In 2020, the IRS labeled the Family Research Council an association of churches, making it exempt from certain tax filing requirements and eligible for special protection from IRS audit.

This action led members of Congress to ask the Treasury secretary and the IRS commissioner for a review of organizations claiming church status.

New research highlights how the federal tax law definitions for “church” and “convention or association of churches” require revision to address multiple recent developments in the American religious landscape, including religious organizations seeking such status when Congress did not intend them to benefit from the special protections for such organizations. This research, “21st Century Churches and Federal Tax Law,” from University of Notre Dame Law School Professor Lloyd Hitoshi Mayer and Loyola Marymount University Professor Ellen Aprill, was published in July in the University of Illinois Law Review.

Other new developments, including virtual participation in worship services by congregants and the increasing diversity of faith communities, are additional reasons for such a revision, Mayer and Aprill write. They also recommend a government study of compliance by all charities that are prohibited by tax law from supporting or opposing candidates to address public perceptions that churches and other charities often violate this rule.

Because the First Amendment to the Constitution protects the free exercise of religion, Congress granted “churches” and “conventions or associations of churches” special protections under federal tax law. The IRS has interpreted “church” to include houses of worship of all faiths, including synagogues, mosques and temples. And the IRS has interpreted “convention or association of churches” to include organizations with member churches from either a single denomination or multiple denominations.

As with other charities, churches and associations of churches can receive tax-deductible charitable contributions and do not pay federal income tax. These organizations are subject to various limits on their activities — including the prohibition on supporting or opposing candidates for public office — as a condition of receiving these benefits.

But unlike other tax-exempt charities, Mayer said, “Churches and associations of churches do not have to apply to the IRS for recognition of their tax-exempt status. They also do not have to file publicly available annual information returns, as do other tax-exempt nonprofits. And federal tax law protects them from audit by requiring a high-level IRS official to reasonably believe that they have violated the federal tax rules before beginning an investigation.”

To distinguish churches from other religious nonprofits, the IRS has long relied on a 14-factor test. Those factors include ecclesiastical government, formal doctrine, a distinct membership, ordained ministers, a regular congregation and religious services. The IRS does not require that all factors be present and does not give any factor controlling weight.

“In recent years, courts have become increasingly uncomfortable with the IRS’ 14-factor test because it draws heavily on the traditional characteristics of Protestant Christian churches,” Mayer said. “It therefore may be a poor fit for houses of worship of other faiths, especially given the increasing diversity of faith communities.” These courts have instead adopted an associational test that focuses on regular religious services and other gatherings of congregants.

Other recent developments have highlighted how the IRS’ approach is a poor fit for 21st-century houses of worship. Those include virtual gatherings by congregations, which ramped up during the COVID-19 pandemic, and a rising number of religious ministries seeking church or association of churches status to claim the special tax benefits these groups enjoy.

The IRS’ Family Research Council decision led members of Congress to send letters to the Treasury secretary and the IRS commissioner questioning whether it was correct and asking the IRS to review claimed church or association of churches statuses more generally. Under the IRS’ current view that associations of churches include organizations with church members from multiple denominations, Mayer and Aprill say that it appears the IRS ruling was correct.

Additionally, there has been a growing public perception that tax-exempt charities, and particularly churches, often violate the prohibition on supporting or opposing candidates.

To reflect all these developments, Mayer and Aprill recommend the IRS change its definition for churches to the associational one adopted by some courts, but modified to accommodate virtual participation in religious services. They also recommend that Congress limit associations of churches to single-denomination organizations and that the government study the extent to which tax-exempt charities, including churches, violate the prohibition on supporting or opposing candidates.

Religious organizations of all types would still enjoy tax exemptions and the ability to receive tax-deductible charitable contributions. The recommended changes would only affect certain religious organizations by requiring them to file publicly available returns with the IRS and taking away some of the protections against IRS audit..

“Limiting that eligibility to churches and single-denomination associations of churches will reduce the risk that other tax-exempt charities will seek to avoid government and public oversight for nefarious purposes while still protecting the special role that churches have in our society,” Mayer said.

Contact: Lloyd Hitoshi Mayer, 574-631-8057, lmayer@nd.edu