In 2013, the American Atheists Inc., Atheists of Northern Indiana Inc., and Atheist Archives of Kentucky Inc. (collectively, the “Atheists”) filed a lawsuit in federal district court in Kentucky, claiming certain Internal Revenue Code provisions preferentially benefit churches and religious organizations. According to the Atheists, the tax code treats religious organizations more favorably than non-religious charities, and this favorable treatment represents an unconstitutional preference for religion in violation of the First Amendment’s prohibition of an establishment of religion.
Although the Atheists did not specifically identify the statutes and regulations they were challenging, the court surmised that the following provisions of the tax code probably were the ones the Atheists were challenging:
Churches are not required to file an application for recognition of tax-exempt status.
In order to receive exemption from federal income tax under section 501(c)(3) of the tax code, organizations must file Form 1023 with the Internal Revenue Service. However, churches are not required to file Form 1023, although many have done so in order to more easily establish their tax-exempt status to assist donors in substantiating charitable contributions and to qualify for various exemptions under state and local laws. Many other churches are covered by a group exemption ruling issued by the IRS to a parent denomination.
Churches are not required to file an annual information return.
Generally, tax-exempt 501(c)(3) public charities must file an annual informational tax return with the IRS on Form 990. Section 6033 of the tax code exempts churches, and some other religious organizations, from the Form 990 filing requirement.
Form 990, with related schedules, is nearly 100 pages, 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;
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, and so on);
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;
itemized 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;
a written conflict-of-interest policy;
a written whistleblower policy;
a records retention policy.
3. Ministers of the gospel are able to receive a tax-free parsonage allowance.
Section 107(1) of the tax code excludes the rental value of a home furnished as part of the compensation of a “minister of the gospel” from his or her gross income. Section 107(2) excludes a housing allowance paid as part of the compensation of a “minister of the gospel” from his or her gross income.
Salaries of ministers of the gospel are exempted from income tax withholding and FICA taxes.
Sections 1402, 3121, and 3401 of the tax code provide exemptions from the income tax withholding requirement and from the Social Security and Medicare tax (collectively, “FICA taxes”) for wages paid for services performed by a minister of the gospel in the exercise of his or her ministry.
The IRS is required to follow specific procedures when examining a church.
Section 7611 of the tax code requires the IRS to follow specific procedures when conducting a “church tax inquiry” or a “church tax examination.” Generally, a “church tax inquiry” is a determination as to whether that entity meets the qualifications to be exempt from federal income tax. A “church tax examination” is an examination of a church’s records or activities.
The IRS may commence a church tax inquiry only if an appropriate high-level Treasury official reasonably believes, on the basis of facts and circumstances recorded in writing, that the church may not be exempt from tax, or may be carrying on an unrelated trade or business, or otherwise may be subject to tax. The heightened requirements outlined in section 7611 only apply to churches and not other tax-exempt organizations.