This is the final post in my three part blog series on churches as tax exempt organizations. This third section will discuss charitable contributions, special rules limiting the IRS’ authority to audit a church, and 990-series return filing requirements.
The burden is generally on donors to obtain and maintain the documentation they need to be able to take a deduction for a charitable contribution. However, a donor cannot claim a tax deduction for a contribution of $250 or more unless they receive a contemporaneous written acknowledgment of the contribution. The written acknowledgment should include the name of the church/religious organization, date of contribution, amount of cash contribution, and/or description (but not the value) of a non-cash contribution. The written acknowledgment must also contain one of the following: 1. statement saying no goods/services were received in return for the contribution 2. statement saying that any goods/services provided in return for the contribution consisted entirely of intangible religious benefits, or 3. a description and estimate of the value of goods/services other than intangible religious benefits provided in return for the contribution. Intangible religious benefits include things like the admission to a religious ceremony or de minimis tangible benefits like wine for a religious ceremony. Benefits that are not intangible religious benefits include things like the tuition for education leading to a recognized degree, travel services, and consumer goods. There is not a penalty imposed by the IRS for failing to provide a contemporaneous written acknowledgement, but it is good donor relations and in general is provided as a matter of course to the donor. Many churches choose to provide a single notice at the end of the tax year that summarizes the donor’s giving, rather than sending out regular notices.
An organization is required to provide an acknowledgement when a contribution of $75 or more is made in exchange for goods/services. These types of contributions are called quid pro quo contributions. The donor needs to know the value of the goods/services since they can only take a contribution deduction if the donation exceeds the fair market value of the goods/services. The organization will need to provide a written statement to a donor (as outlined in the prior paragraph) for a quid pro quo contribution unless the goods or services received in return for the contribution are of insubstantial value, or if the only benefit received by the donor is an intangible religious benefit.
For more information on charitable contributions and the substantiation and disclosure requirements, see IRS Publication 1771.
Special rules limiting IRS authority to audit a church
The IRS may only initiate an audit if a high level Treasury Department official reasonably believes, based on a written statement of facts and circumstances, that a church does not qualify for exemption, may not be paying taxes on an unrelated business or taxable activity, may not be properly withholding or paying employment taxes, or may have entered into an excess benefit transaction with certain insiders to the organization. Congress has imposed special limitations on how and when the IRS can conduct civil inquiries and examinations, found under IRC Section 7611.
Restrictions on church inquiries are limited to churches, and conventions or associations of the church, and do not apply to people or organizations related to the church, including integrated auxiliaries like a school, missionary group, etc.
Once the reasonable belief requirement is met, the IRS must provide a written notice to the church outlining its concerns and the audit process will proceed as follows:
- The church is allowed a reasonable time period to respond to the IRS with a letter addressing the concerns/provide an explanation
- If the church hasn’t responded in the allotted time or the IRS doesn’t feel the issue was addressed, they will issue a second notice within 90 days, informing the church that they will need to examine the books and records
- After the second notice but before the examination of the books/records, the church can request a conference with the IRS
- An examination of the books/records by the IRS is generally completed within two years from the date of the second notice
If at any time the church provides documentation to the IRS that satisfies their inquiry, the case will be closed without examination.
Churches and 990 filing requirements
The thresholds for determining which Form 990-series return to file are found here. Generally, all religious organizations must file form 990, 990-EZ, or 990-N, unless they are subject to an exception. The correct form must be filed before the 15th day of the 5th month following the end of the organization’s tax year. Form 990-N and Forms 990 for certain large organizations must be filed electronically.
Exceptions to the requirement to file Form 990, 990-EZ, and 990-N are limited to the following:
- Churches (as opposed to “religious organizations”)
- Inter-church organizations of local units of a church
- 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
- An exclusively religious activity of any religious order
If an organization is not required to file a Form 990-series return, but chooses to do so, it should continue or it will be revoked for failing to file an annual return for three years in a row. Once an organization begins filing, the IRS will have that organization marked as a filing organization unless the organization affirmatively seeks to have its status changed back to that of a non-filer.
Churches and religious organizations are not exempt from the requirement to file a Form 990-T if they generate gross income from unrelated business of $1,000 or more for a taxable year. This form must be filed by the 15th day of the 5th month after the organization’s accounting period ends. There are no exceptions to file form 990-T.
The topics I have covered on churches are only intended as a summary. Organizations are encouraged to look at other resources (not already linked to in these blog posts) that the IRS provides, including:
Publication 463: Travel, Entertainment, Gift, and Car Expenses
Publication 517: Social Security and Other Information for Members of the Clergy & Religious Workers
Publication 526: Charitable Contributions
Publication 557: Tax-Exempt Status for Your Organization
Publication 598: Tax on Unrelated Business Income and Exempt Organizations
Publication 1828: Tax Guide for Churches & Religious Organizations