The Non-Accountability of Religious Groups


No, it is probably not true that religious groups in this country are robbing us blind. But we cannot be sure, because, inexplicably, our laws have loopholes that prevent the government from effectively checking on the finances of churches, synagogues, and mosques, on how these groups manage or mismanage the very considerable public funds with which they are entrusted by way of tax exemptions and tax deductibility of donations.

Does it ever happen, for example, that a religious group will offer a receipt for a donation for a payment which was not in fact a voluntary contribution but rather a payment for some sort of service, say a church-catered wedding or individual religious tutoring ? Issuing a donation-receipt under such circumstances would be illegal but under current auditing rules of the IRS and state agencies, it would be almost impossible to detect.

I have outlined the contours of the problem in the first part of a law review article entitled “When the Constitution Fails on Church and State: Two Case Studies,” 6 Rutgers Journal of Law and Religion, 1.2 (2005). Here I reproduce Sections 5-15 of this article. I have omitted the numerous footnotes; they contain supporting detail and and can be consulted by clicking on the link shown above.

I. THE NON-ACCOUNTABILITY OF RELIGIOUS GROUPS

[5] The United States in recent years have seen well-publicized scandals in the
Catholic Church, primarily concerning sex, but also involving concomitant financial
irregularities. The public discussion surrounding this matter has not touched upon the fact the Catholic Church, like all other religious groups, is given very unusual immunity from financial reporting to the government and from most auditing by the government.

[6] The federal religious immunities in the IRC are found in Sections
508(a)(c)(1)(a), 6033, and 7611, and have a long history, going back at least to the
beginning of the twentieth century. They are noteworthy because they benefit religious groups and not other non-profit entities (except by way of certain de minimis provisions).

[7] Section 508 immunity provides that new religious groups (and small secular
groups that can qualify under a de minimis rule) need not file an application to qualify for tax exemption. Most non-profit groups must file a Form 1023 to obtain recognition as a tax-exempt entity. This form asks searching questions about the group’s finances angovernance. But churches and synagogues need not file; they are considered tax exempt on their own say-so. This is a very significant exemption from accountability.

[8] However, Form 1023 may be filed by churches on a voluntary basis. A
church that takes this route will be asked, in addition to the questions that are applicable to all non-profits, a special group of questions contained in “Schedule A”, which are designed to distinguish bona fide churches from illegal schemes.16 The logic, if any, of Schedule A is not obvious. If a group considers itself a church or synagogue it need not file such information unless it decides to do so voluntarily, in which case it will have its bona fides questioned; those declining the voluntary filing have their bona fides assumed.

[9] Nor are the advantages of filing [to a church] obvious. A publication by the Union of American Hebrew Congregations (the Reform movement) recommends voluntary filing, partly because it results in a listing by the IRS’s Publication 78. Such listing does confer more visibility to a group, and perhaps enhances its credibility among prospective donors, but does not enhance a church’s tax status or any other legal prerogative. Many churches and synagogues are listed in this mammoth book but many are not. There does not seem to be an easy way to estimate the extent of this voluntary compliance.

[10] The Section 6033 and 7611 exemptions free churches from the periodic
financial reporting that is required of other non-profit groups. These exemptions
benefit “churches, their integrated auxiliaries, and conventions and associations of
churches” (as well as secular groups with annual gross receipts of less than $5000) and are thus more narrowly drawn than certain other definitions of “religion.” Obviously, a mosque and a synagogue is a “church” for this purpose, but certain other church-related groups are not.

[11] The § 6033 exemption is particularly significant and far-reaching because it
affects not only the targeted groups but also the public at large. At issue is the famous IRS Form 990, which for all other non-profit groups affords a revealing and very accessible picture of how non-profit groups manage their money. Secular non-profit groups are required to file this form annually, but churches are not. Most states require that the secular groups operating within their borders also file a copy of the 990 with the state government. Religious groups, however, are generally exempt from these state filings.

[12] The philosophy behind Form 990 is as follows: in return for the many
privileges that the government bestows on non-profit organizations — income tax
exemption, exemption from property taxes, and tax deductibility of donations, the
government asks for the disclosure of financial information, akin to, but much less
extensive than the information required of publicly owned corporations. Since the
various tax privileges of these non-profit groups may be considered tax expenditures by government on all levels, non-profit groups may be said to receive considerable public funds and should be held accountable for such funds.

[13] The Form 990 filings of all the major non-profit organizations are now widely
available in various publications and on the Internet. They form the basis for ratings given to nonprofit groups by various “watchdog” groups who are interested in how efficiently the charities and other nonprofit groups are managed. The information required on Form 990 includes total receipts, sources of such receipts, expenditures by type and recipient, salaries of top officials, and information on self-dealing operations among board and staff members. The IRC provides penalties for self-dealing, for example a property sold by a board member to the organization at an inflated price. Churches do not have to file such information. Consequently, it is possible that the inappropriate expenditures surrounding the sex scandal in the Catholic Church could not have been as easily kept secret if the Church had been required annually to file Form 990.

[14] The Form 990 disclosure of salaries has attracted particular attention in a
report published in the Chronicle of Philanthropy. This kind of publicity is likely to
have a deterrent effect on excessive salaries. Again, this public disclosure is not required of religious bodies. In addition, the § 7611 exemption frees churches from routine auditing by the IRS. The Service can do audits, but only for cause, and then only with restrictions that do not apply to secular groups.

[15] Taken together, these Code exemptions create the impression that Congress
regards religious folk as more trustworthy than non-religious folk and less in need of
accountability. As we shall see below, most of the states have followed these Federal
exemptions from accountability. Concerning the state exemptions, Catherine Knight
observes:

[a] church officer who dips into the collection plate may be
held accountable on Judgment Day, but what about a
reckoning in this life? . . . The ability of the attorneys
general of the various states or of church members to
regulate the fiscal decisions of the church’s corporate
directors or officers is mired in statutory limitations and
constitutional questions. As a result, religious corporations
are largely self-regulated.

Was Congress right to assume that, when acting under color of church, man’s probity is beyond question? …

While, as we have seen, IRS approval is not needed to qualify a religious group for 501(c)(3) status, obtaining such approval seems ludicrously simple. Professor Rob Reich of Stanford has issued a report on the topic: “Anything Goes.” The report has an appendix listing 60 “most eccentric” groups that have managed to obtain IRS approval, for instance groups who impersonate nuns.

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