Academic journal article Journal of Legal, Ethical and Regulatory Issues

Religious Organizations and the Annual Compliance Reporting Exemption

Academic journal article Journal of Legal, Ethical and Regulatory Issues

Religious Organizations and the Annual Compliance Reporting Exemption

Article excerpt


There are approximately 2.3 million nonprofit organizations (NPO) in the United States in 2010 (most recent year available), and 1.6 million were registered with the Internal Revenue Service. One million of these are 501(c) (3) public charities, the most common NPO (Blackwood, Roger & Pettijohn, 2012). According to Giving USA, a public service initiative of The Giving Foundation, Americans contributed approximately $335 billion to charitable organizations (public charities) in 2014, and religious organizations received 31% of the funds, by far the largest benefactor. However, this contribution rate is slowing as a result of declining religious affiliation and attendance and increased giving to religious-oriented charitable organizations.

Religious organizations are charitable organizations and are exempt from taxation under Section 501(a) of the Internal Revenue Code (IRC) and specifically Section 501(c) (3). Tax-exemption is automatic if an organization meets five general requirements outlined in the IRC, including not intervening in political campaigns or attempting to influence legislation (McNair & Pryor, 2006). Also, religious organizations are exempt from paying property taxes in all states plus the District of Columbia.

Charitable and other tax exempt organizations are required to file an information (compliance) return annually with the 1RS. The form and complexity depends on the level of support or revenue received by the charitable organization. The ultimate goal of reporting is to ensure effective management and fiscal oversight of the organization's resources. Large charitable organizations file the complex Form 990; medium ones file Form 990EZ; and smaller organizations (less than $25,000) file Form 990N or e-postcard. It is worth noting that only 40% of registered NPOs were required to file an information financial return with the 1RS in 2010 (Blackwood et al, 2012).

This paper will explore whether religious organizations should be exempt from the annual federal compliance reporting requirements. It discusses religious organizations in general and various the positions in support for and against reporting and concludes with the authors' call for action.


Churches and certain church-affiliated organizations receive special exemptions from the federal government that are not available to other charitable organizations. For instance, they receive automatic tax exemption without the need to file the appropriate forms, they do not need to file annual information returns, and they are protected from 1RS examination though a special law passed by Congress (1RS, 2012).

The law, the Church Audit Procedures Act or CAPA, impose special limitations in 1RS Section 7611 on how and when the 1RS may conduct civil tax inquiries and examination of churches. Specifically, it requires a high ranking Treasury official's approval when the 1RS demands a church's records. However, this particular individual is not specified and so; there is no one in the government to authorize a church audit. Clearly, churches (and other religious organizations) are placed in favorable situations since many of their activities are not subject to review by external parties.

Religious organizations, like other nonprofit organizations, must pay taxes on unrelated business income. They could also lose their tax exemption if they are engaged in certain nonpermissible activities such as political campaigning. The motivation for the favorable tax treatment is the first Amendment passed in 1789 which promotes and protects religious freedom. Clearly, the founding fathers wanted to ensure that people were able to worship as they choose without interference from the government. History shows that Americans enjoy more religious freedoms than any other people in the world. For the most part, various religious organizations exist harmoniously in the United States with limited discord. …

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