Organizations (EO) website

under the IRS Tax Exempt and Government Entities division at www.irs.gov/eo or by calling

EO Customer Account Services toll free at 877-829-5500.

The IRS considers this publication a living document, one that will be revised to take into

account future developments and feedback. Comments on the publication may be submitted

to the IRS at:

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20224 Attn: SE:T:C&L

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Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Tax-Exempt Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Recognition of Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Applying for Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Public Listing of Tax-Exempt Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Jeopardizing Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Inurement and Private Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Substantial Lobbying Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Measuring Lobbying Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Political Campaign Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Unrelated Business Income Tax (UBIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Net Income Subject to the UBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Examples of Unrelated Trade or Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Tax on Income-Producing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Employment Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Social Security and Medicare Taxes — Federal Insurance Contributions Act (FICA). . . . . . 21

Federal Unemployment Tax Act (FUTA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Special Rules for Compensation of Ministers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Withholding Income Tax for Ministers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Parsonage or Housing Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Social Security and Medicare Taxes — Federal Insurance Contributions Act (FICA)

vs. Self-Employment Contributions Act (SECA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Payment of Employee Business Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Accountable Reimbursement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Non-accountable Reimbursement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

iv

Recordkeeping Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Books of Accounting and Other Types of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Length of Time to Retain Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Information and Tax Returns — Forms to File and Due Dates. . . . . . . . . . . . . . . . . . . . . . . . 27

Charitable Contributions— Substantiation and Disclosure Rules . . . . . . . . . . . . . . . . . . 29

Recordkeeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Recordkeeping Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Substantiation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Disclosure Rules that Apply to Quid Pro Quo Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 30

Exceptions to Disclosure Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Special Rules Limiting IRS Authority to Audit a Church . . . . . . . . . . . . . . . . . . . . . . . . . 31

Tax Inquiries and Examinations of Churches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Audit Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Help From The IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IRS Tax Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IRS Customer Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

EO Customer Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

EO Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

EO Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

1

Introduction

This publication explains the benefits and the responsibilities under the federal tax system for

churches and religious organizations. The term church is found, but not specifically defined, in

the Internal Revenue Code (IRC). The term is not used by all faiths; however, in an attempt to

make this publication easy to read, we use it in its generic sense as a place of worship includ-

ing, for example, mosques and synagogues. With the exception of the special rules for church

audits, the use of the term church throughout this publication also includes conventions and

associations of churches as well as integrated auxiliaries of a church.

Because special tax rules apply to churches, it’s important to distinguish churches from other

religious organizations. Therefore, when this publication uses the term “religious organiza-

tions,” it isn’t referring to churches or integrated auxiliaries. Religious organizations that are not

churches typically include nondenominational ministries, interdenominational and ecumenical

organizations, and other entities whose principal purpose is the study or advancement of religion.

Churches and religious organizations may be legally organized in a variety of ways under state

law, such as unincorporated associations, nonprofit corporations, corporations sole and chari-

table trusts.

Certain terms used throughout this publication—church, integrated auxiliary of a church, minis-

ter and IRC Section 501(c)(3) — are defined in the Glossary.

2

Tax-Exempt Status

Churches and religious organizations, like many other charitable organizations,

qualify for exemption from federal income tax under IRC Section 501(c)(3) and are

generally eligible to receive tax-deductible contributions. To qualify for tax-exempt

status, the organization must meet the following requirements (covered in greater

detail throughout this publication):

■ the organization must be organized and operated exclusively for religious,

educational, scientific or other charitable purposes;

■ net earnings may not inure to the benefit of any private individual or shareholder;

■ no substantial part of its activity may be attempting to influence legislation;

■ the organization may not intervene in political campaigns; and

■ the organization’s purposes and activities may not be illegal or violate

fundamental public policy.

Recognition of Tax-Exempt Status

Automatic Exemption for Churches

Churches that meet the requirements of IRC Section 501(c)(3) are automatically

considered tax exempt and are not required to apply for and obtain recognition of

tax-exempt status from the IRS.

Although there is no requirement to do so, many churches seek recognition of

tax-exempt status from the IRS because this recognition assures church leaders,

members and contributors that the church is recognized as exempt and qualifies

for related tax benefits. For example, contributors to a church that has been

recognized as tax exempt would know that their contributions generally are

tax-deductible.

Church Exemption Through a Central/Parent Organization

A church with a parent organization may wish to contact the parent to see if it

has a group ruling. If the parent holds a group ruling, then the IRS may already

recognize the church as tax exempt. Under the group exemption process, the

parent organization becomes the holder of a group ruling that identifies other

affiliated churches or other affiliated organizations. A church is recognized as tax

exempt if it is included in a list provided by the parent organization. If the church

or other affiliated organization is included on the list, it doesn’t need to take further

action to obtain recognition of tax-exempt status.

An organization that isn’t covered under a group ruling should contact its parent

organization to see if it’s eligible to be included in the parent’s application for

the group ruling. For general information on the group exemption process, see

Publication 4573, Group Exemptions, and Revenue Procedure 80-27, 1980-1 C.B. 677.

3

Religious Organizations

Unlike churches, religious organizations that wish to be tax exempt generally must

apply to the IRS for tax-exempt status unless their gross receipts do not normally

exceed $5,000 annually.

Applying for Tax-Exempt Status

Employer Identification Number (EIN)

Every tax-exempt organization, including a church, should have an employer iden-

tification number whether or not the organization has any employees. There are

many instances in which an EIN is necessary. For example, a church needs an EIN

when it opens a bank account, to be listed as a subordinate in a group ruling or if

it files returns with the IRS (for example, Forms W-2, 1099, 990-T).

An organization may obtain an EIN by filing Form SS-4, Application for Employer

Identification Number, according to its instructions. If the organization is submitting

IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of

the Internal Revenue Code, Form SS-4 should be included with the application.

Application Form

When applying for recognition as tax exempt under IRC Section 501(c)(3),

churches and some religious organizations must use Form 1023. Smaller religious

organizations may be eligible to use Form 1023-EZ, Streamlined Application for

Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code

A religious organization generally must submit its application within 27 months

from the end of the month in which the organization is formed to be considered tax

exempt and qualified to receive deductible contributions as of the date the organi-

zation was formed. On the other hand, a church may obtain recognition of exemp-

tion from the date of its formation as a church, even though that date may be prior

to 27 months from the end of the month in which its application is submitted.

Cost of applying for exemption. The IRS is required to collect a non-refundable

fee from any organization seeking a determination of tax-exempt status under IRC

Section 501(c)(3). Although churches are not required by law to file an application

for exemption, if they choose to do so voluntarily, they’re required to pay the fee for

determination.

The fee must be submitted with Form 1023; otherwise, the application will be

returned to the submitter. Fees change periodically. The most recent user fee can

be found at the Exempt Organizations (EO) website under the IRS Tax Exempt and

Government Entities Division via www.irs.gov/eo (key word “user fee”) or by calling

EO Customer Account Services toll-free at 877-829-5500.

4

IRS Approval of Exemption Application

If the application for tax-exempt status is approved, the IRS will notify the

organization of its status, any requirement to file an annual information return and

its eligibility to receive deductible contributions. The IRS does not assign a special

number or other identification as evidence of an organization’s tax-exempt status.

Public Listing of Tax-Exempt Organizations

Exempt Organizations Select Check is an online search tool that allows users to

search for organizations that are eligible to receive tax-deductible charitable

contributions. Note that not every organization that is eligible to receive tax-deductible

contributions is listed on Select Check. For example, churches that have not applied

for recognition of tax-exempt status are not included in the publication. Only the parent

organization in a group ruling is included by name on Select Check.

Select Check also allows users to search for organizations whose tax-exempt

status has been automatically revoked because they have not met their annual

filing requirement for three consecutive years. In addition, users may search Select

Check for organizations that have filed a Form 990-N (e-Postcard) annual electronic

notice.

If you have questions about listing an organization, correcting an erroneous entry

or deleting a listing on Select Check, contact EO Customer Account Services

toll-free at 877-829-5500.

Jeopardizing Tax-Exempt Status

All IRC Section 501(c)(3) organizations, including churches and religious

organizations, must abide by certain rules:

■ their net earnings may not inure to any private shareholder or individual;

■ they must not provide a substantial benefit to private interests;

■ they must not devote a substantial part of their activities to attempting to

influence legislation;

■ they must not participate in, or intervene in, any political campaign on behalf of

(or in opposition to) any candidate for public office; and

■ the organization’s purposes and activities may not be illegal or violate

fundamental public policy.

5

Inurement and Private Benefit

Inurement to Insiders

Churches and religious organizations, like all exempt organizations under IRC

Section 501(c)(3), are prohibited from engaging in activities that result in inurement

of the church’s or organization’s income or assets to insiders (such as persons

having a personal and private interest in the activities of the organization). Insiders

could include the minister, church board members, officers, and in certain circum-

stances, employees. Examples of prohibited inurement include the payment of

dividends, the payment of unreasonable compensation to insiders and transferring

property to insiders for less than fair market value. The prohibition against

inurement to insiders is absolute; therefore, any amount of inurement is, poten-

tially, grounds for loss of tax-exempt status. In addition, the insider involved may

be subject to excise tax. See the following section on Excess benefit transactions.

