12 Mar 2013

When Your 501(c)(3) is More Than Two Years Old

Founder Raul Rivera

It happens every week.  We have a conversation with a church that got its 501(c)(3) approval several years earlier and is not operating in a manner that is consistent with it.  It is common for a church to change its activities, amend its bylaws, alter the number of board members, and even adopt new policies on how it will govern itself.  To the dismay of many pastors and church boards, regulation requires that such changes be submitted to the IRS for further 501(c)(3) consideration.  Internal Revenue Manual 7.21.5-2 states that the IRS must receive such information from the church so that it " . . . may consider the effect of the change on your exempt status . . ."

Out of sight, out of mind

In all of the years that I have been serving churches and ministries, only a handful of pastors and leaders have known of such requirement.  In fact, let me share with you what happens to most churches after they get their 501(c)(3) approval.  The approval letter gets tucked away in a file folder and it either gets lost, or they make copies of it in case they need it from time to time to show they are a tax exempt church organization.  What they never consider is how their church changes as time passes.  I once spoke to the new pastor of a church that was formed several years earlier.  Though the church had gotten its 501(c)(3) approval in 2008, it had started a new daycare/preschool and a bookstore.  This pastor was concerned because after the former pastor resigned his post, a new board was appointed and a new set of bylaws was adopted.  He wanted to know if the current bylaws were legal.

The original 501(c)(3) application

Because no one could find the previous version of the bylaws, IRS form 4506 was used to get a full copy of the original application.  To the pastor's shock, he discovered that his church did not in any way look like the church that was described in the original application.  He also discovered that the previous bylaws had a special provision called the amendment clause.  This clause gave a very clear directive on how the church could change its bylaws.  The church did not follow this directive.  Moreover, the new board that was appointed did not follow the manner described in the bylaws.  This was a real problem for the church.

A problem for the church

Many pastors do not know the hidden dangers of operating their churches without giving due maintenance to their 501(c)(3) status.  It is critical to know that there are important consequences to overlooking this requirement.  Here are a few questions you should consider.

  1. What happens if your church gets audited under section 7611 and your 501(c)(3) shows a different set of bylaws than the ones you now use?
  2. What if you have new activities that were not in the original application?
  3. What if the current board of directors was appointed in a manner that is inconsistent with the bylaws on record with the IRS? 

With increasing IRS scrutiny, churches need to take heed of this requirement.  Many ministers work in the ministry, but few work on their ministry.  I encourage you to take some time this month and work on your ministry.  The number of things you will find that need attention might surprise you.  If your church ever makes any of the following changes, it must submit those changes to the IRS.

  1. Changes to the church's name
  2. Changes to the church's purpose or activities
  3. Changes to the minimum number of board members;
  4. Changes to the bylaws or articles of incorporation;
  5. Changes to the policies or procedures regarding compensation of officers, directors, trustees, or key employees.

The above list is only a short list of the things that require you to spend time giving maintenance to your church's 501(c)(3) approval status.  If you would like to learn more about your church's 501(c)(3), please give us a call today or attend one of our conferences.

Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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