Current Legal Issues

Church Should Make Financial Disclosures

Churches are not required to disclose their financial dealings to the IRS or to the public. Nor are churches required to make financial disclosures to their donors. To fully inform the faithful, a year-end financial summary should be required to be made to all donors of record along with the record of their donations for tax purposes. Also, members of the congregation should have access to the information if requested. If a donor directs that a donation be used for a specific purpose, the donor should be entitled to an accounting as to how the money was used to assure that the donor’s intent is realized. A summary financial report should include all receipts and disbursements for executive compensation, administration, support for specific ministries that are either supported by the congregation or function under the umbrella of the church. 

The legislative history of the non-profit corporation begins with “The Revenue Act of 1943”. Essentially non-profit corporations are the creation of the Internal Revenue Service. (IRS) All non-profit corporations are required to file a Form 990, with the exception of religious organizations. The initial concern was that tax-exempt organizations would unfairly compete against tax paying organizations; therefore, in order to determine if a tax-exempt-nonreligious corporation was unfairly competing, the law required that tax-exempt-nonreligious organizations begin filing returns, but the law exempted churches and other tax-exempt organizations like the prevention of cruelty to children or animals. These tax-exempt-religious organizations by their nature did not perform a commercial function that was likely to compete with tax paying organizations; this is no longer the case, as more and more tax-exempt-religious organizations compete against taxable organizations. 

The Revenue Act of 1950 created the “unrelated business income tax” (UBIT). It was designed to limit tax-exempt organizations from operating businesses unrelated to their tax-exempt purpose, but exempted churches.  In 1969 Congress imposed a tax on church activity that was substantially a commercial activity.  Some churches were engaged in operating publishing houses, hotels, factories, radio and TV stations, parking lots, newspapers, bakeries, restaurants and other commercial activities. Given those developments, some legislators believed that church organizations should disclose their activities. As a result, the Billy Graham Evangelistic Association (ECFA), as the primary mover, formed an organization to oversee church activity, but very few churches joined the organization; furthermore, a recent search of the ECFA website disclosed that in Florida only thirteen churches are members and accredited. Reporting is voluntary and not certified by ECFA. Financial data is shown in a few general categories, but compensation received by pastors and executive personnel is not shown.

Since 1996 as a result of many congressional hearings along the way, tax-exempt-nonreligious organizations are required to mail a copy of its Form 990 to everyone, including donors, who request it. The current Form 990 attempts to make it more difficult for tax-exempt-non-religious organizations to hide executive compensation. The groups who usually access the information are reporters and charity watchdogs. Churches and their affiliated organizations remain exempt from disclosure and are not required to file a Form 990 and are not required to disclose their financial dealings or salaries or benefits enjoyed by the pastor or pastors, and executive personnel.  

The redesigned Form 990 attempts to address financial accountability of tax-exempt-non-religious organizations by asking questions about governance and accountability practices, including questions about the independence of directors, conflicts of interest, and whistleblower protections. Churches are not subject to such scrutiny but should be. Lack of sophistication, oversight, and the high level of trust among like-minded people is evident every time a financial abuse is discovered.  Disclosure is most important in Churches where power is centered in one individual with autocratic leadership or governed by a few people who are sometimes related by blood or marriage.

In general, church administrators enjoy a trust or belief in their good intentions, and non-selfish motives. As a result, there is little motivation to demand financial accountability. Some churches no doubt voluntarily employ systems that permit total transparency. Where financial disclosure is made available, donors have confidence that their donative intent will be evidence by proper financial records.

Lack of transparency creates an environment of distrust and has the potential of damaging the spiritual lives of the congregation. Billy Graham’s organization went way beyond what the IRS required by publishing annual audits of ministry finances, even publicizing its accounting in newspapers for anyone to see.  Billy Graham never wanted to be surrounded by “yes men”. He wanted people who could tell him “no”. He felt it was his Christian duty. 

Christianity Today has published articles on the need for transparency of Church finances and tracking donations to fulfill the donor’s intent. Although churches are not required by law to make full disclosure, they have a moral duty to do so. Some have termed church organizations “trusted hierarchies”; and argue, even if congregants do not have an interest in holding their leaders accountable.