Do Churches Need to Update the IRS?

By Stevonne German

Has your church or organization been in existence for over two years? Have you made any significant changes to your structure? Are you thinking of starting a school, daycare or maybe even a cafe or bookstore in your building? Have you updated your governing documents recently? 

Many organizations complete their initial paperwork to start, but they often don’t know that there is necessary maintenance to those documents to truly keep you in compliance. 

In this blog, I will share a few scenarios that will shed some light on what you can do to ensure your organization is in compliance and up to date with the new laws and rulings that have been passed recently. You will be able to sleep at night and have peace that you are doing everything possible to keep your organization protected. 

Are you ready to find out how you can update your records? Let’s dig in!

“The 3 Rs” of church compliance

At StartCHURCH, we define “the three Rs” of church compliance as reconsideration, reclassification, and reinstatement. 

These three terms describe when significant changes have been made within an organization over the course of time or through growth. It’s a natural indicator of a healthy organization when such changes need to be made.

For example, for organizations that have received their federal tax-exempt status, it is best practice for them to notify the IRS of any significant changes in order to keep their 501(c)(3) status up-to-date and compliant. At StartCHURCH, we call this situation a reconsideration. Changes that necessitate a reconsideration process include any modifications to a ministry’s governmental structure that would require updates to the articles of incorporation and/or bylaws.

At times, changes made to funding or activities may warrant a change in how your ministry is classified from when it received its tax-exempt status, which is known as a reclassification.

There is also an instance in which a ministry may have had its tax-exempt status revoked or suspended. While there are several reasons as to why this may have happened, the most common is when a tax-exempt organization (other than a church) does not file Form 990 for three consecutive years. Such instances necessitate a reinstatement.

Let’s take a closer look at reclassification, reinstatement, and reconsideration.

When a reclassification is necessary

Reclassification occurs when an organization’s purpose and activities change in such a manner that it warrants a need for its tax-exempt status to be classified differently. The two most common forms of reclassification we see are churches that reclassify to a ministry (non-church nonprofit) or for a ministry to reclassify to church status.

A religious organization that was not initially classified as a church may begin to operate as a church by holding weekly worship services with an established congregation and offering other “church-like” activities such as Sunday School, children’s ministry, and Bible studies. In such cases, it becomes advantageous for a ministry to reclassify as a church since churches are not required to file Form 990 annually with the IRS.

In a similar manner, some organizations initially classified as a church may find it necessary to reclassify as a religious nonprofit.

To do this, the church needs to file Form 8940 with a written description of activities and a copy of any amended organizational documents. In addition, the church needs to file Form 990-EZ or 990-LONG for the preceding tax year that the request for reclassification is made. All of this needs to be sent to the IRS with the appropriate filing fee. 

Not long ago, I spoke to a pastor who asked me how she could dissolve her church but still keep her ordination status. She wanted the option to continue to preach and minister without the responsibilities of maintaining the church. Church membership was low and there were not many resources flowing in to help maintain the operational expenses of the church. Yet, she still wanted to reach the community and continue conducting sacerdotal functions.

I asked her one simple question: “Why do you think you need to dissolve the church?” 

I could hear the uncertainty and frustration in her voice as she answered, “That’s the only thing I know to do.” I then asked her if she had ever heard of reclassifying the church’s status. After I explained how she could change the status of her church to that of a ministry, her voice brightened immediately. She wasn’t aware that she could change her church’s status while keeping her ordination and 501(c)(3) status intact. All of her hard work with the church would not be in vain. She immediately took action and asked, “Where do I start?”

Instead of dissolving the church, the IRS gives the option to reclassify an existing organization to a different status as long as they remain 501(c)(3). So in this case, her church can become a ministry and continue to fulfill the mission God has for her.

Is it too late to get right?

There are several ways in which a charitable organization can lose its tax-exempt status, but the most common way is by failing to file Form 990. This is an annual informational return that all tax-exempt organizations, except for churches, must file to the IRS. 

