Richard Hammar is editor of Church Finance Today and Church Law and Tax Report, both CT sister publications. An expert on church law and tax, Hammar has written more than 100 books for churches and clergy. CT associate editor Rob Moll e-mailed Hammar about the Senate Finance Committee’s investigation into the spending practices of six churches.
Why would the Senate Finance Committee be interested in the finances of these six churches? How unusual is this step?
Senator Grassley’s letter to the six religious ministries pits the constitutional protection of religious liberty against the legitimate interest of the federal government in ensuring that religious organizations are in compliance with the tax code. Section 501(c)(3) of the tax code exempts public charities, including religious organizations, from federal taxation so long as they comply with five requirements. One of those requirements is that the charity does not pay unreasonable compensation. This is the main concern that Senator Grassley is addressing. Let me add that another requirement of section 501(c)(3) is that public charities may not intervene in political campaigns. This limitation clearly applies to religious organizations, and all attempts to challenge its constitutionality have failed.
Congress has broad authority under the Constitution to “make all laws which shall be necessary and proper” for carrying out the powers “vested by the Constitution in the government of the United States or in any department or officer thereof.” Implicit in the power to make laws is the power to conduct investigations to determine the need for legislation, and it is in this context that Senator Grassley issued his request for financial information. Senator Grassley has stated that his sole purpose is to ensure that these six large ministries, that receive a substantial amount of charitable contributions, are operating consistently with the law. Most if not all of them are exempt from filing the annual information return (Form 990) that most other tax-exempt charities must file with the IRS. As a result, the IRS has very little information concerning them.
Certainly, at some point, a Senate investigation may cross the line from gathering information to harassment, but the location of that line is not clear. You must balance the constitutional protection afforded churches on the one hand, and the legitimate interest of the government in ensuring compliance with the tax code on the other.
I believe that a good analogy is the Church Audit Procedures Act. This federal legislation balances the constitutional rights of religious organizations against the legitimate needs of government by permitting IRS audits of churches under carefully prescribed limitations. This approach has worked well for 20 years, and I think it provides a basis for evaluating Senator Grassley’s letter. We can recognize that Congress has a right to gather information concerning religious organizations’ compliance with the tax code, but this right must be limited in order to protect the constitutional guaranty of religious freedom. The limitations spelled out in the Church Audit Procedures Act provide a useful roadmap.
Any attempt by Congress to obtain financial information from religious organizations raises concerns. The constitution treats churches differently than Wal-Mart. It guarantees religious freedom. At some point, a congressional investigation into the finances of religious organizations may cross the line from a legitimate request for information to ensure compliance with the law, to an abridgement of religious freedom.
Doesn’t the IRS usually have oversight over compliance with the law?
Yes. But, the IRS is an administrative agency, meaning that it enforces the laws that Congress enacts. The Constitution grants Congress broad authority to conduct investigations into the need for legislation.
When churches report information to the IRS, what do they report, and what is the IRS concerned about?
Churches report very little information to the IRS, other than compensation and withheld taxes (Forms W-2, 1099, 941, etc.). As I noted, churches are exempt from filing the annual information return (Form 990) that most other public charities are required to file with the IRS each year.
What kind of transparency is legally required of churches?
Very little. The constitutional guaranty of religious liberty has restrained Congress from requiring churches to comply with several laws that have been enacted to promote greater transparency by both for-profit and nonprofit organizations.
Where is the line between what a church can legally provide for its pastor, like a house, and what it cannot, presumably cosmetic surgery?
The tax code permits a church to provide compensation to its pastor in any amount, and in any form, so long as this is done consistently with the law. The main limitation is that a church, like any public charity exempt from federal taxation under section 501(c)(3) of the tax code, cannot pay unreasonable compensation to any staff member. Paying unreasonable compensation will jeopardize a church’s tax-exempt status.
So a church could pay for cosmetic surgery for its pastor?
Yes, so long as the total amount of compensation paid to the pastor is reasonable in amount. The IRS cannot prescribe the form of compensation that a church pays its pastor. The First Amendment would prohibit this. The problem in these cases is that a church fails to report a taxable benefit as taxable income. This can lead to significant problems.
As you said, the Constitution gives churches broad freedom to operate. In your opinion, how much abuse of that freedom would justify Congress in requiring more financial transparency in church operations? Is this investigation a signal that some people are suspicious of the way churches have operated with little IRS oversight?
I am sure that some people are suspicious of church autonomy, but that’s a consequence of the unique constitutional protections that churches enjoy. A few years ago, a proposal was made to eliminate the exemption of churches from the annual Form 990 reporting requirement that applies to most other charities. It got nowhere. Abuses by local churches would have to be widespread, persistent, and significant for Congress to even consider greater scrutiny. We are nowhere near that point. Televangelists are a different matter entirely, due to their high visibility, revenue, and the perceived abuses recounted in Senator Grassley’s recent letters.
Copyright © 2007 Christianity Today. Click for reprint information.
Related Elsewhere:
CT’s reports on the investigation include:
Praise and Dismay for Senate Scrutiny of Ministries’ Finances | While some cheer inquiry into alleged misuses of church funds, others fear government intrusion. (Nov. 6, 2007)
Senate Committee Investigating Six Major Ministries | Sen. Grassley probes “possible misuse of donations” to Benny Hinn, Joyce Meyer, and others. (Nov. 6, 2007)
Joyce Meyer has responded to criticism about her church’s finances in the past.
A 2003 Christianity Today editorial said financial transparency was a must, even when not legally required.
Other articles on faith-word churches and fiscal responsibility include:
First Church of Prosperidad | Arlene Sanchez Walsh on the African-style prosperity gospel right in our backyards—in immigrant Latino churches. (July 6, 2007)
Televangelist Report Card | A recent study reveals how religious broadcasters actually use their airtime. (October 22, 2001)
