By: James Guinn, CPA

In recent years there has been an explosion of independent ministries creating the need for tax-exempt religious organizations. Most ministers and religious workers see the formation of a tax-exempt religious organization as a somewhat “mysterious” process.

Many have already been refused recognition by the IRS for failure to comply with regulations and laws, primarily in preparing their application for exemption. Nearly all persons seeking exempt status have had difficulty with the preparation of required tax returns due to lack of understanding of the laws, inadequate records or both.

To make sure existing organizations and those established in the future adhere to the laws and regulations under Section 501(c)(3), the IRS has made a commitment to Congress to audit every exempt organization on a five-year cycle. Thus, with the knowledge IRS is going to examine an organization either in an office audit or field audit and also for reasons of good stewardship, it is imperative that a tax-exempt organization be established and operated consistent with the rules of Section 501(c)(3) of IRS Code.

“A tax-exempt religious organization is a legal entity or vehicle created and operated exclusively for religious purposes, no part of the net earnings of which insures to the benefit of any private individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in or interfere in any
political campaign on behalf of any candidate for public office.”

Your first step in creating a tax-exempt organization is for you, the founders, to establish exactly what you expect to accomplish with the religious organization. The goals and aspirations of the ministry should be defined and reduced to writing. These goals can be very broad in nature, yet there must always be some exempt religious purpose involved.

Some specific religious activities would be:

*A church
*A religious order
*A church auxiliary
*A mission
*Missionary activities
*Religious publishing activities
*Religious bookstore

Be sure the goals and objectives of your religious organization look ahead several years. Consider the expansion of the ministry. A broad-based operation must be created in order to prevent future problems when expansion does occur, if it occurs.

Once you have decided upon and written the goals and objectives of your religious organization and have determined a tax-exempt organization is really needed, your next step is to hire an attorney.

The attorney should prepare the corporation articles and bylaws in conformance with state requirements for tax-exempt organizations and also aid you in preparing the minutes of your organizational meetings and any other required meetings.

Make sure the attorney is aware of the special provisions required by the IRS in the articles of incorporation. If these two particular provisions are not in accordance with IRS rules, the IRS will not accept this corporation as a tax-exempt organization until you have amended your articles of incorporation.

Once your approved articles of incorporation have been returned by the Secretary of State of the particular state in which you are incorporating, your next step is to prepare Package 1023, Application for Recognition of Exemption, under Section 501(c)(3) of the Internal Revenue Code.

Obtain Professional Help

Once again, it is recommended professional help be obtained in preparing this package. Due to the excessive abuse of tax-exempt organizations in recent years, it has become increasingly more difficult for tax-exempt status to be obtained.

A tax lawyer or a certified public accountant who is experienced and familiar with preparation of applications for recognition of exemption should be retained. Form 1023 and the required attachments must be filed within 15 months from the date the corporation was organized to qualify for exemption. If the organization is then approved, the exempt status will be retroactive to the date the organization began doing business, and accordingly, any tax deductible receipts issued would be valid. If Form 1023 is not filed within the 15-month period, then exempt status is
only from the time the application is approved.

Once Form 1023 is complete, it should be submitted to the nearest district office of the IRS where there is a tax-exempt organization division. After submission, the waiting begins. Depending on the completeness of the application and the attachments, and the backlog at the IRS office, the wait will be from six weeks to six months.

During the waiting period, you can expect telephone conferences and letters requesting additional information from the IRS agent assigned to your application in order for him to make the decision as to whether or not the organization is to be granted exempt status. Once the agent is satisfied you meet all requirements based on your application and any additional information provided, your determination letter will be issued.

The determination letter is a two-page document explaining your organization has met the requirements and has been granted the exempt status. Normally this exempt status is a temporary status.

Violations Endanger Status

At the end of your temporary period (advanced ruling period), you will receive a request for additional information from the IRS. Once this is complied with and approved, the exempt status is permanent unless there are violations on the part of the organization.

Violations that endanger the exempt status of the organization include the organization changing its nature of purpose without providing the necessary information to the IRS, interference in political campaigns by the exempt organization, or possible inurement of benefit to an officer, director or employee of the organization. Inurement of benefits is primarily the use of exempt
organizations assets for the benefit of any office, director or organization.

The founder of an exempt organization must be extremely careful that a complete set of books and records be maintained on all funds of the organization and be able to prove, upon audit, there has been no benefit to the officers, directors or employees of the organization other than reasonable compensation. At the end of each fiscal year, Form 990, Return of Organization Exempt from Tax, should be filed.

In summary, by taking advantage of current laws, a tax-exempt religious organization can better carry out its ministry because 100 percent of all funds can be used to further the ministry instead of just after-tax dollars being used.

It is critical, however, for the organization to be properly organized, operated and maintained so it remains above reproach in stewardship and in ministry.

James Guinn is a certified public accountant with the firm Guinn, Smith and Associates in Irving, Texas. He has helped more than 100 non-profit corporations receive tax-exempt status from the Internal Revenue Service (IRS).

Guinn earned a bachelor of business administration degree at Midwestern State University in Wichita Falls, Texas, and worked for Arthur Andersen & Company, one of the world’s largest international public accounting firms.

(The above material originally appeared in Ministries Magazine.)

Christian Information Network