Note that prohibited inurement doesn’t include reasonable payments for services

rendered, payments that further tax-exempt purposes or payments made for the

fair market value of real or personal property.

Excess benefit transactions. In cases where an IRC Section 501(c)(3) organiza-

tion provides an excess economic benefit to an insider, both the organization and

the insider have engaged in an excess benefit transaction. The IRS may impose an

excise tax on any insider who improperly benefits from an excess benefit transac-

tion, as well as on organization managers who participate in the transaction know-

ing that it’s improper. An insider who benefits from an excess benefit transaction

must return the excess benefits to the organization. Detailed rules on excess

benefit transactions are contained in the Code of Federal Regulations, Title 26,

sections 53.4958-0 through 53.4958-8.

Private Benefit

An IRC Section 501(c)(3) organization’s activities must be directed exclusively

toward charitable, educational, religious or other exempt purposes. The organiza-

tion’s activities may not serve the private interests of any individual or organization.

Rather, beneficiaries of an organization’s activities must be recognized objects of

charity (such as the poor or the distressed) or the community at large (for exam-

ple, through the conduct of religious services or the promotion of religion). Private

benefit is different from inurement to insiders. Private benefit may occur even if

the persons benefited are not insiders. Also, private benefit must be substantial to

jeopardize tax-exempt status.

6

Substantial Lobbying Activity

In general, no organization, including a church, may qualify for IRC Section

501(c)(3) status if a substantial part of its activities is attempting to influence legis-

lation (commonly known as lobbying). An IRC Section 501(c)(3) organization may

engage in some lobbying, but too much lobbying activity risks loss of tax-exempt

status.

Legislation includes action by Congress, any state legislature, any local council or

similar governing body, with respect to acts, bills, resolutions or similar items (such

as legislative confirmation of appointive offices), or by the public in a referendum,

ballot initiative, constitutional amendment or similar procedure. It doesn’t include

actions by executive, judicial or administrative bodies.

A church or religious organization will be regarded as attempting to influence

legislation if it contacts, or urges the public to contact, members or employees of

a legislative body for the purpose of proposing, supporting or opposing legislation,

or if the organization advocates the adoption or rejection of legislation.

Churches and religious organizations may, however, involve themselves in issues

of public policy without the activity being considered as lobbying. For example,

churches may conduct educational meetings, prepare and distribute educational

materials, or otherwise consider public policy issues in an educational manner

without jeopardizing their tax-exempt status.

Measuring Lobbying Activity

Substantial part test. Whether a church’s or religious organization’s attempts to

influence legislation constitute a substantial part of its overall activities is deter-

mined on the basis of all the pertinent facts and circumstances in each case. The

IRS considers a variety of factors, including the time devoted (by both compen-

sated and volunteer workers) and the expenditures devoted by the organization

to the activity, when determining whether the lobbying activity is substantial.

Churches must use the substantial part test since they aren’t eligible to use the

expenditure test described in the next section.

Under the substantial part test, a church or religious organization that conducts

excessive lobbying activity in any taxable year may lose its tax-exempt status,

resulting in all its income being subject to tax. In addition, a religious organization

is subject to an excise tax equal to five percent of its lobbying expenditures for the

year in which it ceases to qualify for exemption. Further, a tax equal to five percent

of the lobbying expenditures for the year may be imposed against organization

managers, jointly and severally, who agree to the making of such expenditures

knowing that the expenditures would likely result in loss of tax-exempt status.

7

Expenditure test. Although churches aren’t eligible, religious organizations may

elect the expenditure test under IRC Section 501(h) as an alternative method for

measuring lobbying activity. Under the expenditure test, the extent of an organiza-

tion’s lobbying activity won’t jeopardize its tax-exempt status, provided its

expenditures, related to the activity, do not normally exceed an amount specified

in IRC Section 4911. This limit is generally based on the organization’s size and

may not exceed $1,000,000.

Religious organizations electing to use the expenditure test must file IRS Form

5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To

Make Expenditures To Influence Legislation, at any time during the tax year for which

it is to be effective. The election remains in effect for succeeding years unless it’s

revoked by the organization. Revocation of the election is effective beginning with

the year following the year in which the revocation is filed. Religious organizations

may wish to consult their tax advisors to determine their eligibility for, and the

advisability of, electing the expenditure test.

Under the expenditure test, a religious organization that engages in excessive

lobbying activity over a four-year period may lose its tax-exempt status, making

all its income for that period subject to tax. Should the organization exceed its lob-

bying expenditure dollar limit in a particular year, it must pay an excise tax equal to

25 percent of the excess.

Political Campaign Activity

Under the Internal Revenue Code, all IRC Section 501(c)(3) organizations, includ-

ing churches and religious organizations, are absolutely prohibited from directly or

indirectly participating in, or intervening in, any political campaign on behalf of (or

in opposition to) any candidate for elective public office. Contributions to political

campaign funds or public statements of position (verbal or written) made by or on

behalf of the organization in favor of (or in opposition to) any candidate for public

office clearly violate the prohibition against political campaign activity. Violation

of this prohibition may result in denial or revocation of tax-exempt status and the

imposition of excise tax.

Certain activities or expenditures may not be prohibited depending on the facts

and circumstances. For example, certain voter education activities (including

the presentation of public forums and the publication of voter education guides)

conducted in a non-partisan manner do not constitute prohibited political

campaign activity. In addition, other activities intended to encourage people to

participate in the electoral process, such as voter registration and get-out-the-vote

drives, would not constitute prohibited political campaign activity if conducted in a

non-partisan manner. On the other hand, voter education or registration activities

with evidence of bias that: (a) would favor one candidate over another; (b) oppose

a candidate in some manner; or (c) have the effect of favoring a candidate or

group of candidates, will constitute prohibited participation or intervention.

8

Individual Activity by Religious Leaders

The political campaign activity prohibition isn’t intended to restrict free expression

on political matters by leaders of churches or religious organizations speaking for

themselves, as individuals. Nor are leaders prohibited from speaking about impor-

tant issues of public policy. However, for their organizations to remain tax exempt

under IRC Section 501(c)(3), religious leaders can’t make partisan comments in

official organization publications or at official church functions. To avoid potential

attribution of their comments outside of church functions and publications, reli-

gious leaders who speak or write in their individual capacity are encouraged to

clearly indicate that their comments are personal and not intended to represent

the views of the organization. The following are examples of situations involving

endorsements by religious leaders.

EXAMPLE 1

Minister A is the minister of Church J, a Section 501(c)(3) organization, and is well known in the com-

munity. With their permission, Candidate T publishes a full-page ad in the local newspaper listing five

prominent ministers who have personally endorsed Candidate T, including Minister A. Minister A is

identified in the ad as the minister of Church J. The ad states, “Titles and affiliations of each individual

are provided for identification purposes only.” The ad is paid for by Candidate T’s campaign committee.

Since the ad was not paid for by Church J, the ad is not otherwise in an official publication of Church

J, and the endorsement is made by Minister A in a personal capacity, the ad doesn’t constitute political

campaign intervention by Church J.

EXAMPLE 2

Minister B is the minister of Church K, a Section 501(c)(3) organization, and is well known in the com-

munity. Three weeks before the election, he attends a press conference at Candidate V’s campaign

headquarters and states that Candidate V should be re-elected. Minister B doesn’t say he is speaking

on behalf of Church K. His endorsement is reported on the front page of the local newspaper and he is

identified in the article as the minister of Church K. Because Minister B didn’t make the endorsement at

an official church function, in an official church publication or otherwise use the church’s assets, and

did not state that he was speaking as a representative of Church K, his actions didn’t constitute political

campaign intervention by Church K.

EXAMPLE 3

Minister C is the minister of Church I, a Section 501(c)(3) organization. Church I publishes a monthly

church newsletter that is distributed to all church members. In each issue, Minister C has a column titled

“My Views.” The month before the election, Minister C states in the “My Views” column, “It is my per-

sonal opinion that Candidate U should be re-elected.” For that one issue, Minister C pays from his per-

sonal funds the portion of the cost of the newsletter attributable to the “My Views” column. Even though

he paid part of the cost of the newsletter, the newsletter is an official publication of the church. Because

the endorsement appeared in an official publication of Church I, it constitutes political campaign inter-

vention by Church I.

EXAMPLE 4

Minister D is the minister of Church M, a Section 501(c)(3) organization. During regular services of

Church M shortly before the election, Minister D preached on a number of issues, including the impor-

tance of voting in the upcoming election, and concluded by stating, “It is important that you all do your

duty in the election and vote for Candidate W.” Because Minister D’s remarks indicating support for

Candidate W were made during an official church service, they constitute political campaign intervention

by Church M.

9

Issue Advocacy vs . Political Campaign Intervention

Like other Section 501(c)(3) organizations, some churches and religious organi-

zations take positions on public policy issues, including issues that divide candi-

dates in an election for public office. However, 501(c)(3) organizations must avoid

any issue advocacy that functions as political campaign intervention. Even if a

statement does not expressly tell an audience to vote for or against a specific can-

didate, an organization delivering the statement is at risk of violating the political

campaign intervention prohibition if there is any message favoring or opposing

a candidate. A statement can identify a candidate not only by stating the candi-

date’s name but also by other means such as showing a picture of the candidate,

referring to political party affiliations or other distinctive features of a candidate’s

platform or biography. All the facts and circumstances need to be considered to

determine if the advocacy is political campaign intervention.

