Nonprofit Law Prof Blog

Hundreds of Churches Appear to Receive Exemption Determinations Using Form 1023-EZ

Today, the IRS released complete publicly available data on the over 105,000 organizations that were approved for tax-exemption using the streamlined application process, Form 1023-EZ from its inception in July 2014 through December 2016.  From the IRS news release:

The data on IRS.gov is available in spreadsheet format and includes information for approved applications beginning in mid-2014, when the 1023-EZ form was introduced, through 2016. The information will be updated quarterly, starting with the first quarter of calendar year 2017. The IRS’s Tax Exempt and Government Entities division approved more than 105,000 applications for exemption submitted on the Form 1023-EZ from 2014 through 2016.

In reviewing the data for these organizations, I noted something odd -- there was an organization approved using the streamlined process which by its name appeared to be a church.  According to the Form 1023-EZ instructions and Form 1023-EZ eligibility worksheet, churches are not eligible to use Form 1023-EZ and instead must use Form 1023 to apply for a determination letter from the IRS.  In particular, the eligibility worksheet states that if the applicant answers "yes" to any question on the worksheet, the applicant is not eligible to use Form 1023-EZ.  Question 12 on the worksheet asks, "Are you a church . . .?"  Applicants using Form 1023-EZ must attest on the form that the applicant has completed the eligibility worksheet and is eligible to use the form. 

The Form 1023-EZ is filed electronically and is composed of several self-certifying statements made by the applicant to the effect that the applicant qualifies for tax-exempt status as an organization described in Section 501(c)(3).  No supporting documentation is required to be submitted with the application so that the IRS can verify the applicant's qualification for tax-exemption.  With over 105,000 organizations approved and no way to verify the information, I was not surprised that perhaps a few organizations not eligible to file slipped through the cracks. 

However, I was curious to see just how many churches incorrectly used Form 1023-EZ to obtain an IRS determination letter.  I conducted a search of the names of all of the organizations approved for exemption using Form 1023-EZ for the word "church" using the new searchable data released by the IRS.  I found 623 of the approved organizations had "church" in the name.  Upon closer review, not all of these organizations appeared to be churches.  Some appeared to be a separately organized ministry of a church or a church foundation or an organization in a town named "Churchville." But in my cursory review of the names of these 623 organizations, I would estimate that over 90% appeared to be churches.  Some of these organizations provided website addresses, and a visit to these website addresses confirmed these organizations operated as churches.  Even though churches are not eligible to file Form 1023-EZ, all of these organizations attested that they had completed the eligibility worksheet and were eligible to use Form 1023-EZ.

Churches are not required to file an application for exemption to be exempt as a church described in Section 501(c)(3).  However, many churches opt to apply for exemption so that the church can receive an IRS determination letter stating that the church qualifies for exemption.  The IRS determination letter serves as evidence to donors that the church is recognized as being tax-exempt and contributions made to the church qualify for the charitable contribution deduction. 

The churches that received an IRS determination letter using the Form 1023-EZ process may very well meet the requirements for exemption as a church described in Section 501(c)(3).  But the IRS decided that it wanted to take a closer look at the applicants claiming to be churches, and thus requires them to use the normal Form 1023 process.  By inappropriately using the Form 1023-EZ process, these churches have gotten the benefit of voluntarily applying for tax exemption - the IRS determination letter - without having to go through the scrutiny of the normal Form 1023 application process as the IRS requires.

Additionally, this information is but one example of the problems with the streamlined Form 1023-EZ process.  A quick review of the organization's name (for example "** Baptist Church" or "** Church of Christ") should have given one pause about whether the organization was eligible to use Form 1023-EZ.  This should have resulted in an inquiry to the organization about whether it planned to operate as a church, or one could have visited the organization's website provided on the form to see that the organization had regularly scheduled church services and appeared to operate as a church.  The organization then should have been directed to apply using Form 1023. All of these organizations attested that they were eligible to use Form 1023-EZ, but a quick independent verification of this attestation likely would have shown the attestation to be false in a significant number of cases.  This is one small example of the need to independently verify the applicant's statements made on the Form 1023-EZ, or organizations which do not meet the requirements for exemption or the eligibility requirements to use Form 1023-EZ will inappropriately be approved for exemption. 

