If members of the Zion Missionary Baptist Church in East Palo Alto, California, hadn't fought back, their one-time Pastor, Andre Harris, and his wife, Rhona Edgerton-Harris, would have fleeced them of their church building and a home valued at more than $1 million.
Church members explained that when they arrived for services one day in early May 2014, they found a real estate sign on the parsonage next door where the Christian leader and his family had been allowed to live rent free.
A curious church member did some sleuthing at the county recorder's office and discovered that the deed to the home had been strangely transferred to the pastor and his wife. A for-sale sign also soon appeared on the church property which led alarmed members to demand an explanation from their pastor about a month later.
They protested the sale of the properties which the church's bylaws prohibit without their consent.
Pastor Harris, who had renamed the church Born Again Christian Center when he took over leadership of the congregation, responded by handing the protesting members notices of ex-communication — barring them from the church in the name of Jesus.
"Greetings in the name of our Lord and Savior Jesus Christ. Born Again Christian Center is informing you because of your inconsistent attendance over the months or years, we have therefore removed you as a member," Harris wrote in the notice. "You therefore no longer have any rights or privileges to conduct any matter at the said Church. ... We are informing you of your removal and permanent ban of membership at Born Again Christian Center."
The members replied to Harris with a lawsuit alleging several crimes, including attempts to defraud the church. About 10 months later, the church prevailed.
Harris returned the properties to them in a settlement, the terms of which were not disclosed. But Harris almost got away. Zion Missionary Baptist Church members called themselves "blessed" because most perpetrators of fraud in churches are usually never reported.
Research cited by Brotherhood Mutual Insurance Company, the second largest U.S. provider of property and casualty insurance to Christian churches and related ministries, says reported cases of church financial fraud has been rising by about 6 percent annually and is expected to reach the $60 billion mark by 2025.
The level of reported fraud in churches is dwarfed, however, by the 80 percent of church fraud cases that are estimated to go unreported.
John Montague, a corporate and nonprofit tax law expert and senior associate at leading global international law firm Hogan Lovells, explained in a recent interview with The Christian Post why he believes the best way to abate church fraud is to remove the IRS Form 990 exemption churches currently enjoy. Evidence suggests churches cannot be trusted to regulate themselves, he said.
Montague, who is a practicing Christian, also made his case several years ago when he penned a research paper for the Cardozo Law Review, titled The Law and Financial Transparency in Churches: Reconsidering the Form 990.
What is the IRS Form 990?
The IRS Form 990 is the reporting form that many federally tax-exempt organizations must file with the IRS each year. It allows the IRS and the general public to evaluate a nonprofit's operations, including information on the nonprofit's mission, programs, and finances. Depending on the filing year and the gross receipts of the organization, a nonprofit might be required to file Forms 990, 990-EZ or 990-N.
In his general assessment of what he is hearing from average churchgoers today, Montague said people are frustrated by not having access to the kind of transparency in churches that a Form 990 can give.
If, for example, the Evangelical Council for Financial Accountability were a church, members could easily learn from its 2015 Form 990 disclosure, the latest 990 the organization makes available on their website, that it works to enhance trust in Christ-centered churches and ministries.
The public could also learn financial details such as how much ECFA President Dan Busby got paid from the organization that year — $193,218 in reported compensation and $42,032 in other income totaling just over $235,000.
"Nearly every conversation I've had with members of the laity, people have been interested in the concept of transparency, and frustrated by the general lack of transparency," explained Montague, who served as a law clerk to The Honorable Thomas B. Wells of the U.S. Tax Court prior to joining Hogan Lovells.
"In churches, I've encouraged people to ask questions about the finances of their churches, but I'm not aware of any church that has actually made a move to voluntarily file a 990 or to provide the level of transparency that would result from having to file a 990," Montague said.
He also explained that among the reasons why Christians aren't pushing to hold churches more accountable and showing more concern about financial accountability through the IRS Form 990 is a lack of awareness.
"I don't think most people are aware of the 990. ... And even if they are aware of the 990, they are not aware of the exemption that churches have. I'm sure that 99 percent of Christians are totally unaware of that exemption," Montague said.