According to section 6033(j)(1) of the Pension Protection Act of 2006, any tax-exempt organization (except for churches) that fails to file Form 990 for three consecutive tax years will have its tax-exempt status automatically revoked.

This may seem like a severe penalty, but there is good news. The very next paragraph, section 6033(j)(2), permits an organization whose tax-exempt status was automatically revoked for failing to file Form 990 to apply for reinstatement.

To be reinstated, the revoked organization must submit a new Form 1023 application with a filing fee. Furthermore, Revenue Procedure 2014-11 provides four procedures in which an organization may apply for reinstatement based upon facts and circumstances: 1) streamlined retroactive reinstatement, 2) retroactive reinstatement process (within 15 months of revocation), 3) retroactive reinstatement process, and 4) post-mark date process. In general terms, an organization applying for retroactive reinstatement from the date of revocation must submit the following:

1. A written request and statement that has a compelling and reasonable argument for why the organization did not submit the necessary Form 990’s for three consecutive years (or more if applicable).
2. Proof that it has implemented the necessary procedures to ensure that it does not happen again.
3. All missing and necessary Form 990s that were required but not filed.
4. A declaration signed under penalty of perjury that all information is accurate and true.

About a year ago, a pastor-friend of mine got a letter in the mail stating that his church had been automatically revoked on IRS Publication 78. True to my nature, I asked him one simple question, “Do you know why you have been revoked?” 

“I started my church five years ago, so I don’t know why we’re revoked,” he answered. He knew that churches are not required to file 990s so you can imagine how shocked he was to discover this information. The baffling aspect of this situation was that he truly was leading a church and had been functioning as such since the time of its incorporation. 

It is rare for churches to be revoked because they don’t have to submit 990s. Don’t get me wrong, it can happen, but it’s just not as likely! 

After doing some research, we discovered that his EIN application was completed incorrectly by an individual who helped him start the church. (He had not been introduced to StartCHURCH yet.) The church was listed as a real estate nonprofit business and NOT a church. When the IRS saw the church’s EIN registered as a business, it expected the organization to file taxes. After failing to file for taxes consecutively, the IRS revoked the church’s EIN. My pastor-friend needed to get back to being in good standing with the IRS quickly for two reasons: 

1. So that donors would be able to count their giving as tax-deductible, and 
2. So the church could apply for grant funding.

Without seeking reinstatement, the pastor would run the risk of facing disgruntled donors who could potentially bring a case against his church. Not having 501(c)(3) status leaves the burden of proof on the donors to prove that you are truly operating as a tax-exempt organization. 

Reinstatement was the only option for this pastor to get back in good standing. Fixing his EIN application was the first step. Once that was complete, the reinstatement process began. 

The pastor opted to use the previously mentioned option three (the Retroactive Reinstatement Process) to cover all of the years the church had been revoked. He was so excited when he received his Federal Determination Letter in the mail! 

If you are not sure if you are revoked or in good standing, I strongly suggest checking Publication 78 to check your status. Give us a call at 877-494-4655, and we can check on your status for you. We can help you get back on track if you are revoked.

When is a reconsideration necessary?

As I mentioned before, reconsideration is a term that we use at StartCHURCH that describes the process a tax-exempt organization must take to update its public record with the IRS. In essence, the necessity for a church or ministry to complete a reconsideration comes from IRS Publication 557. This IRS publication essentially informs us that it is best practice for nonprofit organizations (churches included) to update the IRS when substantial changes have occurred within the organization.

The term "substantial" is a broad term. However, we have deduced it to a few key changes. In essence, this includes changes you make to your organizational documents, activities, and/or ways in which you receive funding. Changes to your organizational documents include, but are not limited to:

• Changes to your articles of incorporation (amendment to the purpose or dissolution clause, name change);
• Changes to your constitution and bylaws; and
• Changes to the voting membership.