For additional examples of the need for independent verification of the information provided on Form 1023-EZ, see the Taxpayer Advocate Service 2015 Report to Congress and the Taxpayer Advocate Service 2016 Report to Congress.

 

TLH

 

 

Articles Relating to Repealing the Johnson Amendment

Plenty of articles regarding whether to repeal or relax the Johnson Amendment. Here is a sample:

Chronicle of Philanthropy: Doug White, “Mr. Trump, Let’s End the Hypocrisy and Deny Tax Breaks to Churches"

Tax Prof Blog: collecting articles by the New York Times, Daniel Hemel (Chicago), Roger Colinvaux (Catholic), Ellen Aprill (Loyola-LA), and Andrew Lewis (Cincinnati).

Washington Post: containing a defense of legislation not to repeal but relax the Johnson amendment from the legislation’s sponsors: James Lankford, Steve Scalise, and Jody Hice.

Washington Times (editorial): Be Careful What You Wish For.

Inside Philanthropy: Jon Levine and David Callahan, "The Biggest Loser From Repealing the Johnson Amendment? Philanthropy.

RC

 

 

Is the Emporer Naked? Non-Enforcement of Tax-Exempt Organization Laws

In this post on the Surly Subgroup, Prof. Lloyd Mayer discusses the effectiveness (or lack thereof) of the IRS as a regulator of the nonprofit sector. Here is the opening paragraph:

The Donald J. Trump Foundation admits to illegal self-dealing (The Washington Post). The Bill, Hillary & Chelsea Clinton Foundation files amended annual returns to correct numerous reporting errors (Amended Returns Fact Sheet). A white nationalist group avoids filing annual returns for several years, apparently in reliance on a bureaucratic misclassification (The Washington Post). On “Pulpit Freedom Sunday,” thousands of churches violate the prohibition on IRC section 501(c)(3) organizations supporting or opposing candidates (CNN). These and numerous other recent examples of behavior by tax-exempt organizations that clearly violates the applicable tax laws lead to one obvious question: where was the IRS? The growing perception – and sometimes although not always the reality – is that when it comes to the administration and enforcement of those laws there is no one home.

RC

That's me in the corner/ that's me in the spotlight/ losing my religion*

...but gaining a tax deduction!

At the recent National Prayer Breakfast, President Trump stated:

It was the great Thomas Jefferson** who said, the God who gave us life, gave us liberty. Jefferson asked, can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God. Among those freedoms is the right to worship according to our own beliefs. That is why I will get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that, remember.

Some may not know the term “the Johnson Amendment,” but I am guessing that most of the readers of this blog would be familiar with Code Section 501(c)(3)’s prohibition on election intervention (“and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”)   Famously, Lyndon Johnson was somewhat irritated by negative comments made by a tax-exempt organization (note: not a church… ) during his campaign for re-election to the Senate; thus the Johnson Amendment adding the prohibition on electioneering was born in 1954

Of course, “totally destroying” statutory provisions is traditionally the prerogative of Congress, so it remains to be seen whether this change will come to pass.   A bill repealing the Johnson Amendment is introduced regularly each legislative session and rarely makes any progress; query if the current political climate would give it more traction.   One wonders if the change takes the form of a repeal of the Section 501(c)(3) language (which would open electioneering to all c3s) or a special exception just for churches or religious organizations.   Finally, would such repeal include rules that mirror the income tax provisions that disallow deductions for membership dues allocable to lobbying?   If not, I suspect that a large number of political donors of all stripes will suddenly find religion right quick.

For further discussion of these issues, please see this piece by the most awesome Ellen Aprill in the Washington Post, who has probably forgotten more about the political and lobbying rules for nonprofits than I ever hope to know.

EWW

*With apologies to R.E.M.

**cough** This is me not commenting on the fact that Trump is quoting Thomas Jefferson, author of the First Amendment.  Of course, all political commentary (or non-commentary, as the case may be) is my own individually and should not be attributed to anyone else.  EWW