"I think there are people, [who might say] 'look, my responsibility is to give money to the Church and then I leave it up to God as to what happens to it after.' I think there are those people. I would imagine that they're probably in the minority but I have no idea."
Why churches aren't required to file Form 990
In January 2011, Sen. Charles Grassley, R-Iowa, released a report after a three-year investigation targeting six popular televangelists, including Paula White, Creflo Dollar and Kenneth Copeland.
The report raised questions about their personal use of things such as church-owned airplanes, luxury homes and credit cards. It also expressed concern about the lack of oversight of finances by boards often filled by the televangelists' relatives and friends.
Grassley, citing the concerns raised by the report, asked Busby in his role as leader of the ECFA to come up with a solution using legislation as a last resort.
"As you consider the issues my staff raised, please remember our discussion in my office when you visited me with other members of ECFA board on March 12, 2009. I stated then that I believe that legislation should be the last resort. However, ideas for reform often inspire informed and thoughtful discussions which, in turn, lead to self-correction and eliminate the need for legislation," he wrote.
In 1977, after similar concerns were raised about financial impropriety among certain televangelists at the time, then Republican Senator Mark Hatfield, who died in August 2011, warned that Congress would enact legislation if evangelical leaders could not develop a proposal to regulate themselves, according to Montague in The Law and Financial Transparency in Churches: Reconsidering the Form 990.
This resulted in the Billy Graham Evangelistic Association and the Christian relief organization World Vision partnering to found the ECFA in 1979 with 115 members. Only one televangelist was listed among that number.
In a March 1979 Washington Post report on the launch of the ECFA, organizers said more than 1,100 evangelical charitable organizations with a combined annual income approaching $1 billion would subscribe to the principles laid down by the organization.
Information from the ECFA's 2015 990 shows that it currently reviews the data of more than 2,000 Christian charities and churches with more than $23 billion in annual revenue.
Grassley, in his letter to Busby, reminded him of the origin of the ECFA and its role as an alternative to legislated financial oversight for churches.
"ECFA was founded because of a challenge then-Senator Hatfield made in 1977 to Christian groups to be more accountable. He apparently was responding to a scandal in the religious community at that time. The size and diversity of the religious community in the United States has grown tremendously since the ECFA was created. I hope that a discussion of the issues raised by my staff will similarly result in increased accountability while acknowledging this growth and diversity," Grassley wrote to Busby.
This request led to the creation of the Commission on Accountability and Policy for Religious Organizations, which operated under the authority of the ECFA board of directors.
In a report released in December 2012, the commission, which is now inactive, encouraged churches and their leaders to act honorably and asked members of the public who donate money or their time to them to research religious organizations before investing in them.
"Churches and their leaders should not engage in abusive financial activities, nor should they improperly exploit the exemption from filing Form 990, because doing so undermines the credibility of their organizations and the religious community as a whole," the commission advised.
The commission also recommended that Congress "never pass legislation requiring churches to file Form 990 or any similar information return or form with the federal government."
"To require such a filing would not only place a substantial and unnecessary burden on churches and the government, it would also raise significant constitutional concerns. New churches should not have registration or notification requirements beyond those that already exist," the commission said.
Church transparency and the New Tax Cuts and Jobs Act
In May, however, the IRS appeared to take a step toward bucking that advice when it released guidance on the increased scope of what should be taxed as unrelated business income under the newly instituted Tax Cuts and Jobs Act.
While churches have long been subject to file IRS Form 990-T as long as they generated unrelated business income, the new law, the ECFA says, will now require many more churches and tax exempt organizations to file the form because the federal income tax is now applied to parking benefits.
"Because of this new tax, many tax‐exempt employers, including churches, hospitals, charities, and schools will be required to file federal Form 990‐T, and in many cases, state corporate income returns, every year regardless of whether they actually engage in any unrelated business activity. This new tax was purportedly added to the law to put tax‐exempt employers on the same footing as taxable employers with respect to employer‐provided parking," the ECFA explained in a statement to CP.
