Forced to File Form 990?

Editor’s Note: This legal challenge was subsequently dismissed in 2014 after the court determined the plaintiff, Freedom From Religion Foundation (FFRF), lacked standing (meaning the type of injury constitutionally required in order for FFRF to bring a lawsuit was too remote or speculative). In October 2018, FFRF initiated a new legal challenge through a not-for-profit entity it formed in 2015 called NonBelief Relief Inc. In January of 2020, though, a federal district judge dismissed the lawsuit on technical grounds, but FFRF indicated plans to pursue a new challenge based on the judge’s opinion.

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The Freedom from Religion Foundation (FFRF) sued the IRS in a federal district court in Wisconsin, claiming that 501(c)(3) tax code provisions make it easier for churches to obtain and maintain tax-exempt status than other nonprofit organizations. This, they claim, violates the First Amendment's prohibition of an "establishment of religion" and the Fifth Amendment's guaranty of the equal protection of the laws. Freedom from Religion Foundation v. Werfel, 2013 WL 4501057 (W.D. Wis. 2013).

In particular, FFRF alleged that it was required to file a "detailed application" (Form 1023) and pay a fee before obtaining tax exempt status, and since then has been required to file "detailed, intrusive and expensive annual reports" (Form 990) in order to maintain that status, but churches are not required to do either of these things.

The federal government, which defended 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. Standing is a requirement of any plaintiff in a federal case. It has been described by the United States Supreme Court as follows:

The party who invokes the power [of the federal courts] must be able to show not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers in some indefinite way in common with people generally. Doremus v. Board of Ed. of Hawthorne, 342 U.S. 429 (1952).

The standing requirement is rooted in a provision in the federal Constitution limiting federal judicial power to "cases and controversies." The court concluded that FFRF was alleging that "the government is relieving an ongoing burden from some taxpayers on the basis of religious affiliation and … the alleged injury is the unequal treatment." This, concluded the court, satisfied the standing requirement since the FFRF was asserting a direct injury.

What this could mean for churches

This case is of direct relevance to every church. The tax code for many years has exempted churches from the need to file an exemption application to obtain IRS recognition of tax-exempt status. It also exempts churches from the requirement, which applies to most non-religious charities, that they file the lengthy and intrusive annual information form (Form 990) with the IRS. If the court rules that these two exemptions violate the First Amendment's prohibition of the establishment of religion, and this ruling if affirmed on appeal, then this could lead to the extraordinary requirement that churches obtain IRS recognition of tax-exempt status. This would have little impact on churches that are included in a denominational "group exemption ruling," but it would require other churches to file the official exemption application (Form 1023) with the IRS.

But even more troubling is the fact that if the courts conclude that exempting churches from the Form 990 reporting requirement is an unconstitutional preference for religion, then this would require every church in the nation to begin filing the annual information return (Form 990) that most non-religious charities are required to file each year. Form 990, with related schedules, is nearly 100 pages in length, and requires the disclosure of highly confidential financial and operational information, including, but not limited to, the following:

compensation, including deferred compensation, nontaxable benefits, and bonuses, paid to officers, directors, and the highest compensated employees;

all current and former employees who received more than $100,000 in compensation from the church;

all current and former board members who received more than $10,000;

all first-class travel;

reimbursement of spouses' travel;

the existence of any "discretionary funds";

all housing allowances;

club dues;

personal services (maid, chauffeur, etc.);

whether adequate substantiation is required for expense reimbursements;

existence of a compensation committee or consultant;

use of compensation surveys;

whether the board approved all compensation arrangements;

severance agreements;

compensation arrangements based on a percentage of revenue;

number of employees;

number of board members;

number of volunteers;

unrelated business income;

all charitable contributions received from donors;

political activities;

investment income;

financial statements;

loans paid to officers or employees;

itemize noncash contributions of more than $25,000;

recent, substantial changes to governing documents;

minutes of membership and board meetings;

contact information for all board members;

written conflict of interest policy;

written whistleblower policy;

records retention policy;

Why churches shouldn't have to file Form 990

The FFRF is correct in noting that churches, unlike most non-religious charities, are not required to provide this kind of information each year to the IRS on Form 990. However, there is a compelling reason for this different treatment, and it was ignored by the federal district court in Wisconsin in allowing the FFRF challenge to proceed to trial. In short, churches are treated differently from FFRF and other non-religious tax-exempt organizations because under our Constitution, they receive explicit protections not available to secular charities. The First Amendment guaranties of religious freedom and nonestablishment of religion confer special protections upon religious organizations not available to non-religious charities such as FFRF.

In 1971, the United States Supreme Court announced a three-part test to assess alleged violations of the First Amendment's ban on any establishment of religion:

First, the statute must have a secular legislative purpose; second, its principal or primary effect must be one that neither advances nor inhibits religion; finally, the statute must not foster "an excessive governmental entanglement with religion." Lemon v. Kurtzman, 403 U.S. 602 (1971).

The Court observed that "excessive entanglement" between church and state connotes "comprehensive, discriminating, and continuing state surveillance." This describes perfectly the result of any attempt to impose the Form 990 reporting requirement on churches. The searching and continuing surveillance of churches by the IRS, which the Form 990 requirement would necessitate, is the very evil that the First Amendment condemns.

Should the federal district court in Wisconsin conclude that the exemption of churches from the exemption application and Form 990 requirements is unconstitutional, and this result is affirmed on appeal, there likely will be many churches that as a matter of conscience will not voluntarily comply, which may lead to a legislative or judicial remedy.