Religious Organizations and the 990 Exemption: more harm than good?

One of the side effects of our American separation of church and state is that churches are neither taxed, nor are they required to file a 990 with the IRS, even though they are generally considered to be “charities.”[1]  But in actual practice over the years, this exemption has spread to religious organizations, so that not only congregations themselves are exempt, but so too are those entities affiliated with a church or religion.  This means that not only congregations and houses of worship are exempt, but so too are religious orders, ministries, missionary organizations, and other similar organized efforts.  But it has to be asked if the blanket exception from both taxation and reporting is necessarily a good thing.

Among the historical underpinnings of these exemptions is Chief Justice John Marshall’s observation that “power to tax involves the power to destroy.”  A corollary to this precept might be “the power to force compliance with reporting involves the power to control.”  Religious organizations in the United States are exempt from state regulation because under our concept of a wall between church and state, neither party should be in a position to influence, control, or impact the fortunes of the other.  This is understood.  But in a day when these entities, particularly the arms that undertake the socially relevant effort of working with people in need, are competing with secular entities for scarce resources, you have to wonder if they are doing themselves and their potential donors a disservice by not reporting as other charities do.

An example of this came to light yesterday.  My wife and I were in church and a visiting priest spoke during the homily of the work his organization is doing in some of the poorer developing nations.  Among their activities are feeding centers, orphanages, schools, clinics, job-training centers, and home building programs.  As ushers passed out self-mailer brochures, he spoke of his own work in Haiti and asked the congregation to consider making donations.  A former college president, he was an excellent speaker and made a compelling, if emotion-based argument

Predictably, some people immediately began filling out the forms and either placing checks or cash in the envelopes.  Some just placed them in the pews and waited for the whole thing to be over.  My wife and I took one home.  Sometime later she tried to look up the organization on Charity Navigator, our go-to source for getting an initial picture of charities that ask us for donations.  But the organization was not rated.  My wife at first wondered if it was because the organization was too small for CN to rate it, but I quickly realized that it was because it is a “religious organization” and does not file the full 990 upon which CN bases a significant portion of its ratings.

This made me wonder.  How, other than upon an emotional or religiously-spurred basis, was anyone supposed to know whether this charity was a good investment?  The brochure claimed that 95.51% of its revenue went to program expenses –with 1.93% going to fundraising and only 2.56% going to admin and overhead- but how was anyone to know anything else?  A visit to the organization’s website was not much more illuminating, giving an impressive list of activities, featuring a discussion about the organization’s data gathering, but not actually offering any of that data that might reflect the organization’s actual impact.

Now this is not to say that most secular organizations operating within the same cause area are much better.  They too laden their websites with activity accounts and more often than not imply, rather than document effectiveness.  But at least they have to file their financial information with the government.  At least, for those who believe that sound finances suggest a well-managed organization, there is something to look at, something to compare to other similar organizations.  But for those many, many religiously affiliated charities, there is usually nothing because they don’t have to file.

This may be a mistake.  It is one thing for churches and congregations to be exempt from the reporting requirement.   But it is an entirely different matter for a religiously affiliated charity, one that is operating side-by-side with secular organizations, one that is out there in the same marketplace seeking support from many of the same donors, to not to provide the same financial information its secular counterparts do.  Operating as a charity, these entities are not a religion, a church, a religious order, or a congregation, irrespective of their affiliation.

By not making public the information their secular competition must provide, these organizations do themselves a disservice –they can’t be rated as other charities are and the resultant lack of information could lead to the suspicion that something fishy is going on or that they’re somehow not as good as the charities that are rated- and they similarly do no favors for those who might want to support them on something other than an emotional basis.  It’s tough to make an informed decision when there is little or no information to go on.

Filing a 990 would not subject these religiously affiliated entities to taxation.  It would, however, demonstrate that they are ready, willing, and able to make their case on the same playing field as their secular counterparts.  And I can’t quite see how that would hurt anyone………..


[1] Under IRS guidelines, the exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  The term charitable includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency, many activities which religiously affiliated organizations often undertake.

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