501(c)(3) Compliance: How to Keep Your Church Safe from Audits as It Grows
Sep 24, 2025As your church grows, good and bad things could happen. When your ministry has more than 100 members, the IRS investigates more closely to make sure you are following the severe rules for 501(c)(3) tax-exempt status. If you don't follow the rules, you can have to pay for audits, fines, and maybe even lose your tax-exempt status.
To protect your church, your donors, and your leadership team, you need to know what the most important parts of 501(c)(3) compliance are and how to deal with them ahead of time. This guide gives churches that are growing a lot of information and useful steps that go along with the Tier 2: THE FOUNDATION PLUS PLAN.
What Does It Mean to Be a 501(c)(3)?
Your church is in conformity with 501(c)(3) if it follows the IRS rules for religious groups that don't have to pay taxes. To keep this status, your church must do the following:
- Only do things for religious, charitable, or educational reasons.
- Don't provide people or groups private benefits.
- Fill out the right forms and keep good records.
- Don't do something political that goes against the rules.
You can't just do compliance once; you have to do it all the time, and it gets harder as your church grows.
Important Areas of Compliance to Watch Out For
1. Tests of the Group and How It Functions
Your church's Articles of Incorporation and bylaws must clearly state a religious purpose that follows IRS standards. Most of what the church does every day should help with that.
You could lose your exemption if you make money from things that aren't related to your religious mission and don't disclose it correctly and keep it below IRS limits.
Operational Alignment: The IRS won't look too closely at your events and programs if they are in accordance with the religious purpose you say they serve.
2. Keeping Good Records and Papers
Keep track of your money, such as donations, bills, and receipts.
Take notes during board and membership meetings, especially when decisions are made regarding how the group is operated and how to spend money.
Write down all the big decisions, acts, and changes in leadership.
Good records are your best protection against an audit.
3. You Have to Give the IRS Alerts and Files Every Year
You do have to file Form 990-T if your unrelated business makes more than $1,000 a year. But churches usually don't have to fill out Form 990.
Quickly and appropriately respond to any letters or questions from the IRS.
4. Pastors Should Earn Good Pay and Benefits
To avoid "excess benefit transactions" that could lead to sanctions, pay must be fair and well-documented.
It should be clear and written down how much housing assistance people get.
You must follow the rules imposed by the federal and state governments when you keep payroll and tax records.
5. No Campaigning for Political Office Is Allowed at All
Churches can't support or speak out against candidates for office.
It's crucial to stay neutral and have good proof when you teach people about social or political concerns.
If you don't follow the rules, you could lose your tax-exempt status and get in trouble with the IRS.
6. Being Honest and Letting People Know About Things
If they ask for it, give them your IRS determination letter and financial filings.
Be honest with your church and donors if you want them to trust you.
Things You Can Do to Keep the IRS from Checking Your Taxes
Set up regular internal audits or reviews of how well you are following the law so you can find and fix problems early.
Teach your leaders the basics of following the law and what they need to do.
Have a lawyer with experience check over important papers and rules.
Encourage your church community to be open, honest, and responsible.
How the Foundation Plus Plan Keeps You Safe from Audits
The FOUNDATION PLUS PLAN helps churches with 900 to 2,500 members with all of their legal and regulatory issues, like:
- Full legal checks that meet the requirements for 501(c)(3) compliance.
- Professional aid with keeping records, running a business, setting up payroll systems, and doing things that are against the law.
- Help with IRS audits or questions to keep your ministry safe.
- Ongoing training, templates, and other tools to help your church stay up to date and ready.
In the end, making sure your ministry is audit-proof can help it last.
You have to take on more duties as you grow. If your church considers 501(c)(3) compliance a top priority and hires skilled legal help through the FOUNDATION PLUS PLAN, it may safely obey IRS rules, avoid expensive fines, and focus on its purpose.
Links Inside
Links to Other Websites
- IRS Guidelines on 501(c)(3) Compliance
- National Council of Nonprofits: IRS Compliance
- Church Law & Tax - 501(c)(3) Resource Center
Notice
This blog article is not legal advice; it is just meant to give you information. If you want legal advice that is relevant to your church, you should go to a lawyer who is licensed.