While church and financial transparency experts agree that the 990-T would only add minimally to the broader push toward church transparency and accountability, Busby argued that it's also likely to create various administrative and financial costs for many churches that do not have the means to meet them.
"Working in the church world most of my career, my guess is that prior to this provision, there's probably only 1 [percent] or 2 percent of churches in America that file form 990-T so we're really talking about two issues," Busby said in a June interview with CP.
"We're talking about a financial issue. We're gonna have to pay a tax on providing employee parking and two, which may be more important, is the administrative piece of this — to file a return with which they are not familiar. If you can imagine, small churches across America have to file a form 990-T that they've never even heard of. And probably they're gonna need to secure professional advice and pay a professional to file the return, even though the money may not be a significant amount, it's just a ridiculous provision that was put in the law," he said.
In July, the Ethics & Religious Liberty Commission of the Southern Baptist Convention issued a policy brief in support of repealing the new parking tax and earlier this month, bills were introduced in both the House and Senate echoing that recommendation.
"In addition to the new federal requirements, many nonprofits will then be required to file state returns and possibly pay state income tax," the ERLC stated. "The new regulations create tax liability and increase operations costs for these nonprofits, all because they simply have a parking lot. ...
"Taxing nonprofits on basic costs of operating an institution defeats the purpose of nonprofit status, an American tradition for over 100 years."
The case for IRS oversight of churches
Pete Evans, lead investigator at the Dallas-based Trinity Foundation, which has been tracking religious fraud and helping victims of religious fraud for almost 30 years, told CP that the new requirement is a step in the right direction toward transparency and is a small price to pay compared to the billions being lost in church fraud annually.
"Even if it affects our own church, I would vote yes [to the 990-T provision]," Evans said.
"You have all these churches now and ministries that are wealthy beyond wealth and some of which have thousands and thousands of acres in the counties that are not on the tax rolls because of various exemptions and they are living like Arabian princes," Evans noted.
Evans also questioned Busby's apparent concern for smaller churches in his criticism of the ECFA.
"If you look at the majority of people that ECFA represents, they represent the larger churches because ECFA charges so much money that small churches can't afford to be members of ECFA. And so I think there is hypocrisy there that on one hand they're getting a lot of money from the larger ministries, churches and now all of a sudden they are defending the little churches?" he said.
In response to recent questions about the organization's membership, a spokesperson for the ECFA revealed that only a minority of its currently registered members, 225, are churches.
That's less than 1 percent of the 250,000 churches registered with the IRS' Select Check program, according to Holly Ivel, director of Guidestar's data services. Under this program, the IRS provides official recognition of an organization's tax-exempt status which assures donors that their contributions are tax deductible.
"Based on how these organizations are coded there's almost a quarter of a million churches that have chosen to do that (Select Check)," explained Ivel of the program. "So they've voluntarily registered, which is great."
While Ivel, like the ECFA, does not recommend requiring churches to file a Form 990, she did notice from the data in their system that just over 2 percent of the 250,000 churches registered for the Select Check program also filed some variation of the form 990, even though they aren't required to file it.
"They are not required to file a return but even though they are not required to, about 5,300 have filed an annual return — either an EZ, which is kind of the short form, or a 990. And that's between 2014 and 2017," Ivel said.
Some of these filings could be easily searched and viewed on a database available on the IRS website as recently as late June. An update to that page on July 6 now only allows the public to determine deductibility of their contributions. It is unclear why this change was made.
Evans, who agrees with Montague that the evidence against churches show they cannot be trusted with self-regulation, argued that the 990 would be a more powerful safeguard against abuse because of the detailed information it requires. Many churches, he argued, as seen in the number of churches that file Form 990 even though they are not required, would be able to adhere to IRS oversight if there was a requirement to do so.
"Especially for the larger ministries and churches, there needs to be some transparency because they're not going to do it on their own. Churches, if they are not required to, are typically not going to be transparent on their own and I think a lot of churches would be willing if there was a requirement," Evans said.
"ECFA does not reveal salary information of their clients and that's one of the key aspects of transparency that they're hiding their own clients. They give everybody a seal of approval, this organization is good and above board and yet don't reveal salary information? What's up with that?" he asked.
