Is it Time to Make Changes to Your Tax-Exempt Status?

Informative article from

Pastor Teddy began his ministry as an evangelist 8 years ago. Two years after he started, he decided to incorporate his ministry as a religious nonprofit organization and apply for 501(c)(3) tax-exempt status. In addition to various conferences and traveling each week to minister the Word of God to different churches, Pastor Teddy met weekly with 12 people in his home for a time of Bible study and intercessory prayer. Over the next several years as his traveling ministry continued to flourish, so did the worship gathering in his home. What started out as a time of worship with a modest group of 12 individuals soon turned into a time of worship with 30 individuals. Pastor Teddy loved ministering the Word of God to congregations across the country, yet he was beginning to feel God calling him to plant a church in his hometown. Above all else, Pastor Teddy wanted to be obedient to the voice and call of God. He was ready to answer God’s call to start a church in his hometown, yet at the same time, he knew there were some legal steps he would need to take to convert his ministry to a church; he did not know if he should convert his ministry to a church or start a new entity for his church.

“The 3-R’s” of Church Compliance
There will come a time in your ministry when the changes that occur become significant. It is the natural process of a healthy organization that is experiencing growth. For churches that have received federal tax-exempt status, Revenue Manual 7.21.5-2 requires them to notify the IRS of any significant changes in order to keep their 501(c)(3) status up-to-date and compliant. This what we at StartCHURCH call a 501(c)(3) reconsideration. These changes include any modifications to your ministry’s governmental structure (articles of incorporation and/or bylaws), activities, or funding. At times, these changes may warrant a change in how your ministry is classified from when it received its tax-exempt status like it did for Pastor Teddy and his ministry. This necessary process is what is known as are classification. 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 ministry (other than a church) fails to file Form 990 for three consecutive years. Such instances necessitate a reinstatement.  Let’s take a closer look at what we call “The 3 R’s” of church compliance: reconsideration, reclassification, and reinstatement.

Reconsideration is a term that we at StartCHURCH created to describe the process a tax-exempt organization must take to update its public record with the IRS. Internal Revenue Manual Part 7, Chapter 21, Section 5 states:

“If your source of support, or your purposes, character, or method of operation change, please let us know so that we can consider the effect of the change on your exempt status and foundation status. In the case of an amendment to your organizational document or bylaws please send us a copy of the amended document or bylaws. Also, you should inform us of all changes in your name and address.”
It is important to report any substantial changes so that all information on public record is up-to-date with the IRS. 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;
  • Changes to your policies and procedures; and
    Changes to the voting membership.

Unlike when you first applied for 501(c)(3) tax-exempt status and you have to pay the $850 user fee, when you submit a “reconsideration packet” to the IRS, you WILL NOT have to pay another filing fee. Now that is some good news!

The second of our “3 R’s”, 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. In general, it is more common for a church to be reclassified as a ministry (religious nonprofit), or for a ministry to be reclassified as a church.

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, Bible study groups, and more. In this instance, it becomes advantageous for the ministry to reclassify as a church since churches are not required to file Form 990 annually with the IRS. To do this, all the ministry has to do is file Form 8940 along with Schedule A of Form 1023, a written description of activities, one year of projected income and expenses, and a copy of any amended organizational documents. All of this needs to be sent to the IRS with a filing fee of $400.

In a similar manner, some organizations initially classified as a church may find it necessary to reclassify as a religious nonprofit. For example, if a church has a transitional housing program for homeless families that begins to require more time, energy, and resources than the church itself, then the church may need to consider reclassifying its tax-exempt status. To do this, the church needs to file with the IRS Form 8940, 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. Again, all of this needs to be sent to the IRS with a filing fee of $400.

While there are several ways in which a charitable organization may lose its tax-exempt status, 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. However, there is good news in the midst of this.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.
In order to be reinstated, the revoked organization must submit a new Form 1023 application with the 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, an organization applying for retroactive reinstatement from the date of revocation must submit the following:

  • 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).
  • Proof that is has implemented the necessary procedures to insure that it does not happen again.
  • All missing and necessary Form 990’s that were required but not filed.
  • A declaration signed under penalty of perjury that all information is accurate and true.

Humble or Haughty?

“But among you it will be different. Those who are the greatest among you should take the lowest rank, and the leader should be like a servant.” — Luke 22:26, NLT

This verse states a view that is so different than what the world practices. According to the world, a leader is to have special privileges and to be treated better than everyone else.  The world seems to see service as a form of weakness. Jesus tells us and shows us that service is a sign of strength—it takes inner strength to serve those around us. It’s a very humbling experience. Leaders who think they are above serving are simply afraid of their weaknesses.