Key factors in determining whether a communication results in political campaign

intervention include:

■ whether the statement identifies one or more candidates for a given public office,

■ whether the statement expresses approval or disapproval for one or more

candidates’ positions or actions,

■ whether the statement is delivered close in time to the election,

■ whether the statement makes reference to voting or an election,

■ whether the issue addressed in the communication has been raised as an issue

distinguishing candidates for a given office,

■ whether the communication is part of an ongoing series of communications by

the organization on the same issue that are made independent of the timing of any

election, and

■ whether the timing of the communication and identification of the candidate are

related to a non-electoral event such as a scheduled vote on specific legislation by

an officeholder who also happens to be a candidate for public office.

A communication is particularly at risk of political campaign intervention when

it makes reference to candidates or voting in a specific upcoming election.

Nevertheless, the communication must still be considered in context before

arriving at any conclusions.

10

EXAMPLE 1

Church O, a Section 501(c)(3) organization, prepares and finances a full-page newspaper advertisement

that is published in several large circulation newspapers in State V shortly before an election in which

Senator C is the incumbent candidate for nomination in a party primary. The advertisement states that

a pending bill in the United States Senate would provide additional opportunities for State V residents

to participate in faith-based programs by providing funding to such church-affiliated programs. The

advertisement ends with the statement “Call or write Senator C to tell him to vote for this bill, despite his

opposition in the past.” Funding for faith-based programs hasn’t been raised as an issue distinguishing

Senator C from any opponent. The bill is scheduled for a vote before the election. The advertisement

identifies Senator C’s position as contrary to O’s position. Church O has not violated the political cam-

paign intervention prohibition. The advertisement doesn’t mention the election or the candidacy of

Senator C or distinguish Senator C from any opponent. The timing of the advertising and the identifi-

cation of Senator C are directly related to a vote on the identified legislation. The candidate identified,

Senator C, is an officeholder who is in a position to vote on the legislation.

EXAMPLE 2

Church R, a Section 501(c)(3) organization, prepares and finances a radio advertisement urging an

increase in state funding for faith-based education in State X, which requires a legislative appropriation.

Governor E is the governor of State X. The radio advertisement is first broadcast on several radio sta-

tions in State X beginning shortly before an election in which Governor E is a candidate for re-election.

The advertisement is not part of an ongoing series of substantially similar advocacy communications

by Church R on the same issue. The advertisement cites numerous statistics indicating that faith-based

education in State X is under funded. Although the advertisement doesn’t say anything about Governor

E’s position on funding for faith-based education, it ends with “Tell Governor E what you think about

our under-funded schools.” In public appearances and campaign literature, Governor E’s opponent has

made funding of faith-based education an issue in the campaign by focusing on Governor E’s veto of

an income tax increase to increase funding for faith-based education. At the time the advertisement is

broadcast, no legislative vote or other major legislative activity is scheduled in the State X legislature

on state funding of faith-based education. Church R has violated the political campaign prohibition. The

advertisement identifies Governor E, appears shortly before an election in which Governor E is a can-

didate, is not part of an ongoing series of substantially similar advocacy communications by Church R

on the same issue, is not timed to coincide with a non-election event such as a legislative vote or other

major legislative action on that issue, and takes a position on an issue that the opponent has used to

distinguish himself from Governor E.

EXAMPLE 3

Candidate A and Candidate B are candidates for the state senate in District W of State X. The issue of

State X funding for a faith-based indigent hospital care in District W is a prominent issue in the cam-

paign. Both candidates have spoken out on the issue. Candidate A supports funding the care; Candidate

B opposes the project and supports increasing State X funding for public hospitals instead. P is the

head of the board of elders at Church C, a Section 501(c)(3) organization located in District W. At C’s

annual fundraising dinner in District W, which takes place in the month before the election, P gives a

long speech about health care issues, including the issue of funding for faith-based programs. P doesn’t

mention the name of any candidate or any political party. However, at the end of the speech, P states,

“For those of you who care about quality of life in District W and the desire of our community for health

care responsive to their faith, there is a very important choice coming up next month. We need more

funding for health care. Increased public hospital funding won’t make a difference. You have the power

to respond to the needs of this community. Use that power when you go to the polls and cast your vote

in the election for your state senator.” C has violated the political campaign intervention prohibition

as a result of P’s remarks at C’s official function shortly before the election, in which P referred to the

upcoming election after stating a position on a prominent issue in a campaign that distinguishes the

candidates.

11

Inviting a Candidate to Speak

Depending on the facts and circumstances, a church or religious organization may

invite political candidates to speak at its events without jeopardizing its tax-exempt

status. Political candidates may be invited in their capacity as candidates, or indi-

vidually (not as candidates). Candidates may also appear without an invitation at

organization events that are open to the public.

Speaking as a candidate. Like any other IRC Section 501(c)(3) organization,

when a candidate is invited to speak at a church or religious organization event as

a political candidate, factors in determining whether the organization participated

or intervened in a political campaign include:

■ whether the church provides an equal opportunity to the political candidates

seeking the same office,

■ whether the church indicates any support of or opposition to the candidate. This

should be stated explicitly when the candidate is introduced and in communica-

tions concerning the candidate’s appearance,

■ whether any political fundraising occurs,

■ whether the individual is chosen to speak solely for reasons other than candi-

dacy for public office,

■ whether the organization maintains a nonpartisan atmosphere on the premises

or at the event where the candidate is present, and

■ whether the organization clearly indicates the capacity in which the candidate is

appearing and does not mention the individual’s political candidacy or the upcom-

ing election in the communications announcing the candidate’s attendance at

the event.

Equal opportunity to participate. Like any other Section 501(c)(3) organization,

in determining whether candidates are given an equal opportunity to participate, a

church or religious organization should consider the nature of the event to which

each candidate is invited, in addition to the manner of presentation. For exam-

ple, a church or religious organization that invites one candidate to speak at its

well attended annual banquet, but invites the opposing candidate to speak at a

sparsely attended general meeting, will likely be found to have violated the political

campaign prohibition, even if the manner of presentation for both speakers is oth-

erwise neutral.

Public forum. Sometimes a church or religious organization invites several

candidates to speak at a public forum. A public forum involving several candi-

dates for public office may qualify as an exempt educational activity. However, if

the forum is operated to show a bias for or against any candidate, then the forum

would be prohibited campaign activity, as it would be considered intervention or

12

participation in a political campaign. When an organization invites several candi-

dates to speak at a forum, it should consider:

■ whether questions for the candidate are prepared and presented by an indepen-

dent nonpartisan panel;

■ whether the topics discussed by the candidates cover a broad range of issues

that the candidates would address if elected to the office sought and are of interest

to the public;

■ whether each candidate is given an equal opportunity to present his or her views

on the issues discussed;

■ whether the candidates are asked to agree or disagree with positions, agendas,

platforms or statements of the organization; and

■ whether a moderator comments on the questions or otherwise implies approval

or disapproval of the candidates.

A candidate may seek to reassure the organization that it’s permissible for the

organization to do certain things in connection with the candidate’s appearance.

An organization in this position should keep in mind that the candidate may not

be familiar with the organization’s tax-exempt status and that the candidate may

be focused on compliance with the election laws that apply to the candidate’s

campaign rather than the federal tax law that applies to the organization. The orga-

nization will be in the best position to ensure compliance with the prohibition on

political campaign intervention if it makes its own independent conclusion about

its compliance with federal tax law.

The following are examples of situations where a church or religious organization

invites candidates to speak before the congregation.

EXAMPLE 1

Minister E is the minister of Church N, a Section 501(c)(3) organization. In the month prior to the election,

Minister E invited the three Congressional candidates for the district in which Church N is located to

address the congregation, one each on three successive Sundays, as part of regular worship services.

Each candidate was given an equal opportunity to address and field questions on a variety of topics

from the congregation. Minister E’s introduction of each candidate included no comments on their qualifi-

cations or any indication of a preference for any candidate. The actions do not constitute political cam-

paign intervention by Church N.

EXAMPLE 2

The facts are the same as in Example 1 except there are four candidates in the race rather than three,

and one of the candidates declines the invitation to speak. In the publicity announcing the dates for each

of the candidate’s speeches, Church N includes a statement that the order of the speakers was deter-

mined at random and the fourth candidate declined the church’s invitation to speak. Minister E makes

the same statement in his opening remarks at each of the meetings where one of the candidates is

speaking. Church N’s actions do not constitute political campaign intervention.

13

EXAMPLE 3

Minister F is the minister of Church O, a Section 501(c)(3) organization. The Sunday before the election,

Minister F invited Senate Candidate X to preach to her congregation during worship services. During his

remarks, Candidate X stated, “I am asking not only for your votes, but for your enthusiasm and dedica-

tion, for your willingness to go the extra mile to get a very large turnout on Tuesday.” Minister F invited

no other candidate to address her congregation during the Senatorial campaign. Because these activ-

ities took place during official church services, they are by Church O. By selectively providing church

facilities to allow Candidate X to speak in support of his campaign, Church O’s actions constitute politi-

cal campaign intervention.

