Can a Ministry or Charity Lose its Tax-Exempt Status?

It's possible. See these tips for complying with IRS requirements.

In order to maintain their tax-exempt status, churches and other religious organizations must comply with certain ongoing rules. Failure to follow these Internal Revenue Service guidelines can result in costly fines or the loss of the organization’s tax-exempt status. Use these recommendations to help develop practices that can protect your ministry.

1. Understand how the Fair Labor Standards Act applies to ministries

Substantial penalties may be imposed on a ministry that fails to withhold and pay employment taxes properly. The Fair Labor Standards Act (FLSA), which covers issues of wages and overtime, can apply to individual employees within a ministry, even if the ministry as a whole is exempt.

2. Realize that not all ministry income is tax-exempt

For charitable organizations, unrelated business income is any income from trade or business activity that is not wholly related to its tax-exempt purpose. The federal government generally considers this type of revenue to be taxable. This resource provides helpful information as you consider whether your ministry’s income-producing activities meet the taxable criteria.

3. Collect business expense receipts

You most likely have people in your organization who purchase goods or services on behalf of the ministry using an expense account. How those expenses are paid or reimbursed could open up pastors, employees, and volunteers to personal taxable income. Learn the difference between accountable and non-accountable spending, and how to stay compliant with IRS guidelines.

4. Avoid personal benefit

Charitable organizations are prohibited from taking part in activities that result in an individual advantage or benefit, also known as inurement. Examples of inurement include a board member’s family business winning a ministry contract or an employee purchasing organizational goods for below-market value. Take our Fraud Prevention Quiz, and discover how to protect your ministry while cultivating good governance.

5. Use caution in political situations

A ministry can participate in some political lobbying, as long as it’s issue-driven and not related to a particular candidate. However, if lobbying becomes a substantial part of its activities, a church could jeopardize its exempt status. Learn the key factors used to determine lobbying and political campaign intervention.

6. Make church documents available to the public

If your ministry has to pay unrelated business income tax (UBIT) and files an IRS Form 990-T, then your organization needs to make that document available to the public. Other documents for public inspection may apply to your ministry as well. Click the link below to see the complete list.

Documents for Public Inspection

7. Churches can be audited

Because churches and other nonprofits enjoy certain tax benefits, the IRS has the right to audit any organization it believes no longer qualifies for exemption or has failed to pay applicable taxes. Organizing your information now can streamline a potential audit in the future.

Maintaining your ministry’s tax-exempt designation requires ongoing commitment. While this list offers general information, see the IRS Tax Guide for Churches and Religious Organizations for a deeper examination of nonprofits and tax-exempt issues.