Christ tells us that our leadership should be different than what the world expects. We shouldn’t gloat over being above anyone else but use our place in life to help others. The best leaders or teachers are the ones who can admit when they are wrong or they don’t know the answer. Then, because they are leaders, they work to find the correct answers and lead people down the right path.

Look at the leadership examples around you. Do they tend to be humble or haughty? Take a look at your own leadership style. If you’re a parent, how do you lead your children? As a wife, how do you serve your husband? Husbands, how do you serve your wives? Service isn’t just a sign of humility but of love as well. Good leadership requires love. It’s a love outside of us—God’s love. Ask God for His love to empower and guide your leadership and relationships with people. Follow Him, for He is our ultimate servant-leader.

IRS Deadline Approaches

By January 31, churches must issue the following 2014 tax forms:

  • W-2 form (“wage and tax statement”) to each employee by this date. This requirement applies to clergy who report their federal income taxes as employees rather than as self-employed, even though they are not subject to mandatory income tax (or FICA) withholding. Nonminister church employees must also receive a W-2.
  • 1099-MISC form (“statement for recipient of miscellaneous income”) to any self-employed person to whom the church paid nonemployee compensation of $600 or more in 2014 by this date. This form (rather than a W-2) should be provided to clergy who report their federal income taxes as self-employed, since the Tax Court and the IRS have both ruled that a worker who receives a W-2 rather than a 1099-MISC is presumed to be an employee rather than self-employed. Other persons to whom churches may be required to issue a 1099-MISC include evangelists, guest speakers, contractors, and part-time custodians.
  • 1099-INT form to any person to whom it paid $600 or more in interest during 2014 by this date (a $10 rule applies in some cases).

The Saul Syndrome

To all appearances Saul was special: chosen by God to lead a nation, anointed, publicly endorsed by God and the leading prophet of his time, divinely led, humble, non-assertive, and had a kingly appearance. Even his early days as king reflected God’s favor. He was a success. Yet, incredibly, the same man developed an “above the law” mentality and a knack for denial and self-justification when challenged by God’s prophet. Saul then began a nosedive into anxiety, paranoia, and depression. Jealousy consumed him as one of his servants, David, began to share in the limelight. Although Saul knew David was a dedicated servant who would lay down his life for him, his jealousy raged, driven by an evil spirit.

Scripture records Saul’s relentless plots to kill David, to recruit others as assassins, and to even use his own daughters (at the expense of their hearts) as unwitting accomplices. In his paranoia he perceived his own advisors and his son Jonathan as disloyal, even threatening to kill Jonathan. Such was his delusion that he pronounced a blessing in God’s name on a man who revealed David’s hiding place.

Saul’s life ended miserably after consulting a medium. Never was he able to bring himself to say, “I repent.”


Symptoms of narcissism abound in the Saul Syndrome. According to Drs. Floyd and Narramore, pathological narcissism is characterized by at least five of the following symptoms:

1. A need for constant attention and admiration.  Like Saul, narcissists love the admiration of crowds and need to be the focus of attention. While taking credit for everything positive happening in their church, they distance themselves from weak or unsuccessful programs.  Much time is spent posturing, demanding unquestioning loyalty that creates a wall of silence protecting them from scrutiny and maintaining their perfect image.  Status conscious, they actually believe the prosperous image they project (for example, “C.E.O”) enhances the image of the church, and therefore the success of the church. Even when they do things that seem motivated by service, they are actually motivated by their desire to look good. They become spin doctors — never admitting a failure, but spinning the facts to maintain the illusion of grandeur. They will not accept positions that will not bring them praise.

2. A sense of entitlement.  Position comes with appropriate perks, say these Sauls who require extravagance as a salve for their fragile self-image.  Since entitlements reflect their honored position, they expect and even demand perks that their secular counterparts (for example, business executives) receive, and are angry when these are not forthcoming. Such entitlements may include exorbitant salary and investment packages, luxury autos, travel opportunities, and the exclusive right to perform high-profile ceremonies (for example, funerals and weddings of the wealthy) even when families may desire a staff member to whom they feel closer. Entitlement outweighs any sense of concern for the financial health of the church or its staff. Narcissistic pastors also feel entitled to blind loyalty and respect without earning either.

3. Interpersonally exploitive (for their own ends).  Money and favors are solicited from wealthy, influential members in the guise of friendship. Consequently, it is easy to understand why other church members feel slighted and why the narcissist has few enduring, close friends. Staff, (paid and volunteer), are worked unreasonably to make the pastor look good. When image is everything, no price is too high — especially when others pay it.  Any attempt to reign in out-of-control church finances is a threat to their self-image. Such pastors believe the church and staff revolve around them. Consequently others never become the people God made them to be. When a staff member is finally used up he or she is replaced by someone fresh.