Speaking as a non-candidate. Like any other Section 501(c)(3) organization, a

church or religious organization may invite political candidates (including church

members) to speak in a non-candidate capacity. For instance, a political candidate

may be a public figure because he or she: (a) currently holds, or formerly held,

public office; (b) is considered an expert in a non-political field; or (c) is a celebrity

or has led a distinguished military, legal or public service career. A candidate may

choose to attend an event that is open to the public, such as a lecture, concert or

worship service. The candidate’s presence at a church-sponsored event does not,

by itself, cause the organization to be involved in political campaign intervention.

However, if the candidate is publicly recognized by the organization, or if the can-

didate is invited to speak, factors in determining whether the candidate’s appear-

ance results in political campaign intervention include:

■ whether the individual speaks only in a non-candidate capacity,

■ whether either the individual or any representative of the church makes any men-

tion of his or her candidacy or the election,

■ whether any campaign activity occurs in connection with the candidate’s atten-

dance,

■ whether the individual is chosen to speak solely for reasons other than candi-

dacy for public office,

■ whether the organization maintains a nonpartisan atmosphere on the premises

or at the event where the candidate is present, and

■ whether the organization clearly indicates the capacity in which the candidate is

appearing and doesn’t mention the individual’s political candidacy or the upcom-

ing election in the communications announcing the candidate’s attendance at the

event.

In addition, the church or religious organization should clearly indicate the capac-

ity in which the candidate is appearing and shouldn’t mention the individual’s polit-

ical candidacy or the upcoming election in the communications announcing the

candidate’s attendance at the event.

Below are examples of situations where a public official appears at a church or

religious organization.

14

EXAMPLE 1

Church P, a Section 501(c)(3) organization, is located in the state capital. Minister G customarily

acknowledges the presence of any public officials present during services. During the state guberna-

torial race, Lieutenant Governor Y, a candidate, attended a Wednesday evening prayer service in the

church. Minister G acknowledged the Lieutenant Governor’s presence in his customary manner, saying,

“We are happy to have worshiping with us this evening Lieutenant Governor Y.” Minister G made no ref-

erence in his welcome to the Lieutenant Governor’s candidacy or the election. Minister G’s actions do

not constitute political campaign intervention by Church P.

EXAMPLE 2

Minister H is the minister of Church Q, a Section 501(c)(3) organization. Church Q is building a commu-

nity center. Minister H invites Congressman Z, the representative for the district containing Church Q, to

attend the groundbreaking ceremony for the community center. Congressman Z is running for re-elec-

tion at the time. Minister H makes no reference in her introduction to Congressman Z’s candidacy or the

election. Congressman Z also makes no reference to his candidacy or the election and does not do any

fundraising while at Church Q. Church Q has not intervened in a political campaign

EXAMPLE 3

Church X is a Section 501(c)(3) organization. Church X regularly publishes a member newsletter.

Individual church members are invited to send in updates about their activities, which are printed in each

edition of the newsletter. After receiving an update letter from Member Q, Church X prints the following:

“Member Q is running for city council in Metropolis.” The newsletter does not contain any reference to

this election or to Member Q’s candidacy other than this statement. Church X has not intervened in a

political campaign.

EXAMPLE 4

Mayor G attends a concert performed by a choir of Church S, a Section 501(c)(3) organization, in City

Park. The concert is free and open to the public. Mayor G is a candidate for re-election, and the concert

takes place after the primary and before the general election. During the concert, Church S’s minister

addresses the crowd and says, “I am pleased to see Mayor G here tonight. Without his support, these

free concerts in City Park would not be possible. We will need his help if we want these concerts to

continue next year so please support Mayor G in November as he has supported us.” As a result of these

remarks, Church S has engaged in political campaign intervention.

Voter Education, Voter Registration and Get-Out-the-Vote Drives

Section 501(c)(3) organizations are permitted to conduct certain voter education

activities (including the presentation of public forums and the publication of voter

education guides) if they are carried out in a non-partisan manner. In addition,

Section 501(c)(3) organizations may encourage people to participate in the elec-

toral process through voter registration and get-out-the-vote drives, conducted in a

non-partisan manner. On the other hand, voter education or registration activities

conducted in a biased manner that favors (or opposes) one or more candidates is

prohibited.

Like other Section 501(c)(3) organizations, some churches and religious organi-

zations undertake voter education activities by distributing voter guides. Voter

guides, generally, are distributed during an election campaign and provide infor-

mation on how all candidates stand on various issues. These guides may be dis-

15

tributed with the purpose of educating voters; however, they may not be used to

attempt to favor or oppose candidates for public elected office.

A careful review of the following facts and circumstances may help determine

whether a church or religious organization’s publication or distribution of voter

guides constitutes prohibited political campaign activity:

■ whether the candidates’ positions are compared to the organization’s position,

■ whether the guide includes a broad range of issues that the candidates would

address if elected to the office sought,

■ whether the description of issues is neutral,

■ whether all candidates for an office are included, and

■ whether the descriptions of candidates’ positions are either:

– the candidates’ own words in response to questions, or

– a neutral, unbiased and complete compilation of all candidates’ positions.

The following are examples of situations where churches distribute voter guides.

EXAMPLE 1

Church R, a Section 501(c)(3) organization, distributes a voter guide prior to elections. The voter guide

consists of a brief statement from the candidates on each issue made in response to a questionnaire

sent to all candidates for governor of State I. The issues on the questionnaire cover a wide variety of

topics and were selected by Church R based solely on their importance and interest to the electorate as

a whole. Neither the questionnaire nor the voter guide, through their content or structure, indicate a bias

or preference for any candidate or group of candidates. Church R is not participating or intervening in a

political campaign.

EXAMPLE 2

Church S, a Section 501(c)(3) organization, distributes a voter guide during an election campaign. The

voter guide is prepared using the responses of candidates to a questionnaire sent to candidates for

major public offices. Although the questionnaire covers a wide range of topics, the wording of the ques-

tions evidences a bias on certain issues. By using a questionnaire structured in this way, Church S is

participating or intervening in a political campaign.

EXAMPLE 3

Church T, a Section 501(c)(3) organization, sets up a booth at the state fair where citizens can register to

vote. The signs and banners in and around the booth give only the name of the church, the date of the

next upcoming statewide election and notice of the opportunity to register. No reference to any candi-

date or political party is made by volunteers staffing the booth or in the materials available in the booth,

other than the official voter registration forms which allow registrants to select a party affiliation. Church

T is not engaged in political campaign intervention when it operates this voter registration booth.

EXAMPLE 4

Church C is a Section 501(c)(3) organization. Church C’s activities include educating its members on

family issues involving moral values. Candidate G is running for state legislature and an important ele-

16

ment of her platform is challenging the incumbent’s position on family issues. Shortly before the elec-

tion, Church C sets up a telephone bank to call registered voters in the district in which Candidate G is

seeking election. In the phone conversations, Church C’s representative tells the voter about the moral

importance of family issues and asks questions about the voter’s views on these issues. If the voter

appears to agree with the incumbent’s position, Church C’s representative thanks the voter and ends the

call. If the voter appears to agree with Candidate G’s position, Church C’s representative reminds the

voter about the upcoming election, stresses the importance of voting in the election and offers to pro-

vide transportation to the polls. Church C is engaged in political campaign intervention when it conducts

this get-out-the-vote drive.

Business Activity

The question of whether an activity constitutes participation or intervention in a

political campaign may also arise in the context of a business activity of the church

or religious organization, such as the selling or renting of mailing lists, the leasing

of office space or the acceptance of paid political advertising. (The tax treatment

of income from unrelated business activities follows.) In this context, some of the

factors to be considered in determining whether the church or religious organiza-

tion has engaged in prohibited political campaign activity include:

■ whether the good, service or facility is available to the candidates equally;

■ whether the good, service or facility is available only to candidates and not to the

general public;

■ whether the fees charged are at the organization’s customary and usual rates;

and

■ whether the activity is an ongoing activity of the organization or is conducted

only for the candidate.

EXAMPLE 1

Church K is a Section 501(c)(3) organization. It owns a building that has a large basement hall suitable

for hosting dinners and receptions. For several years, Church K has made the hall available for rent to

the public. It has standard fees for renting the hall based on the number of people in attendance. A num-

ber of different organizations have rented the hall. Church K rents the hall on a first come, first served

basis. Candidate P’s campaign pays the standard fee for the dinner. Church K isn’t involved in political

campaign intervention as a result of renting the hall to Candidate P for use as the site of a campaign

fundraising dinner.

EXAMPLE 2

Church L is a Section 501(c)(3) organization. It maintains a mailing list of all its members. Church L has

never rented the mailing list to a third party. The campaign committee of Candidate A, who supports

funding for faith-based programs, approaches Church L and offers to rent Church L’s mailing list for a

fee that is comparable to fees charged by similar organizations. Church L rents the list to Candidate

A’s campaign committee, but declines similar requests from campaign committees of other candidates.

Church L has intervened in a political campaign.

17

Websites. The Internet has become a widely used communications tool. Section

501(c)(3) organizations use their own websites to disseminate statements and

information. They also routinely link their websites to websites maintained by other

organizations as a way of providing additional information that the organizations

believe is relevant to the public.

