Under current law and ever since Congress required annual federal information returns for nonprofit organizations in 1943, churches and certain other church-related organizations have been statutorily exempt from having to file for initial recognition of tax-exempt status with the IRS, as well as the annual information returns necessary to maintain tax exemption. In its latest lawsuit against the IRS, the Freedom from Religion Foundation (FFRF) is arguing that these church exemptions to IRS filing requirements violate the Establishment Clause of the First Amendment and equal protection principles under the Fifth Amendment.
This suit comes after two other FFRF complaints have been filed against the IRS in the past six months—one challenging the constitutionality of the clergy housing exclusion and another seeking to compel the IRS to enforce the campaign prohibition against churches involved in electioneering activities.
Because other nonprofit organizations, including FFRF, are required by law to file IRS forms for initial recognition of tax-exempt status (Form 1023) and information returns each year (Form 990), FFRF and one of its local chapters are asking a federal district court to declare the church filing exemptions unconstitutional and to enjoin the IRS from allowing churches these exemptions in the future. The complaint filed in late December 2012 alleges the exemptions constitute preferential treatment of churches and other religious organizations, while discriminating against other nonprofit organizations.
This issue was recently considered by the Commission on Accountability and Policy for Religious Organizations (Commission) and its Panels of Nonprofit Sector Representatives, Religious Sector Representatives, and Legal Experts in the Commission’s December 2012 report to Senator Charles E. Grassley. In recommending that Congress never pass legislation requiring churches to file these reports or any other similar information returns or forms with the federal government, the Commission observed,
The U.S. Supreme Court has ruled that the First Amendment’s Establishment Clause prohibits ‘excessive entanglement’ between the church and the government. The Court has ruled that ‘detailed monitoring and close administrative contact’ are elements of excessive entanglement. Requiring churches to file detailed information returns such as the Form 990 with the federal government would raise serious constitutional questions. In addition to the significant constitutional concerns, requiring churches to file detailed information returns with the federal government would not be in the best interests of the free exercise of religion in America, and it would create a significant burden on both the religious sector and the federal government.
The IRS is expected to file its response to the latest FFRF complaint by the end of February.