4. Lack of empathy. Saul’s lack of empathy and normal parental concern is chilling. And while empathy is professed by narcissistic leaders (that is, it is part of their projected image), they are self-engrossed and care little for the needs and feelings of their staff or congregation. For example, visits to the bereaved or dying may be made solely to ensure the family will do business with the church. (For example, a pastor visiting a wealthy, dying man turned to the wife after the man had taken his last breath and said, “Will you be having the funeral at our church?”) This inability to empathize with those they lead enables narcissists to pursue their own ends without any restraint (that is, no hesitancy to use and abuse workers). Any protest or reluctance is met with anger and self-righteous talk of dedication and sacrifice. Such pastors have no concern for the long-term health of the church or staff.

5. Envious of others or believes others are envious of them.  They cannot stand to see anyone else getting credit or being in the limelight unless they put them there and can share in the people’s admiration. Even successful ministries in their churches are a threat unless they can take credit for them. “More common in church ministry is a senior pastor who refuses to allow an associate to preach for fear the congregation might like the associate’s preaching better than his own. … He takes steps to limit the praise the associate receives, usually by limiting his public exposure.” Their belief that staff members are envious of them also feeds their paranoia.

6. An arrogant, haughty attitude.  Uncharacteristic of a servant of Christ, these Sauls exude an air of pride, aloofness, and an over-inflated sense of importance. They overestimate their achievements while stubbornly refusing to acknowledge others’ accomplishments or abilities because their significance is threatened as well as the exclusive admiration they crave. Narcissists are offended when others do not share their opinions of themselves and often become vengeful.

7. A preoccupation with fantasies of unlimited success.  True narcissists are not interested in truth or reality — or you. They concoct a vision of success that becomes their obsession. These fantasies are often bred by the vain promises of church growth gurus and images presented by megachurches and television ministries. In the mean time, present reality is usually overstated. When contradictory facts and figures are submitted it makes them angry, and the messenger is denounced as negative. Data is doctored to reflect the illusion. Many churches have been destroyed because they were led into projects that were too costly for the congregation but were necessary to build the self-image of the pastor.

8. A belief that they are special and unique and can only be understood by, or should associate with, other special or high-status people. This is reflected by their buddying up to big-name leaders while treating their own people like simple commoners. Therefore, they ignore advice and/or correction that may come from staff, board, or congregation. After all, “Who do they think they are?” This sense of specialness is also reflected in their tendency to live above the rules while rigidly enforcing them on others. Often this leads to unethical, immoral, or illegal behavior.


In conclusion, the disturbing paradox of the Saul Syndrome is that Christian leaders, whose holy calling implies Christlikeness and Spirit-led lives, are capable of exhibiting such incongruity. As a result many staff and congregational members leave Christian service wounded, bitter, and confused. Some never return.

The good news is that the Saul Syndrome can be dealt with successfully, but the likelihood of the leader being open to help is negligible. Nevertheless, great hope is found in the One “who is at work in you, both to will and to do work for His good pleasure,” (Philippians 2:13, emphasis added). Scripture illustrates God’s ability to bring change to the most resistant hearts with the most deeply rooted behaviors (for example, Jacob and Saul of Tarsus). Perhaps through the earnest, compassionate prayers of those aware of a leader’s dark side change can be precipitated, for it is “ ‘Not by might nor by power, but by my Spirit,’ says the Lord of hosts,” (Zechariah 4:6).

Source: Ed Vainio

Church Government

In most churches there are three types of government structures:

  1. Voting membership churches: In most voting membership churches the members vote annually on pastoral salaries and whether the pastor shall continue his/her post.
  2. Board-led churches: Many church organizations are set up where the church board has full charge of every aspect of the church.  The pastor is hired by the board to faithfully carry out certain duties, which include preaching and other various sacerdotal functions. However, like a voting membership church, the board can dismiss the pastor at any time for moral failure, malfeasance, inappropriate use of church funds, or other reasons.
  3. Pastor-led churches: Conversely, there are some churches that are 100% pastor-led. The pastor has the complete authority and full power to make the final decision on everything and can overrule anyone at any time he/she wishes. He/she can never be dismissed from office no matter what he or she does. This type of structure often leads to abusive power, a falling away from the truth of the gospel, and inappropriate use of church funds.  Some churches begin as board-led but change to pastor-led when the pastor, behind-the-scenes, chooses his/her close friends to serve on the church board without any sense of accountability to them or the church.

For several years, we have consulted with churches on how to best establish a structure that gives the pastor the authority to run the day-to-day affairs of the church yet with a healthy dose of accountability.  A competent and effective pastor should be given the ability to run the church but also have discipline and accountability.  If he/she abuses power, embezzles, lives in unrepentant sin, or ceases to act in the best interest of the church, there must be a clear path for dismissal.

Ministry Leadership and Church Development