A website is a form of communication. If an organization posts something on its

website that favors or opposes a candidate for public office, the organization will

be treated the same as if it distributed printed material, oral statements or broad-

casts that favored or opposed a candidate.

An organization has control over whether it establishes a link to another site. When

an organization establishes a link to another website, the organization is respon-

sible for the consequences of establishing and maintaining that link, even if the

organization doesn’t have control over the content of the linked site. Because the

linked content may change over time, an organization may reduce the risk of polit-

ical campaign intervention by monitoring the linked content and adjusting the links

accordingly.

Links to candidate-related material, by themselves, do not necessarily constitute

political campaign intervention. All the facts and circumstances must be taken into

account when assessing whether a link produces that result. The facts and circum-

stances to be considered include, but are not limited to, the context for the link on

the organization’s website, whether all candidates are represented, any exempt

purpose served by offering the link and the directness of the links between the

organization’s website and the Web page that contains material favoring or oppos-

ing a candidate for public office.

EXAMPLE 1

Church P, a Section 501(c)(3) organization, maintains a website that includes biographies of its ministers,

times of services, details of community outreach programs and activities of members of its congrega-

tion. B, a member of Church P’s congregation, is running for a seat on the town council. Shortly before

the election, Church P posts the following message on its website, “Lend your support to B, your fellow

parishioner, in Tuesday’s election for town council.” Church P has intervened in a political campaign.

EXAMPLE 2

Church N, a Section 501(c)(3) organization, maintains a website that includes staff listings, directions

to the church and descriptions of its community outreach programs, schedules of services and school

activities. On one page of the website, Church N describes a particular type of treatment program for

homeless veterans. This section includes a link to an article on the website of O, a major national news-

paper, praising Church N’s treatment program for homeless veterans. The page containing the article

on O’s website doesn’t refer to any candidate or election and has no direct links to candidate or elec-

tion information. Elsewhere on O’s website, there is a page displaying editorials that O has published.

Several of the editorials endorse candidates in an election that hasn’t yet occurred. Church N has not

intervened in a political campaign by maintaining a link on O’s website because the link is provided for

the exempt purpose of educating the public about its programs; the context for the link, the relation-

ship between Church N and O and the arrangement of the links going from Church N’s website to the

endorsement on O’s website don’t indicate that Church N was favoring or opposing any candidate.

18

EXAMPLE 3

Church M, a Section 501(c)(3) organization, maintains a website and posts an unbiased, nonpartisan

voter guide. For each candidate covered in the voter guide, Church M includes a link to that candidate’s

official campaign website. The links to the candidate websites are presented on a consistent neutral

basis for each candidate, with text saying “For more information on Candidate X, you may consult

[URL].” Church M has not intervened in a political campaign because the links are provided for the

exempt purpose of educating voters and are presented in a neutral, unbiased manner that includes all

candidates for a particular office.

Consequences of Political Campaign Activity

When it participates in political campaign activity, a church or religious organi-

zation jeopardizes both its tax-exempt status under IRC Section 501(c)(3) and its

eligibility to receive tax-deductible contributions. In addition, it may become sub-

ject to an excise tax on its political expenditures. This excise tax may be imposed

in addition to revocation, or it may be imposed instead of revocation. Also, the

church or religious organization should correct the violation.

Excise tax. An initial tax is imposed on an organization at the rate of 10 percent of

the political expenditures. Also, a tax at the rate of 2.5 percent of the expenditures

is imposed against the organization managers (jointly and severally) who, without

reasonable cause, agreed to the expenditures knowing they were political expen-

ditures. The tax on management may not exceed $5,000 with respect to any one

expenditure.

In any case in which an initial tax is imposed against an organization, and the

expenditures are not corrected within the period allowed by law, an additional tax

equal to 100 percent of the expenditures is imposed against the organization. In

that case, an additional tax is also imposed against the organization managers

(jointly and severally) who refused to agree to make the correction. The addi-

tional tax on management is equal to 50 percent of the expenditures and may not

exceed $10,000 with respect to any one expenditure.

Correction. Correction of a political expenditure requires the recovery of the

expenditure, to the extent possible, and establishment of safeguards to prevent

future political expenditures.

Please note that a church or religious organization that engages in any political

campaign activity also needs to determine whether it complies with the appropri-

ate federal, state or local election laws, as these may differ from the requirements

under IRC Section 501(c)(3).

19

Unrelated Business Income Tax (UBIT)

Net Income Subject to the UBIT

Churches and religious organizations, like other tax-exempt organizations, may

engage in income-producing activities unrelated to their tax-exempt purposes, as

long as the unrelated activities aren’t a substantial part of the organization’s activi-

ties. However, the net income from these activities will be subject to the UBIT if the

following three conditions are met:

■ the activity constitutes a trade or business,

■ the trade or business is regularly carried on, and

■ the trade or business is not substantially related to the organization’s exempt

purpose. (The fact that the organization uses the income to further its charitable

or religious purposes does not make the activity substantially related to its exempt

purposes.)

Exceptions to UBIT

Even if an activity meets the above criteria, the income may not be subject to tax

if it meets one of the following exceptions: (a) substantially all the work in operat-

ing the trade or business is performed by volunteers, (b) the activity is conducted

by the organization primarily for the convenience of its members or (c) the trade

or business involves the selling of merchandise substantially all of which was

donated.

In general, rents from real property, royalties, capital gains, and interest and div-

idends aren’t subject to the unrelated business income tax unless financed with

borrowed money.

Examples of Unrelated Trade or Business Activities

Unrelated trade or business activities vary depending on types of activities.

Advertising

Many tax-exempt organizations sell advertising in their publications or other forms

of public communication. Generally, income from the sale of advertising is unre-

lated trade or business income. This may include the sale of advertising space

in weekly bulletins, magazines or journals, or on church or religious organization

websites.

Gaming

Most forms of gaming, if regularly carried on, may be considered the conduct of

an unrelated trade or business. This can include the sale of pull-tabs and raffles.

Income derived from bingo games may be eligible for a special tax exception (in

addition to the exception regarding uncompensated volunteer labor), if: (a) the

20

bingo game is the traditional type of bingo (as opposed to instant bingo, a varia-

tion of pull-tabs), (b) the conduct of the bingo game is not an activity carried out

by for-profit organizations in the local area and (c) the operation of the bingo game

does not violate any state or local law.

Sale of merchandise and publications

The sale of merchandise and publications (including the actual publication of

materials) can be considered the conduct of an unrelated trade or business if the

items involved do not have a substantial relationship to the exempt purposes of the

organization.

Rental income

Generally, income derived from the rental of real property and incidental personal

property is excluded from unrelated business income. However, there are certain

situations in which rental income may be unrelated business taxable income:

■ if a church rents out property on which there is debt outstanding (for example, a

mortgage note), the rental income may constitute unrelated debt-financed income

subject to UBIT. (However, if a church or convention or association of churches

acquires debt-financed land and intends to use it for exempt purposes within 15

years of the time of acquisition, then income from the rental of the land may not

constitute unrelated business income.)

■ if personal services are rendered in connection with the rental, then the income

may be unrelated business taxable income.

Parking lots

If a church owns a parking lot that is used by church members and visitors while

attending church services, any parking fee paid to the church would not be sub-

ject to UBIT. However, if a church operates a parking lot that is used by members

of the general public, parking fees would be taxable, as this activity would not be

substantially related to the church’s exempt purpose, and parking fees are not

treated as rent from real property. If the church enters into a lease with a third

party who operates the church’s parking lot and pays rent to the church, these

payments would not be subject to tax, as they would constitute rent from real

property.

Whether an income-producing activity is an unrelated trade or business activ-

ity depends on all the facts and circumstances. For more information, see IRS

Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

Tax on Income-Producing Activities

If a church, or other exempt organization, has gross income of $1,000 or more

for any taxable year from the conduct of any unrelated trade or business, it must

file IRS Form 990-T, Exempt Organization Business Income Tax Return, for that year.

21

If the church is part of a larger entity (such as a diocese), it must file a separate

Form 990-T if it has a separate EIN. Form 990-T is due the l5th day of the 5th

month following the end of the church’s tax year. (IRC Section 512(b)(12) provides

a special rule for parishes and similar local units of a church. A specific deduction

is provided, which is equal to the lower of $1,000 or the gross income derived from

any unrelated trade or business regularly carried on by the parish or local unit of a

church.) See Filing Requirements.