In response, Busby noted in a statement to CP: "There has never been a legal requirement for churches to disclose their salaries. ECFA's standards start with legal requirements, and in some cases, go beyond the law."
In 2013, shortly after the Commission on Accountability and Policy for Religious Organizations recommended that Congress not require churches to file Form 990, Montague argued against the advice in The Law and Financial Transparency in Churches: Reconsidering the Form 990.
"... Because of their opacity and the unique nature of religious authority, churches are more likely to foster and shelter malfeasance. Churchgoers are unlikely to challenge leaders because doing so can endanger their position in the religious community, making it imperative that transparency be mandated by outside authorities," Montague argued.
"Ironically, increased transparency may actually be good for churches because, as studies suggest, it is likely to increase donations and because, by minimizing opportunities for financial improprieties, it may preserve the religious experience of churchgoers. In addition, transparency is consistent with the teaching of many Christian leaders and with the expressed preferences of a large portion of churchgoers."
Montague said he sent copies of his research to Busby and Grassley.
In a response from Busby to Montague shared with CP, Busby noted in a 2013 letter: "ECFA's position with respect to Form 990 coincides with the recommendations in the Commission report, i.e., that requiring such a form for churches would constitute unnecessary and constitutionally prohibited excessive entanglement by the government in the affairs of the church."
The excessive entanglement problem
Some see potential religious freedom issues in additional filing requirements being placed upon churches.
In The Internal Revenue Service as a Monitor of Church Institutions: The Excessive Entanglement Problem, published in the Fordham Law Review in 1977, Sharon L. Worthing concluded that requiring church-related organizations to file IRS information returns was one example of excessive government entanglement with religion.
"Although the entanglement created by having church-related institutions file information returns does not seem terribly great, the requirement can be seen as a first step whose ultimate end is full government surveillance of religious institutions. The excessive entanglement test serves as a 'warning signal' regarding programs which may appear harmless, but whose ultimate expression would result in a clearly unconstitutional relationship between church and state," Worthington wrote.
In discussing the excessive entanglement concerns, Montague pointed in his study to a well-publicized congressional hearing in 1987 hearing with witnesses from the IRS and the Treasury, as well as notable televangelists including Jerry Falwell and Oral Roberts.
Then Congressman J.J. Pickle, chair of the Subcommittee on Oversight of the House Ways and Means Committee who convened the hearing, noted how Congress and the executive "historically have been reluctant to look very closely at tax issues involving religious organizations" because of their political sensitivity.
Roberts argued that the ECFA, which had been formed as an alternative to legislation, lacked teeth and that it would be better for all organizations to file the Form 990 and submit to external audits.
Gordon Loux, then chairman of the board of the ECFA, also noted that there are "inherent difficulties in self-regulation" as it is limited to those who consent to be regulated. He agreed that the Form 990 is a "minimal requirement that ought to be met by those that are operating in the public service."
Then Commissioner of the IRS Lawrence Gibbs, who had previously agreed that churches had not been subject to the requirements of filing information returns because of concern about government intrusion into religion, was challenged during the hearing by former Congressman from New York Charles Rangel. An excerpt of their exchange is highlighted below:
Mr. Rangel: Do you see where filing an annual report by churches would be in violation of the constitutional right of separation of church and state?
Mr. Gibbs: I have assumed, perhaps erroneously, that that was the reason—or certainly one of the prominent reasons—for specifically excluding them by statute in 1969.
Mr. Rangel: Well, why did you reach that assumption? You know, it is only a congressional decision. Has any court said that you cannot put limitations on the privilege of tax exemption? We do it in unrelated taxes. We do it in lobbying. We do it in political affairs. We do it in FCC control. What in God's name could be even remotely considered a violation of the constitutional rights of churches to say that they should file an annual report as to how much money they got and what they did with it?
Several pastors contacted by CP to discuss this story because their churches filed 990 returns referred questions to their treasurer or the individual who prepared them. None of these individuals responded to interview requests.
Montague suggested that some of the churches may have filed the returns in error, not realizing they are exempt from filing.