Approved Then Revoked By Broken IRS System

By Raul Rivera

In June of 2012, Pastor Nick discovered that the IRS had revoked their newly acquired 501(c)(3) status.  He had no idea why.  Why would the IRS approve their 501(c)(3) application and then within a week, revoke it?  That was the question the pastor asked me at our Ultimate Church Structure Conference. 

The history of his church

Pastor Nick started his church in 2010.  He began in a small 2400 square foot storefront and had no idea that his church would grow so fast.  By the end of 2010, over 170 people were attending every week.  The growth made it necessary to move to a new 7,500 square foot building.  It was Pastor Nick's dream to head up a church that would inspire people to become all they were called to be, by going deep in God.  Now in early 2013, with the church averaging 315 people per week, they decided it was time to apply for 501(c)(3) status.

The application process

When Pastor Nick started the application process, he reported that the church was incorporated in March of 2010.  He also reported 3 years worth of financial reports and the proposed budget for 2013.  On the first page of the application, he indicated that he was applying as a church, and he also filled out Schedule A-further indicating to the IRS that he was applying as a church.  Pastor Nick was careful to follow the step-by-step instructions of the 501(c)(3) software, and made sure he checked "Box A", which indicates he is a church under section 170(b)(1)(A)(i).  What could go wrong? 

A change in the law

In August 2006, Congress added Code Section 6033(j), allowing them to revoke the tax-exempt status of all non-profit organizations that do not file their required annual tax returns for three consecutive years.  Since May 15, 2010, hundreds of thousands of non-profit organizations have had their 501(c)(3) status revoked for failure to file their tax returns.  However, paragraph (3)(A)(i) exempts churches from having to file tax returns. This means that churches should never have their 501(c)(3) statuses revoked for not filing tax returns.  So, why has it happened to numerous churches this year? 

A broken system

In recent months, the IRS Exempt Organizations Unit has made the news for improperly holding up the 501(c)(3) applications of many conservative and Christian groups who focus on abortion education.  It appears that they are in the process of creating another newsworthy event because of a broken system.  The IRS has sent letters to thousands of churches telling them they have been automatically revoked for not filing tax returns for the previous three years.  The vast majority of the churches that have received these letters are either in the process of applying or had just recently gotten their approval letters.  That is what happened to Pastor Nick's church.  His church started in 2010.  The IRS computer system flagged his church as an organization that needed to file tax returns.  This year, we have had to deal directly with the IRS on behalf of numerous churches that have fallen into this IRS pitfall through no fault of their own.  Getting things straightened out is usually a long and difficult process.  Until the IRS fixes its system, let me give you 2 tips that will keep you out of that pitfall: 

1.    Get 501(c)(3) before the three-year mark:  The churches that have fallen into to this trap have acquired their 501(c)(3) status after the three-year mark of getting their F.E.I.N. (Tax-ID number).  These are churches that got started by getting a TAX-ID number and then incorporating.  It is possible that the reason they fell into the trap is because they improperly filled out the TAX-ID application by not clearly indicating they are a church.   

2.    Consider reincorporating and getting a new Tax-ID:  If you have waited 2 and ½ years or more and have not gotten your 501(c)(3) status, it may be a good idea to reincorporate and apply for a new tax ID number.  Since each circumstance is different, our consultants can help you determine if this option is best for you.  Feel free to call us at 770-638-3444.

StartRIGHT, GetRIGHT, and StayRIGHT

Getting started on the right foot is very important today.  Everything in our radar shows us that government is continuing to become more and more legislatively hostile towards churches.  That is why starting right and staying right is the best way to avoid some of those hostilities.  In light of all that is going on today, churches can no longer afford to ignore the one legal thing that every church in America must do-- StartRIGHT, GetRIGHT, and StayRIGHT.