Employment Tax

Generally, churches and religious organizations are required to withhold, report

and pay income and Federal Insurance Contributions Act (FICA) taxes for their

employees. Employment tax includes income tax and FICA taxes withheld and

paid for an employee. Substantial penalties may be imposed against an organiza-

tion that fails to withhold and pay the proper employment tax. Whether a church

or religious organization must withhold and pay employment tax depends upon

whether the church’s workers are employees. Determination of worker status

is important. Several facts determine whether a worker is an employee. For an

in-depth explanation and examples of the common law employer-employee rela-

tionship, see IRS Publication 15-A, Employer’s Supplemental Tax Guide. If a church

or a worker wants the IRS to determine whether the worker is an employee, the

church or worker should file IRS Form SS-8, Determination of Worker Status for

Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Social Security and Medicare Taxes — Federal Insurance

Contributions Act (FICA)

FICA taxes consist of Social Security and Medicare taxes. Wages paid to employ-

ees of churches or religious organizations are subject to FICA taxes unless one of

the following applies:

■ wages are paid for services performed by a duly ordained, commissioned or

licensed minister of a church in the exercise of his or her ministry, or by a member

of a religious order in the exercise of duties required by such order; or

■ a church that is opposed to the payment of Social Security and Medicare taxes

for religious reasons files IRS Form 8274, Certification by Churches and Qualified

Church-Controlled Organizations Electing Exemption From Employer Social Security

and Medicare Taxes. Very specific timing rules apply to filing Form 8274. It must

be filed before the first date on which the electing entity is required to file its first

quarterly employment tax return. This election does not relieve the organization of

its obligation to withhold income tax on wages paid to its employees. In addition, if

an employee makes such an election and earns more than $108.28 in wages in a

calendar year, he or she must pay Self-Employment Contributions Act (SECA) tax.

For more information, see Publication 517, Social Security and Other Information for

Members of the Clergy and Religious Workers.

22

Withheld employee income tax and FICA taxes are reported on IRS Form 941,

Employer’s Quarterly Federal Tax Return. Some small employers are eligible to file an

annual Form 944 instead of quarterly returns. For more information about employ-

ment tax, see;

■ Publication 15, Circular E, Employer’s Tax Guide

■ Publication 15-A, Employer’s Supplemental Tax Guide

■ Publication 517, Social Security and Other Information for Members of the Clergy and

Religious Workers

■ Form 944 Instructions

Federal Unemployment Tax Act (FUTA)

Churches and religious organizations are not liable for FUTA tax. For further

information on FUTA, see IRS Publication 15, Circular E, Employer’s Tax Guide,

IRS Publication 15-A, Employer’s Supplemental Tax Guide, and IRS Publication

517, Social Security and Other Information for Members of the Clergy and Religious

Workers.

Special Rules for Compensation of Ministers

Withholding Income Tax for Ministers

Unlike other exempt organizations or businesses, a church isn’t required to with-

hold income tax from the compensation it pays to its duly ordained, commissioned

or licensed ministers for performing services in the exercise of their ministry. An

employee minister may, however, enter into a voluntary withholding agreement

with the church by completing IRS Form W-4, Employee’s Withholding Allowance

Certificate. A church should report compensation paid to a minister on Form W-2,

Wage and Tax Statement, if the minister is an employee, or on IRS Form 1099-MISC,

Miscellaneous Income, if the minister is an independent contractor.

Parsonage or Housing Allowances

Generally, a minister’s gross income does not include the fair rental value of a

home (parsonage) provided, or a housing allowance paid, as part of the minister’s

compensation for services performed that are ordinarily the duties of a minister.

A minister who is furnished a parsonage may exclude from income the fair rental

value of the parsonage, including utilities. However, the amount excluded can’t be

more than the reasonable pay for the minister’s services.

23

A minister who receives a housing allowance may exclude the allowance from

gross income to the extent it’s used to pay expenses in providing a home.

Generally, those expenses include rent, mortgage payments, utilities, repairs and

other expenses directly relating to providing a home. If a minister owns a home,

the amount excluded from the minister’s gross income as a housing allowance

is limited to the least of: (a) the amount actually used to provide a home, (b) the

amount officially designated as a housing allowance or (c) the fair rental value of

the home. The minister’s church or other qualified organization must designate the

housing allowance by official action taken in advance of the payment. If a minister

is employed and paid by a local congregation, a designation by a national church

agency won’t be effective. The local congregation must make the designation. A

national church agency may make an effective designation for ministers it directly

employs. If none of the minister’s salary has been officially designated as a hous-

ing allowance, the full salary must be included in gross income.

The fair rental value of a parsonage or housing allowance is excludable from

income only for income tax purposes. These amounts are not excluded in deter-

mining the minister’s net earnings from self-employment for Self-Employment

Contributions Act (SECA) tax purposes. Retired ministers who receive either a par-

sonage or housing allowance aren’t required to include the amounts for SECA tax

purposes.

As mentioned above, a minister who receives a parsonage or rental allowance

excludes that amount from his income. The portion of expenses allocable to the

excludable amount is not deductible. This limitation, however, does not apply to

interest on a home mortgage or real estate taxes, nor to the calculation of net

earnings from self-employment for SECA tax purposes.

IRS Publication 517, Social Security and Other Information for Members of the Clergy

and Religious Workers, has a detailed example of the tax treatment for a housing

allowance and the related limitations on deductions. IRS Publication 525, Taxable

and Nontaxable Income, has information on particular types of income for ministers.

Social Security and Medicare Taxes — Federal Insurance

Contributions Act (FICA) vs. Self-Employment Contributions Act

(SECA)

The compensation that a church or religious organization pays to its ministers

for performing services in the exercise of ministry is not subject to FICA taxes.

However, income that a minister earns in performing services in the exercise of

his ministry is subject to SECA tax, unless the minister has timely applied for and

received an exemption from SECA tax.

24

Payment of Employee Business Expenses

A church or religious organization is treated like any other employer as far as

the tax rules on employee business expenses. The rules differ depending upon

whether the expenses are paid through an accountable or non-accountable plan,

and these plans determine whether the payment for these expenses is included in

the employee’s income.

Accountable Reimbursement Plan

An arrangement that an employer establishes to reimburse or advance employee

business expenses will be an accountable plan if it: (1) involves a business con-

nection, (2) requires the employee to substantiate expenses incurred and (3)

requires the employee to return any excess amounts.

Employees must provide the organization with sufficient information to identify the

specific business nature of each expense and to substantiate each element of an

expenditure. It isn’t sufficient for an employee to aggregate expenses into broad

categories such as travel or to report expenses through the use of non-descriptive

terms such as miscellaneous business expenses. Both the substantiation and the

return of excess amounts must occur within a reasonable time.

Employee business expenses reimbursed under an accountable plan are: (a)

excluded from an employee’s gross income, (b) not required to be reported on the

employee’s IRS Form W-2, Wage and Tax Statement, and (c) exempt from the with-

holding and payment of wages subject to FICA taxes and income tax withholdings.

Non-accountable Reimbursement Plan

If the church or religious organization reimburses or advances the employee for

business expenses, but the arrangement does not satisfy the three requirements

of an accountable plan, the amounts paid to the employees are considered

wages subject to FICA taxes and income tax withholding, if applicable, and are

reportable on Form W-2. (Amounts paid to employee ministers are treated as

wages reportable on Form W-2, but are not subject to FICA taxes or income tax

withholding.)

For example, if a church or religious organization pays its secretary a $200 per

month allowance to reimburse monthly business expenses the secretary incurs

while conducting church or religious organization business, and the secretary is

not required to substantiate the expenses or return any excess, then the entire

$200 must be reported on Form W-2 as wages subject to FICA taxes and income

tax withholding. In the same situation involving an employee-minister, the allow-

ance must be reported on the minister’s Form W-2, but no FICA or income tax

withholding is required. For further information see IRS Publication 463, Travel,

Entertainment, Gift, and Car Expenses.

25

One common business expense reimbursement is for automobile mileage. If a

church or religious organization pays a mileage allowance at a rate that is less

than or equal to the federal standard rate, the amount of the expense is deemed

substantiated. (Each year, the federal government establishes a standard mileage

reimbursement rate.) There are no income or employment tax consequences to

the reimbursed individual provided that the employee substantiates the time, place

and business purposes of the automobile mileage for which reimbursement is

sought. Of course, reimbursement for automobile mileage incurred for personal

purposes is includible in the individual’s income.

If a church or religious organization reimburses automobile mileage at a rate

exceeding the standard mileage rate, the excess is treated as paid under a non-

accountable plan. This means that the excess is includible in the individual’s

income and is subject to the withholding and payment of income and employment

taxes, if applicable.

In addition, any mileage reimbursement that is paid without requiring the individual

to substantiate the time, place and business purposes of each trip is included in

the individual’s income, regardless of the rate of reimbursement.

No income is attributed to an employee or a volunteer who uses an automobile

owned by the church or religious organization to perform church-related work.

Recordkeeping Requirements

Books of Accounting and Other Types of Records

All tax-exempt organizations, including churches and religious organizations

(regardless of whether tax-exempt status has been officially recognized by the

IRS), are required to maintain books of accounting and other records necessary to

justify their claim for exemption in the event of an audit. See Special Rules Limiting

IRS Authority to Audit a Church. Tax-exempt organizations are also required to

maintain books and records that are necessary to accurately file any federal tax

and information returns that may be required.

There is no specific format for keeping records. However, the types of required

records frequently include organizing documents (charter, constitution, articles

of incorporation) and bylaws, minute books, property records, general ledgers,

receipts and disbursements journals, payroll records, banking records and

invoices. The extent of the records necessary generally varies according to the

type, size and complexity of the organization’s activities.

26

Length of Time to Retain Records

The law does not specify a length of time that records must be retained; however,

the following guidelines should be applied in the event that the records may be

material to the administration of any federal tax law.