Unlike the first time you applied for 501(c)(3) status and had to include a fee, you do NOT have to pay another filing fee when you submit a “reconsideration packet” to the IRS. Now, that is some good news! 

The IRS recommends updating your governing documents every so often. By not updating your governing documents, you run the risk of not being properly protected. 

I recently spoke to a pastor who inherited a church from his family. Pastoral care of the church had been passed down from generation to generation. To put things in perspective, the church was 100 years old, meaning it was incorporated in 1919! 

The pastor shared the church history with me and had revealed that he was the new pastor and wanted to ensure the church was “up to par.” After he finished speaking, I asked him one simple question, “When was the last time you updated your bylaws?” He was silent for about two minutes before he responded. “You know,” he said, “I honestly don’t think they have ever been updated.” 

This is not something uncommon for us to hear at StartCHURCH. We talk to many pastors who lead churches that have long been established. Unfortunately, churches that don’t update their bylaws regularly can find themselves in court and unprotected if their documents are not up to date with the times.

Bylaws and policies

We had a client that called in and shared with us that his church had been sued and lost the lawsuit. They had not gone through our StartRIGHT Service, so they didn’t have the necessary language in their bylaws that could prevent them from having to participate in acts that did not align with the church’s mission. We consider keeping updated governing documents to be best practice because it ensures you are properly protected. 

Not sure if you have the right language in your bylaws? Let me ask you this one simple question: Do you have prohibited activities and mutual interest clauses in your bylaws? 

If your answer is “no,” “I don’t know,” or “I don’t even know where my bylaws are,” give us a call. We can help you get everything sorted out. We have a few options to help you get everything updated correctly and sent off to the IRS. You are going to have peace of mind and all the proper protection. Ask about the reconsideration process and how we can help you get what you need to update your ministry’s governing documents.

(Recommended Reading: When Your 501(c)(3) Is More Than Two Years Old)

What if I want to change my name or address?

As I mentioned before in this blog, organizations that make significant changes to their governing documents are required to update the IRS about these changes. This does include change of address, especially if you move to another state. As you can imagine, I have received this question numerous times. If the mailing address has changed, but you’re still located in the same state, simply complete and submit form 8822-B. You can read more about how to change your mailing address with the IRS here.

One situation comes to mind where a pastor called in and asked what the process would look like if they started a ministry in one state and then wanted to move to another state down the line. After speaking with the team here at StartCHURCH and doing some additional research, I found that the IRS allows you to move to another state and, in some cases, keep your existing 501(c)(3) approval. As of January 1, 2018, Section 1 of Rev. Proc. 2018-15 states that, 

This revenue procedure reduces compliance burdens on certain exempt organizations by providing the circumstances under which the Internal Revenue Service (IRS) generally will not require domestic business entities to file a new exemption application when they change their form or state of organization. This revenue procedure obsoletes Rev. Rul. 67-390 and Rev. Rul. 77-469.

In order to update your mailing address, you must submit Form 8822-B to IRS if you relocate to a new state and use Rev. Proc. 2018-15. As part of our Reconsideration Service, our specialists will help you complete this form. This new ruling will save many organizations more time! 

Simply put, some organizations that want to move their nonprofit from one state to another may not have to complete a brand new 501(c)(3) application. Certain requirements do apply. Give us a call to find out if you meet the criteria. If for some reason you have a more complex situation, don’t worry! Our reconsideration process will still get everything taken care of for you so that your records will be properly updated. Our team will devise the best plan to update and transition your organization as smoothly as possible.

Practical, simple solutions

At StartCHURCH, we want to serve our clients as best we can. Ultimately, the best way we can serve is to provide practical, simple solutions to what can feel like a very complicated scenario. Give us a call and we can help you restructure your organization successfully!

Call us today at 877-494-4655 to ask about our reconsideration, reclassification, and reinstatement services. Or, you can click on the link below to schedule a day and time for our of our specialists to reach out to you. We love to serve our clients and ensure that you are not only in compliance but truly are protected.

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