IRS’s Data Book Offers Insights on Tax-Exempt Religious Organizations
The U.S. Internal Revenue Service recently released its 2021 Data Book, an 80-page trove of statistics profiling the country’s tax base. Of the 2 million organizations the IRS recognized as tax-exempt last year, 1.4 million fell under the umbrella of religious, charitable, or similar organizations. This nonprofit category has grown steadily over the last two decades, compared to 865,000 in 2001 and 1 million in 2011.
With an increasing number of religious organizations making up the tax base—even if most don’t pay income taxes—it bears looking into some of the broader trends underlying the IRS’s latest data release.
Below, MinistryWatch will highlight the key takeaways of this year’s IRS Data Book as it applies to churches, parachurch organizations, and other nonprofits falling under the tax-exempt category.
Rise in Form 990 Returns and Unrelated Business Income
By definition, tax-exempt organizations aren’t required to pay income taxes, but still need to file a Form 990 information return with the IRS. Last year, the amount of Form 990 filings jumped 26% to 1.7 million, compared to 1.3 million in 2020. This deviates from recent trends, in which tax-exempt filings fell 14% between 2019 and 2020 after slipping 0.8% the year prior. Still, this year’s growth could mark a return to the pre-pandemic trajectory, as Form 990 filings previously grew by 4.9% from 2017 to 2018.
Most of last year’s tax-exempt filings were submitted electronically, perhaps unsurprising given recent changes requiring organizations to e-file. About 10% of the filings originated from California, more than any other state, followed by Ohio, New York, and Texas, each claiming about 6%.
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While most nonprofits source revenue from donor contributions, some also earn “unrelated business income” from work that extends beyond the organization’s purpose or mission. This category racked up $1.1 billion in collections last year—a comparatively tiny slice of the non-individual tax base, led by $419 billion in business income taxes. It’s still a notable increase from 2020, when the IRS drew $943 million in unrelated business income from tax-exempt entities. But overall, the trend marks a return to 2019 levels, which were roughly the same as today ($1.1 billion).
Religious Groups & Charities Still Dominate Approvals for Tax-Exempt Status
The IRS approved 86% of the 94,466 applications it processed for organizations seeking tax-exempt status. The overwhelming majority (over 78,000) were religious, charitable or similar organizations, with only 64 applications denied and about 12,300 withdrawn or incomplete.
The number of approvals for religious and charitable organizations has declined by about 1,600 since 2020, when the IRS approved nearly 90% of all 95,864 tax-exempt applications. While 79,730 religious and charitable organizations were approved that year, 61 were denied and 9,686 were withdrawn/incomplete.
Few Audits for Tax-Exempt Entities
Most IRS audits happen due to mistakes or math errors on the filer’s part, while cases of fraud or financial crime are far less common. Examining tax-exempt filings is only a small part of the IRS’s compliance activities, with the agency closing 738,959 audit cases in total last year.
The IRS only audited 9,067 tax-exempt returns, about 17% of which were Form 990s. (Worth noting: In this dataset, the IRS included employee retirement plans, government entities, and tax-exempt bonds, not just nonprofits.)
The IRS also assessed $1.1 billion in civil penalties from tax-exempt organizations and trusts for excise taxes, mainly under the categories of delinquency, failure to pay, or existing penalty appeals cases. However, more than half of those penalties were abated.