TYPE OF RECORD

LENGTH OF TIME TO RETAIN

Records of revenue

Retain for at least four

and expenses,

years after filing the

including payroll

returns to which they

records.

relate.

Records relating to

Retain for at least four

acquisition and

years after the filing of

disposition of property

the return for the year

(real and personal,

in which disposition

including investments).

occurs.

27

Information and Tax Returns — Forms to File and Due Dates

Churches or religious organizations may be required to report certain payments

or information to the IRS. The following is a list of the most frequently required

returns, who should use them, how they are used and when they should be filed.

Filing Requirements

Forms

Form W-2

Wage and Tax Statement

Form W-3

Transmittal of Wage

and Tax Statement

Form W-2G

Certain Gaming Winnings

Form 941

Employer’s Quarterly

Federal Tax Return

or

Form 944

Employer’s Annual

Federal Tax Return

Form 945

Annual Return of

Withheld Federal

Income Tax

Form 990

Return of Organization

Exempt From Income Tax

Form 990-EZ

Short Form Return of

Organization Exempt

From Income Tax

Form 990-N (e-Postcard)

Electronic Notice for

Tax-Exempt Organizations

Not Required to File

Form 990 or 990-EZ

When to File

Furnish each employee with a

completed Form W-2 by January 31;

and file all Forms W-2 and Form W-3

with the Social Security Administration

(SSA) by the last day of February.

For each winner meeting the

filing requirement, the church

or religious organization must furnish

Form W-2G by January 31; and file

Copy A of Form W-2G with the IRS

by February 28.

See form instructions for due dates.

File Form 945 by January 31. This

form is not required for those years

in which there is no non-payroll tax

liability.

Form 990, 990-EZ or 990-N must be

filed on or before the 15th day of the

5th month following the end of the

organization’s tax year.

For 990-N must be electronically filed.

For more information on reporting

requirements for gaming activities,

see IRS Publication 3079, Tax-

Exempt Organizations and Gaming.

Who Should Use Them

Organizations with employees.

Any charitable or religious orga-

nization, including a church, that

sponsors a gaming event (raffles,

bingo) must file Form W-2G when

a participant wins a prize over a

specific value amount.

Small employers that have been

notified by the IRS to file Form

944 (see form instructions) may

use that form; other employers

required to file must use Form 941.

Generally, all religious organiza-

tions (see exceptions to file Form

990 below) must file Form 990,

Form 990-EZ or Form 990-N.

Exceptions to file Form 990, 990-EZ and 990-N

The following is a list of some of the organizations that are not required to file

Form 990, 990-EZ, or 990-N.

n Churches (as opposed to “religious organizations,” defined earlier)

n Inter-church organizations of local units of a church

n Mission societies sponsored by or affiliated with one or more churches or church

denomination, if more than half of the activities are conducted in, or directed at,

persons in foreign countries

n An exclusively religious activity of any religious order

See the form instructions for a list of other organizations that are not required to file.

How They are Used

Use Form W-2 to report employee

wages and the taxes withheld from

them. Use Form W-3 to transmit

Forms W-2 to the Social Security

Administration.

The requirements for reporting and

withholding depend on the type of

gaming, the amount of winnings and

the ratio of winnings to the wager.

Use Form 941 or 944 to report Social

Security and Medicare taxes and income

taxes withheld by the organization, and

Social Security and Medicare taxes paid

by the organization.

If a church or religious organization

withholds income tax, including backup

withholding, from non-payroll payments,

it must file Form 945.

The thresholds for determining which

form to file, Form 990. 990-EZ or 990-N

are found at www.irs.gov/charities.

28

Forms

Form 990-T

Exempt Organization

Business Income Tax Return

Form 990-W

Estimated Tax on Unrelated

Business Taxable Income for

Tax-Exempt Organizations

Form 1096

Annual Summary and

Transmittal of U.S.

Information Returns

Form 1099-MISC

Miscellaneous Income

Form 5578

Annual Certification of

Racial Nondiscrimination

for a Private School Exempt

from Federal Income Tax

Form 8282

Donee Information Return

Treasury Form 90.22.1,

Report of Foreign Bank

and Financial Accounts

Who Should Use Them

Churches and religious organizations.

Churches and religious organizations.

Churches and religious organizations.

Churches and religious organizations.

A church or religious organization

that operates a private school, whether

separately incorporated or operated

as part of its overall operations, that

teaches secular subjects and generally

complies with state law requirements

for public education.

Churches and religious organizations.

See form instructions

How They are Used

Churches and religious organizations

must file Form 990-T if they generate

gross income from an unrelated busi-

ness of $1,000 or more for a taxable

year.

If the tax on unrelated business income

is expected to be $500 or more, the

church or religious organization must

make estimated tax payments.

Use Form 990-W to compute the

estimated tax liability.

Use Form 1096 to transmit Forms

1099-MISC, W-2G and certain other

forms to the IRS.

A church or religious organization

must use Form 1099-MISC if it pays an

unincorporated individual or an entity

$600 or more in any calendar year for

gross rents; commissions, fees or other

compensation paid to non-employees;

prizes and awards; or other fixed and

determinable income.

File Form 5578 to certify that the

school does not discriminate based

on race or ethnic origin.

A church or religious organization must

file Form 8282 if it sells, exchanges,

transfers or otherwise disposes of cer-

tain non-cash donated property within

three years of the date it originally

received the donation. This applies

to non-cash property that had an

appraised value of more than $5,000

at time of donation.

See form instructions

For more information on unrelated

business income, see Unrelated

Business Income Tax (UBIT).

When to File

Form 990-T must be filed by the 15th

day of the 5th month after the organiza-

tion’s accounting period ends (May 15

for a calendar year accounting period).

Form 990-W is for computation

purposes only and does not need

to be filed.

Form 1096 must be filed by February

28 in the year following the calendar

year in which the payments were

made.

Churches or religious organizations

must furnish each payee with a copy

of Form 1099-MISC by January 31;

and file Copy A of Form 1099-MISC

with the IRS by February 28.

Form 5578 must be filed on or

before the 15th day of the 5th month

following the end of the organization’s

taxable year (May 15 for a calendar

year).

If an organization files Form 990 or

Form 990-EZ, the certification must

be made on Schedule A (Form 990

or Form 990-EZ).

The church or religious organization

must file Form 8282 with the IRS within

125 days of date of disposition of

the property; and furnish the original

donor with a copy of the form.

See form instructions

See the Instructions for

Form 1099-MISC for details.

For information on racial and ethnic

nondiscriminatory policies, see

Revenue Procedure 75-50, 1975-2

C.B. 587 at www.irs.gov.

Note: It is not considered racially discriminatory for a parochial school to select students on

the basis of membership in a religious denomination if membership in the denomination is open

to all on a racially nondiscriminatory basis. Further, a seminary, or other purely religious school,

that primarily teaches religious subjects usually with the purpose of training students for the

ministry, is not subject to the racially nondiscriminatory requirements because it is considered

to be a religious rather than an educational organization.

29

Charitable Contributions— Substantiation and Disclosure Rules

Recordkeeping

A church or religious organization should be aware of the recordkeeping and sub-

stantiation rules imposed on donors of charities that receive certain quid pro quo

contributions.

Recordkeeping Rules

A donor cannot claim a tax deduction for any contribution of cash, a check or

other monetary gift made on or after January 1, 2007, unless the donor maintains a

record of the contribution in the form of either a bank record (such as a cancelled

check) or a written communication from the charity (such as a receipt or a letter)

showing the name of the charity, the date of the contribution and the amount of the

contribution.

Substantiation Rules

A donor can’t claim a tax deduction for any single contribution of $250 or more

unless the donor obtains a contemporaneous, written acknowledgment of the con-

tribution from the recipient church or religious organization. A church or religious

organization that doesn’t acknowledge a contribution incurs no penalty; but with-

out a written acknowledgment, the donor can’t claim a tax deduction. Although it’s

a donor’s responsibility to obtain a written acknowledgment, a church or religious

organization can assist the donor by providing a timely, written statement contain-

ing:

■ name of the church or religious organization,

■ date of the contribution,

■ amount of any cash contribution, and

■ description (but not the value) of non-cash contributions.

In addition, the timely, written statement must contain one of the following:

■ statement that no goods or services were provided by the church or religious

organization in return for the contribution,

■ statement that goods or services that a church or religious organization provided

in return for the contribution consisted entirely of intangible religious benefits, or

■ description and good-faith estimate of the value of goods or services other than

intangible religious benefits that the church or religious organization provided in

return for the contribution.

30

The church or religious organization may either provide separate acknowledg-

ments for each single contribution of $250 or more or one acknowledgment to

substantiate several single contributions of $250 or more. Separate contributions

aren’t aggregated for purposes of measuring the $250 threshold.

Disclosure Rules that Apply to Quid Pro Quo Contributions

A contribution made by a donor in exchange for goods or services is known as a

quid pro quo contribution. A donor may only take a contribution deduction to the

extent that his or her contribution exceeds the fair market value of the goods and

services the donor receives in return for the contribution. Therefore, donors need

to know the value of the goods or services. A church or religious organization must

provide a written statement to a donor who makes a payment exceeding $75 partly

as a contribution and partly for goods and services provided by the organization.

