21st Century Churches and Federal Tax Law

Federal tax treatment matters to churches, the term the IRS uses for all types of religious congregations, including synagogues, mosques, and temples. The federal tax provisions most significant for churches and certain entities closely related to them, however, are not those that the public and commentators often assume. Exemption from income tax and the ability of donors to deduct contributions, the benefits that receive the most public attention, in fact provide surprisingly little benefit either to churches in the aggregate or to most individual churches. Their status as organizations tax-exempt under section 501(c)(3) of the Internal Revenue Code, moreover, imposes a variety of burdens on them. The burdens include limitations on lobbying and the prohibition on any intervention in campaigns for public office.

At the same time, churches enjoy special tax benefits not afforded to other section 501(c)(3) organizations, not even other kinds of tax-exempt religious organizations. These special benefits make church status appealing. Such benefits include exemption from filing with the IRS Form 990, an annual information return that, with the exception of the names and addresses of major donors, is also publicly available. In addition, the IRS cannot begin any audit of a church unless it complies with several procedures. Further, unlike other section 501(c)(3) organizations, churches are not required to file an application for recognition of exemption, although many choose to do so.

These advantages limit oversight of churches by the IRS, the media, and the public. They create an incentive for religious organizations that share some traits commonly found in churches to seek status as a church. Two recent IRS grants of church or association of churches status have attracted sharp criticism from the media and members of Congress. At the same time, a number of developments, such as loss of membership, expansion of virtual worship, and recent Supreme Court Free Exercise jurisprudence, have created new challenges for churches and their tax treatment.

In response to all these developments, this article recommends changes to the longstanding IRS approaches for defining “church” and certain church-affiliated entities. These changes would substitute a definition for church developed by courts and limit the definition for conventions or associations of churches to those of a single denomination. The definitional changes will clarify the distinction between non-church religious organizations and churches. Updating the understanding of “church” to reflect the twenty-first century realities of virtual participation and the increasing diversity of faith communities will also improve IRS oversight.

This article also recommends that the GAO undertake a renewed study of campaign intervention by section 501(c)(3) organizations generally. This study will clarify whether all section 501(c)(3) organizations, including churches, are in fact violating this prohibition in ways that go beyond sporadic, minor, and usually inadvertent footfalls.

In the authors’ view the recommended changes would benefit churches and the public because they take into account both current realities and current concerns. In so doing, they would not only give churches welcome guidance but also increase public trust that churches are not abusing the special privileges they enjoy under federal tax law.


* John E. Anderson Professor of Tax Law Emerita, LMU Loyola Law School.

** Professor of Law, Notre Dame Law School. The authors are very grateful for research assistance from Susan Carlson. The authors thank Mark Chopko, Richard Garnett, and Edward Zelinksy for their thoughtful comments on an earlier draft of this piece, including several comments that raised important issues we hope to consider in future work.

The full text of this Article is available to download as a PDF.