Churches have always been exempt from federal income taxes. But through the years, several misconceptions have arisen about their tax-exempt status. Here are the five myths we hear most often—with the facts.
MYTH 1: Churches are not subject to section 501(c)(3) of the federal Tax Code.
The truth is all churches are subject to section 501(c)(3) of the federal Tax Code whether they apply for recognition as a 501(c)(3) organization or not. Churches are not required to apply for recognition from the IRS, but that does not remove them from the Tax Code requirements.
MYTH 2: Churches that do not apply to the IRS for 501(c)(3) recognition are free from government regulation.
The truth is all churches must abide by the federal Tax Code regardless of whether they have applied for IRS recognition of tax-exempt status. This issue has been litigated, and federal courts have clearly held that churches are subject to section 501(c)(3). The Tax Code was written with the assumption that all income is taxable unless it is exempted by the Code. Thus, even if a church does not apply for recognition of tax-exempt status, it is still considered subject to the federal Tax Code. The good news is that churches are automatically exempt from income taxes by section 501(c)(3), but this also means churches are subject to the requirements of section 501(c)(3).
MYTH 3: Churches that do not incorporate are not subject to regulation by the IRS.
Some mistakenly believe that if their church never incorporated, then the IRS (and any other state government or federal agency) cannot regulate or control their church. A similar myth is that if a church un-incorporates, creates a “corporation sole,” or some other unique corporate status, that it will remove itself from government control.
The truth is a church’s corporate status has no effect on its regulation by the IRS under the Tax Code. The IRS regulates both incorporated and unincorporated organizations. Just because a church is not incorporated does not mean it gets a free pass from federal tax laws and regulations. The same is true of other federal, state, and local laws and regulations.
MYTH 4: Churches that incorporate or apply to the IRS for tax exemption give up their freedom.
The truth is churches do not give up their constitutional rights by incorporating or applying for a 501(c)(3) letter from the IRS. Because churches make no “exchange” for a 501(c)(3) letter or to incorporate, they retain their constitutional rights no matter what corporate form or tax letters they receive from the government.
That is not to say that the federal government never overreaches when it comes to churches. The Johnson Amendment in section 501(c)(3) of the Tax Code restricts what a pastor can preach from the pulpit on the issue of candidates in an election. Every church is subject to the Johnson Amendment regardless of whether it incorporates, seeks recognition as a church, or attempts to take on a unique corporate form to prevent government control.
MYTH 5: Churches should fear the IRS as a powerful agency that can wreak havoc on them.
Many churches fear the IRS because they have heard stories of abuses of power, or perhaps they know someone who went through a particularly painful audit.
The truth is the IRS is subject to legal restrictions that curtail its power over churches. For instance, Congress passed the Church Audit Procedures Act in 1984, which requires the IRS to abide by significant restrictions when deciding to audit a church and how to conduct the audit. The IRS is also constrained by the unique status churches have under the federal Tax Code. Churches are considered automatically exempt from income taxes, and this unique status provides beneficial protection for churches.
While government can abuse its powers, churches should not fear the IRS. A healthy mutual respect is appropriate. As Romans 13:3 states, “For rulers are not a terror to good conduct, but to bad. Would you have no fear of the one who is in authority? Then do what is good and you will receive his approval, for he is God’s servant for your good.” If your church does “what is good,” then it has no reason to fear the IRS. This is especially true because ADF stands ready to defend your church, should the need arise.
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When it comes to politics, every church and ministry must decide for itself how specific to be when it comes to biblical guidance and engagement. Our new legal guide Pastors Churches & Politics will help ministries navigate the laws surrounding tax-exempt status for religious organizations. It will equip ministries to identify what activities are permitted and prohibited by the IRS and its regulations so that you can both shepherd your people and protect your ministry.