May 13, 2013

Churches and taxes

A Congressional committee working on ways to reform and simplify the US tax code has considered recommendations to change the tax exempt status of churches.

The working group hears and summarizes recommendations from interested parties and passes that information on to the elected representatives on the House Ways and Means Committee. There's no straight line from the working group's report to eventual legislation. It doesn't make recommendations, but considers them, digests them, and passes them on. In the more than 500-page report, however, this is the only reform considered that is specific to churches' tax status.

The committee heard three recommendations for change:
  • Require churches to apply for tax-exempt status, rather than receiving it automatically
  • Require churches to file an annual tax return, even though no taxes are being paid, as do other non-profits
  • Ease restrictions on IRS, allowing for more tax inquiries and audits of church finances
The recommendations seem to come from the Secular Coalition for America.

In a letter to the House Ways and Means Committee, the group writes
A fair tax system should require accountability from all organizations that are entrusted with the privileges of tax exemption. However, the limitations imposed on the IRS by these three provisions ensure that churches are virtually insulated from public or government oversight. Reporting requirements for tax-exempt organizations are in place to ensure the benefits received are serving the benevolent purpose for which they were intended. Charitable contributions by individuals, foundations, bequests, and corporations reached $298.42 billion in 2011, with religious organizations receiving the largest share -- 32 percent -- of total estimated contributions. Holding religious organizations to the same filing standards as other charitable and educational institutions ensures that the almost $100 billion being donated to these organizations is actually going to help those who need it.
The group is not recommending churches lose their tax-exempt status, but that they be held to the same standards as other non-profits, such as para-church organizations.

The Secular Coalition argues that some specific religious groups, notably the Catholic Church and the Church of Jesus Christ of Latter-day Saints, have used their money in questionable ways and cannot be held accountable because the government has provided them with a "veil of secrecy." The Secular Coalition also objects to the way charitable donations are being used for political purposes in violation of the Johnson Amendment, sometimes flagrantly, as in the Pulpit Freedom movement

The Secular Coalition estimates that "Enabling the IRS to revoke the tax-exempt status of violating religious organizations by requiring application, reporting, and removing [Church Audit Procedures Act] from the tax code could generate up to $16.75 billion per year, almost enough to cover the entire 2012 budget for NASA.

The politics of such a reform make it pretty unlikely. Changing the tax code in these ways would probably be cast as an attack on churches, and it's pretty impolitic to be seen as attacking churches.

There is, though, at least one interesting possibility for a compromise apparent in the clash between the reforms suggested by the Secular Coalition and those sought by those Pulpit Freedom movement. Perhaps the restriction on political activity could be withdrawn in exchange for new requirements that churches apply for tax exempt status, report their taxes and submit to audits in the same way as other non-profits.