What Will Happen If We Lose Our Tax-Exempt Status?
Oct 24, 2025Section 501(c)(3) of the Internal Revenue Code says that most churches need to continue tax-exempt so they can accomplish their work and carry out their purpose. This position lets churches accept gifts that are tax-deductible and not have to pay federal income taxes, and sometimes not even state or local taxes.
But it can be very bad to lose your tax-exempt status. It harms the church's reputation, makes it harder for it to accomplish its job well, and makes it less stable financially. Many churches believe that once they get tax-exempt status, it will last forever. "We never thought this would happen," they remark. But revocations by the IRS happen more often than people think, mostly because people make mistakes that could have been avoided or don't follow the laws.
This book is interactive and goes into great detail about how vital it is for churches to be tax-exempt, the typical mistakes that can cause them to lose it, the awful legal and financial effects of losing it, and most importantly, what churches can do to keep it and what to do if they do lose it. We also talk about how Tier 3: THE PASTOR SUPPORT PLAN gives churches the legal audits, strategic compliance consulting, and crisis management tools they need to defend this critical right.
What does it mean to not have to pay taxes, and why is that important?
Section 501(c)(3) says that churches don't have to pay federal income tax. People who give them gifts can also deduct the money they provide them. It stipulates that churches can only do things that have to do with religion, helping others, or learning.
You won't have to pay state or local taxes on property, sales, and other things in addition to federal taxes. You can also win grants, and people will believe you more.
Many people give to churches because they may write off their donations as taxes. Losing status can make money difficulties worse.
Nonprofit Identity and Public Trust: This shows that the group is willing to respect the law and be held responsible by the public.
Why churches often lose their tax-exempt status
- Political Campaign Intervention: Helping candidates or getting involved in political campaigns in ways that the IRS doesn't allow.
- Too Much Personal Benefit or Inurement: Giving board members, clergy, and workers more money than they should.
- Unrelated Business Income: Getting money from businesses that have nothing to do with the church's mission and not paying taxes on it or reporting it accurately.
Churches don't normally have to fill out Form 990, but if they are connected to another group or if other charities aren't filling it out, that may be a problem.
If you don't follow the guidelines for public charities, it means you're not doing enough good work or you're not passing the tests for public support.
An example of bad governance is not having rules, board minutes, or keeping good records.
Using Money for Illegal or Non-Exempt Activities: Spending money on things that are against the law.
What happens to your money and the law if you lose your tax-exempt status?
- Tax Liability: unpaid federal income taxes, fines, and interest from the past.
- People who give money can't deduct it from their taxes anymore, which has a major effect on giving.
- The state and local governments may make you pay sales and property taxes.
- Damaged Reputation and Public Trust: Bad press makes it harder to engage with the community and get new members.
- Not being able to acquire grants and other money: A lot of foundations only provide money to 501(c)(3) organizations.
- Operational Disruptions: More work for the administration and less money to spend.
How to Keep Your Tax-Exempt Status
- Strong Governance and Compliance Culture: Make rules, have board meetings often, and keep track of the choices that are made.
- Don't become involved in politics, but teach leaders the rules.
- Financial Oversight and Controls: Watch transactions to make sure they don't benefit you personally or inure to you.
- Reporting and Keeping Records: Follow the standards specified by the IRS and your state, and keep good records.
- Managing Unrelated Business Income: Learn how to submit and pay your taxes on UBIs.
- Checking your finances and the law on a regular basis: Do evaluations ahead of time to detect problems.
- Training and Education: Make sure that all employees, boards, and pastors know how to follow the rules.
If your church is having problems or has lost its status, see Section 5 for help.
- Get in touch with church law professionals who know about your case and can help you straight away.
- Voluntary Disclosure and Correction: Work with the IRS to remedy mistakes and maybe get your status back.
- Change the rules, procedures, and techniques of keeping an eye on things to put in place corrective governance measures.
- Be honest about how you talk to donors, members, and other important people in your communication plan.
- Find out about different ways to make money and get it: Be ready for changes in your money and change your budget as needed.
How Tier 3: THE PASTOR SUPPORT PLAN Keeps and Restores Tax-Exempt Status
- Full Legal Audits: Check for spots where you're not following the regulations and things that could put your standing at risk.
- Strategic Compliance Consulting makes sure that there are good norms for reporting, governance, and financial controls.
- Crisis Management: Helps churches get their tax-exempt status back and cope with audits from the IRS.
- Executive coaching and training: This helps leaders keep up with the rules and decrease risks over time.
- Ongoing Monitoring and Support: This helps churches stay on top of new dangers and rules as they come up.
This blog post is only for information and shouldn't be used as legal advice. Churches should talk to lawyers who can help them follow the law and pay their taxes.
If a church loses its tax-exempt status, it could hurt its mission, finances, and reputation. To be safe, you need to know what causes loss and what occurs when it does. You also need to follow the regulations and keep an eye on yourself. Tier 3: THE PASTOR SUPPORT PLAN helps churches keep and get back their tax-exempt status by giving them experienced legal audits, strategic planning, and crisis management. This will make secure their future so they can accomplish God's mission with faith and honesty.
Links Inside
- A report on the Church's legal audit and compliance
- A Look at the Pastor Support Plan
- Getting Help from a Lawyer to Run a Church
