Church Exemption From Filing Form 990 Challenged

Cross with light shafts. Faith symbol.

Churches are exempt from having to file Form 990 with the IRS. This exemption has been in place since the early 1940’s when Form 990 was adopted, and non-profit organizations were required to file the form with the IRS. This was brought about by a concern that tax-exempt organizations were using their status to engage in unfair competition with for-profit businesses. Churches have held to be exempt, as to do so would violate the First Amendment to the Constitution.

The Freedom From Religion Foundation (FFRF) has filed suit in a federal district court in Wisconsin, alleging that it was required to file a “detailed application” (Form 1023) and pay a fee before obtaining tax exempt status, and has also been required to file “detailed, intrusive and expensive annual reports” (Form 990) in order to maintain that status. Churches are exempt from both these requirements.

There are at least three compelling reasons why churches should not be required to file Form 990. First, the United States Supreme Court has ruled that the First Amendment Establishment Clause prohibits “excessive entanglement” between churches and the government. The Court stated that “detailed monitoring and close administrative contact” are elements of excessive entanglement.” Requiring churches to file, therefore, raises some serious constitutional questions.

Second, requiring churches to File Form 990 would not be in the best interests of the free exercise of religion in the United States. This could be problematic in that it could result in favoring some churches over others based on their governing structure, operations and administration. There would likely be pressure from several parties for churches to conform to a model preferred by the government or by those who peruse Form 990 (which is available to the public).

Third, if churches were required to file Form 990 it would create a significant burden on the religious sector and on the federal government. Although it is difficult to determine the exact number, there are an estimated 350,000 churches in the United States. According to the IRS, it takes an average of 159 hours in recordkeeping, learning about the law or the form, completing the form, and assembling and sending Form 990 to the IRS. While significantly less, the IRS estimate for a Form 990-EZ is about 55 hours. That is a heavy burden to be placed on an organization that often relies heavily on volunteers. For larger churches with large paid staffs, this can create an overload work situation. Assuming that many churches would have the return prepared by a professional, the fees paid to the preparer could be significant. Add to this the burden on the IRS of 350,000 new returns in the Exempt Organizations Sector. Considering that only 189,000 Forms 990 are currently being filed, this is a recipe for disaster.

The 990 requires extensive financial, operational, and governance disclosures. Some of this information is often not even made available to members of the church. The form also requires disclosure of donors giving $5,000 or more to the organization on Schedule B. However, Schedule B is redacted and not made available to the public.

Based on past history, it seems to be unlikely that this lawsuit will prevail. There is ample precedent to maintain the current exemptions enjoyed by the churches. The federal government, in defending the constitutionality of the tax code provisions (since they are federal statutes), asked the court to dismiss the lawsuit on the ground that FFRF lacked “standing” to pursue its claims. A similar lawsuit was filed in Kentucky by the American Atheists organization, but was dismissed for lack of standing by the organization. However, the Judge Barbara Crabb of the Western District of U. S. Circuit Court has ruled that the FFRF does have standing to bring suit.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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