AG Investigations into Churches and Nonprofits Are on the Rise

While the Internal Revenue Service is seen as the primary watchdog to the nonprofit world, attorneys general also can investigate nonprofits, and AG investigations into nonprofits and churches are on the rise.

This may be surprising, but in most states, attorneys general not only have the power to investigate nonprofits and churches, but they also have the power to render civil and criminal penalties and prosecute and remove board members.

In one non-church nonprofit matter in Minnesota, the attorney general even petitioned to dissolve a nonprofit.

There is certainly an overlap between an attorney general and the IRS’s involvement in investigating churches and nonprofits for financial concerns, but it seems that the attorney general’s offices are picking up in areas where the IRS is not.

Under IRS regulations, the IRS must have a “reasonable belief”—with evidence—that wrongdoing is occurring.

However, “reasonable belief” is not a requirement for attorneys general.

In our law practice—exclusively devoted to representing churches and nonprofits—this has been the fastest-growing trend in years.

From 2010 through 2022, we only saw a handful of these investigations. They predominantly focused on non-church nonprofit organizations.

Since fall 2022, though, we have represented churches and nonprofits in more than a dozen attorney general investigations.

Just as Scripture refers to money as the root of all evil, in the nonprofit compliance world, money is indeed the root of all state attorney general investigations.

Due to the potential for fraud, state attorneys general are very interested in how church boards handle money provided by the citizens of their states.

The online complaint process is simple, and can trigger an investigation for reasons that include, but are not limited to, the following:

Impropriety Related to Unrelated Business Income (UBI): Revenue generated by your church that appears to be substantial and not closely related to its exempt purposes may trigger unrelated business income taxes. Correct legal and accounting counsel on how to properly set up and facilitate your ministry’sUBI is critical. Improperly structuring multi-entity ministries—especially if UBI is involved and board members are involved in the process—can have dire consequences and present the appearance that the church is funneling money to the personal business endeavors of the church’s directors.

With an increase in these investigations, church leaders may wonder what to expect if one arises.

At the preliminary stage, there is a unique and limited opportunity to directly refute charges and provide the necessary evidence to do so.

But suppose the investigator sees that the organizational and legal health of the church is in disarray. In that case, it is a sure bet that the attorney general’s office will begin to investigate. At this juncture, this could be a criminal investigation into individual board members. It could also be a civil matter against board members and/or the entity, or a combination of both.

In all matters, hiring competent legal counsel to represent your organization throughout the investigation is critical.

If the matter is potentially criminal, the attorney general will have the option to investigate and present the findings to a grand jury for indictment. In lieu of indictment, some states may allow the church the opportunity to hire its own forensic auditor (holding certified fraud examiner (CFE) and/or certified financial fiduciary (CFF) certifications) to provide an independent report as to whether financial malfeasance occurred.

These audits often require $50,000 to $100,000 to complete. It’s expensive, but it’s better than a criminal indictment. And the state may still choose to indict depending on the findings.

Our firm has yet to encounter a board involved in an attorney general investigation that had been properly trained on:

Focus on the following areas to reduce the risk of a lengthy investigation:

Board member training covering fiduciary duties, oversight responsibilities, and understanding your church’s governing documents and board policies. Every new board member should also receive this training. Proper board disciplines should include—but not be limited to—keeping accurate minutes and board member recusal of voting as it relates to conflicts of interest.

Written board policies and procedures that promote legal and financial integrity such as:

Simply ensuring your board members have this information and understand their roles will virtually eliminate this risk.

Dustin Gaines is a pastor and a lawyer who is a partner with My Church Law Firm in Texas. Dustin specializes in litigation related to churches, schools, and religious non-profits.