EXAMPLE 1

If a donor gives a church a payment of $100 and, in return, receives a ticket to an event valued at $40,

this is a contribution, and only $60 is deductible by the donor ($100 - $40 = $60). Even though the

deductible amount does not exceed $75, since the contribution the church received is in excess of $75,

the church must provide the donor with a written disclosure statement. The statement must: (1) inform

the donor that the amount of the contribution that is deductible for federal income tax purposes is limited

to the excess of money (and the fair market value of any property other than money) contributed by the

donor over the value of goods or services provided by the church or religious organization; and (2) pro-

vide the donor with a good-faith estimate of the value of the goods or services.

The church or religious organization must provide the written disclosure statement

with either the solicitation or the receipt of the contribution and in a manner that is

likely to come to the attention of the donor. For example, a disclosure in small print

within a larger document may not meet this requirement.

Exceptions to Disclosure Statement

A church or religious organization isn’t required to provide a disclosure statement

for quid pro quo contributions when: (a) the goods or services meet the standards

for insubstantial value or (b) the only benefit received by the donor is an intangi-

ble religious benefit. Additionally, if the goods or services the church or religious

organization provides are intangible religious benefits (examples follow), the

acknowledgment for contributions of $250 or more doesn’t need to describe those

benefits.

Generally, intangible religious benefits are benefits provided by a church or reli-

gious organization that are not usually sold in commercial transactions outside a

donative (gift) context.

Intangible religious benefits include:

■ admission to a religious ceremony

■ de minimis tangible benefits, such as wine used in religious ceremony

31

Benefits that are not intangible religious benefits include:

■ tuition for education leading to a recognized degree

■ travel services

■ consumer goods

IRS Publication 1771, Charitable Contributions: Substantiation and Disclosure

Requirements, provides more information on substantiation and disclosure rules.

Special Rules Limiting IRS Authority to Audit a Church

Tax Inquiries and Examinations of Churches

Congress has imposed special limitations, found in IRC Section 7611, on how

and when the IRS may conduct civil tax inquiries and examinations of churches.

The IRS may only initiate a church tax inquiry if an appropriate high-level Treasury

Department official reasonably believes, based on a written statement of the facts

and circumstances, that the organization: (a) may not qualify for the exemption or

(b) may not be paying tax on an unrelated business or other taxable activity.

Restrictions on Church Inquiries and Examinations

Restrictions on church inquiries and examinations apply only to churches (includ-

ing organizations claiming to be churches if such status has not been recog-

nized by the IRS) and conventions or associations of churches. They don’t apply

to related persons or organizations. Thus, for example, the rules don’t apply to

schools that, although operated by a church, are organized as separate legal enti-

ties. Similarly, the rules don’t apply to integrated auxiliaries of a church.

Restrictions on church inquiries and examinations do not apply to all church inqui-

ries by the IRS. The most common exception relates to routine requests for infor-

mation. For example, IRS requests for information from churches about filing of

returns, compliance with income or Social Security and Medicare tax withholding

requirements, supplemental information needed to process returns or applications

and other similar inquiries are not covered by the special church audit rules.

Restrictions on church inquiries and examinations don’t apply to criminal inves-

tigations or to investigations of the tax liability of any person connected with the

church, such as a contributor or minister.

The procedures of IRC Section 7611 will be used in initiating and conducting any

inquiry or examination into whether an excess benefit transaction (as that term is

used in IRC Section 4958) has occurred between a church and an insider.

32

Audit Process

The sequence of the audit process is:

1 . If the reasonable belief requirement is met, the IRS must begin an inquiry by

providing a church with written notice containing an explanation of its concerns.

2 . The church is allowed a reasonable period in which to respond by furnishing a

written explanation to alleviate IRS concerns.

3 . If the church fails to respond within the required time, or if its response is not

sufficient to alleviate IRS concerns, the IRS may, generally within 90 days, issue a

second notice, informing the church of the need to examine its books and records.

4 . After issuance of a second notice, but before commencement of an examination

of its books and records, the church may request a conference with an IRS official

to discuss IRS concerns. The second notice will contain a copy of all documents

collected or prepared by the IRS for use in the examination and subject to disclo-

sure under the Freedom of Information Act, as supplemented by IRC Section 6103

relating to disclosure and confidentiality of tax return information.

5 . Generally, examination of a church’s books and records must be completed

within two years from the date of the second notice from the IRS.

If at any time during the inquiry process the church supplies information sufficient

to alleviate the concerns of the IRS, the matter will be closed without examination

of the church’s books and records. There are additional safeguards for the protec-

tion of churches under IRC Section 7611. For example, the IRS can’t begin a sub-

sequent examination of a church for a five-year period unless the previous exami-

nation resulted in a revocation, notice of deficiency or assessment or a request

for a significant change in church operations, including a significant change in

accounting practices.

33

Glossary

Church. Certain characteristics are generally attributed to churches. These attrib-

utes of a church have been developed by the IRS and by court decisions. 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 worship;

■ regular congregations;

■ regular religious services;

■ Sunday schools for the religious instruction of the young; and

■ schools for the preparation of its ministers.

The IRS generally uses a combination of these characteristics, together with other

facts and circumstances, to determine whether an organization is considered a

church for federal tax purposes.

The IRS makes no attempt to evaluate the content of whatever doctrine a particular

organization claims is religious, provided the particular beliefs of the organization

are truly and sincerely held by those professing them and the practices and rites

associated with the organization’s belief or creed are not illegal or contrary to

clearly defined public policy.

Integrated Auxiliary of a Church. The term integrated auxiliary of a church refers

to a class of organizations that are related to a church or convention or association

of churches, but are not such organizations themselves. In general, the IRS will

treat an organization that meets the following three requirements as an integrated

auxiliary of a church. The organization must:

■ be described both as an IRC Section 501(c)(3) charitable organization and as a

public charity under IRC Sections 509(a)(1), (2) or (3);

34

■ be affiliated with a church or convention or association of churches; and

■ receive financial support primarily from internal church sources as opposed to

public or governmental sources.

Men’s and women’s organizations, seminaries, mission societies and youth groups

that satisfy the first two requirements above are considered integrated auxiliaries

whether or not they meet the internal support requirements. More guidance as to

the types of organizations the IRS will treat as integrated auxiliaries can be found

in the Code of Regulations, 26 CFR Section 1.6033-2(h).

The same rules that apply to a church apply to the integrated auxiliary of a church,

with the exception of those rules that apply to the audit of a church. See Special

Rules Limiting IRS Authority to Audit a Church.

Minister. The term minister is not used by all faiths; however, as used in this book-

let, the term minister denotes members of clergy of all religions and denominations

and includes priests, rabbis, imams and similar members of the clergy.

IRC Section 501(c)(3). IRC section 501(c)(3) describes charitable organizations,

including churches and religious organizations, which qualify for exemption from

federal income tax and generally are eligible to receive tax-deductible contribu-

tions. This section provides that:

■ an organization must be organized and operated exclusively for religious or other

charitable purposes,

■ net earnings may not inure to the benefit of any private individual or shareholder,

■ no substantial part of its activity may be attempting to influence legislation,

■ the organization may not intervene in political campaigns, and

■ the organization’s purposes and activities may not be illegal or violate fundamen-

tal public policy.

35

IRS Tax Publications

The IRS provides free tax publications and forms. Download publications and

forms from the IRS website at www.irs.gov. The following publications may provide

further information for churches and other religious organizations:

Help From The IRS

Publication 1

Your Rights as a Taxpayer

Publication 15

Circular E, Employer’s Tax Guide

Publication 15-A

Employer’s Supplemental Tax Guide

Publication 334

Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

Publication 463

Travel, Entertainment, Gift, and Car Expenses

Publication 517

Social Security and Other Information for Members of the Clergy and

Religious Workers

Publication 525

Taxable and Nontaxable Income

Publication 526

Charitable Contributions

Publication 557

Tax-Exempt Status for Your Organization

Publication 561

Determining the Value of Donated Property

Publication 571

Tax-Sheltered Annuity Plans (403(b) Plans) for Employees of Public Schools

and Certain Tax-Exempt Organizations

Publication 598

Tax on Unrelated Business Income of Exempt Organizations

Publication 910

Guide to Free Tax Services

Publication 1771

Charitable Contributions: Substantiation and Disclosure Requirements

Publication 3079

Tax-Exempt Organizations and Gaming

Publication 4221-PC

Compliance Guide for 501(c)(3) Public Charities

Publication 4573

Group Exemptions

Publication 4630

The Exempt Organizations Product and Services Catalog

36

IRS Customer Service

Telephone assistance for general tax information is available by calling:

IRS Customer Service toll-free at 800-829-1040.

EO Customer Service

Telephone assistance specific to exempt organizations is available by calling:

IRS Exempt Organizations Customer Account Services toll-free at 877-829-5500.

EO Website

Visit the IRS Exempt Organizations website at www.irs.gov/eo.

StayExempt —Tax Basics for Exempt Organizations — online courses available at

www.stayexempt.irs.gov.

EO Update

To receive IRS EO Update, a periodic newsletter with information for tax-exempt

organizations and tax practitioners who represent them, visit www.irs.gov/eo and

click on “Free e-Newsletter.”