4 Things to Consider Before and After You Get 501(c)(3); Part 2

By Raul Rivera

Last year, when helping a church resolve some ordination issues, we discovered that the IRS had revoked the church's 501(c)(3) status and had placed the church in the automatic revocation list three years prior.  Several years earlier, the church had hired a law firm to help them obtain 501(c)(3) status. Why would their church be revoked, if everything had been done correctly?  The answer goes back to things that should have been considered before they got the 501(c)(3) status. While the numbers of things to consider are too numerous to cover in one article, today I want to cover some of the basics to avoid a church being automatically revoked by the IRS. Moreover, if you have already acquired 501(c)(3) status, this article is a good resource for you to use to discover if your church made any mistakes when it acquired its tax ID number or applied for its 501(c)(3) status.

Consideration #1: meet the requirements of 501(c)(3) before applying

Many churches wait several years before they apply for their 501(c)(3) status.  Because of the Pension Protection Act of 2006, waiting such a long time adds layers of complexity to the church getting official 501(c)(3) status. We strongly recommend that the church apply for the 501(c)(3) immediately after incorporating. However, in the meantime, the law requires that the church comply with all of the requirements of section 501(c)(3). It is important that your church knows those requirements and follows them. In a federal court case (Jack Lane Taylor vs. Commissioner), the court's opinion concerning a church that did not have 501(c)(3) status was that they still required the church to meet the requirements of section 501(c)(3). Mr. Taylor asserted that his church was "not required to meet the requirements of sections 170(c)(2) and 501(c)(3)" because it was not incorporated.  Therefore, Mr. Taylor believed he could still get a tax deduction for all of his giving.  Conversely, the court ruled that nothing "relieves a church from having to meet the requirements of section 501(c)(3)." Therefore, all of Taylor's giving to the church was not tax deductible because during the year that he gave to the church, the IRS ruled that the church failed to meet the requirements of section 501(c)(3).

Consideration #2: make sure you got the right tax-ID number

Before applying for 501(c)(3) status, you need to make sure that the IRS issued to your church the correct Employer Identification Number (EIN), also known as a tax-ID number. The IRS will classify your tax-ID number in their system based on the way you apply for it.  It is very easy to make a mistake when getting it. Many times a new church will apply for the number and accidentally check the box stating that they are a nonprofit organization when they should have checked the box stating their status as a church or church controlled organization. On Form SS-4, question 9a, if they are applying for it electronically on the IRS website, there are three possibilities that come up when you tell the IRS what type of organization you are.  They are "Church," "Church-Controlled Organization," or "Other Non-Profit/Tax-Exempt Organizations". If you are a church, then check church.  If you are not a church but rather a ministry that does not have a congregation, then check "Other Non-Profit/Tax-Exempt Organizations." If you are not sure which box to check, keep in mind that all churches are ministries, but not all ministries are churches. 

What happens if a church made a mistake in the application for a tax-ID? The variables are too numerous to exhaustively cover in this article. Below are two things you can do:

a)    If you apply for 501(c)(3) status as a church within 2 years of getting the tax-ID number, then no problem. The IRS will automatically correct the mistake in its system.

b)   File a 990 tax return and on box K, check "other" and state you are a church.  Then file for 501(c)(3) status after following consideration #3 below.

Consideration #3: check to see if your church is in the automatic revocation list

As of today, the IRS has revoked the tax-exempt status of over 449,000 tax-exempt organizations. That is an astounding number. You can check by going to http://apps.irs.gov/app/eos/. If you find your organization on the list, give us a call; we need to help you get your tax-exempt status reinstated. If your organization is not on the list, then the next thing to do is to consider the following facts. 

a.     Did I get the right the tax-ID number? If yes, then apply. We can help you with our StartRIGHT™ program. If No, or you are not sure, you may need our help.  Give is a call and we can help you GetRIGHT™. 

Consideration #4: apply right

The church that I wrote about at the beginning of this article got automatically revoked because they did not apply right. The law firm they had hired failed to cover certain aspects of the application. They checked the wrong box on question 5 of part X of the application. Instead of checking box A, they checked box g. Moreover, they failed to file a schedule A. When that happens the IRS will still approve the application but not as a church.  Instead they will approve it as a ministry and require you to file annual tax returns. The church did not know this and the pastor and his board of directors were surprised to discover they were automatically revoked. In order to correct their problem, we took them through our GetRIGHT^TM program and got them on the right track. 

A lot to consider

I often talk about the hostile legislative culture we live in today.  The church like never before must understand the times and seasons we live in and have an answer.  By establishing the legal aspects of your church, you set up the execution of a cohesive and deliberate system that will prepare your church to thrive and grow. Why? Because the key to receiving a blessing is to be ready for it when it comes. Today there are many churches that will not get the $1,000,000.00 donation because they could not prove to the giver that they were legitimately set up as a 501(c)(3) organization, even though it is not required. The time has come to make yourself ready. We will support you all the way through the process so that you can focus on what really matters.