🇺🇸United States

Loss of Donor Tax-Deductibility and IRS Risk from Pass-Through Benevolence Gifts

5 verified sources

Definition

When members earmark gifts to specific individuals and the church simply passes funds through, the IRS treats those as non‑deductible gifts from donor to individual, not charitable contributions, jeopardizing donor deductions and exposing the church to audit risk. Church tax advisors stress that benevolence funds must remain under full church control and not be donor‑directed to avoid IRS noncompliance.

Key Findings

  • Financial Impact: $10,000–$100,000 per year in lost or reduced donations in mid‑sized churches once donors learn that designated pass‑through gifts are not deductible; potential additional cost in IRS penalties and professional fees during examinations.
  • Frequency: Monthly
  • Root Cause: Improperly allowing donors to designate benevolence gifts to named individuals, failure to maintain organizational control over distributions, and inadequate understanding of IRS rules distinguishing charitable assistance from private gifts and private inurement.

Why This Matters

This pain point represents a significant opportunity for B2B solutions targeting Religious Institutions.

Affected Stakeholders

Senior pastor, Executive pastor, Finance director, Church treasurer, Development/fundraising staff, Board members/elders

Deep Analysis (Premium)

Financial Impact

$10,000-$100,000+ baseline loss in reduced donations once donors learn gifts are non-deductible; audit defense costs $8,000-$30,000; potential IRS penalties on church (501c3 status jeopardy for repeated violations) • $10,000-$100,000+ in lost donor deductions; bookkeeper liability exposure if audited (questions about competency/training); IRS penalties on church • $10,000-$60,000+ in lost external and internal donor deductions; governance liability if audit reveals board-approved pass-throughs; audit defense costs

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Current Workarounds

Approval workflow lacks designated-gift detection; board minutes document approvals without noting donor intent restrictions; informal understanding that 'church will manage it' • Creates private Excel spreadsheet with 'restricted' column; communicates intent via email threads that bypass benevolence policy review; manual spreadsheet becomes source of truth instead of official ledger • Facilities manager manually documents earmarked requests via email threads, Excel tracking sheets, or personal notes; communicates intent informally to church leadership without standardized intake process; requests are sometimes fulfilled as direct pass-through payments to individuals rather than through formal benevolence fund controls

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Methodology & Sources

Data collected via OSINT from regulatory filings, industry audits, and verified case studies.

Evidence Sources:

Related Business Risks

Benevolence Funds Misused Due to Lack of Segregation of Duties and Oversight

$5,000–$50,000 per year (typical range cited in church fraud/embezzlement case work; exact loss varies by church size and fund volume)

Ad Hoc, Emotion-Driven Benevolence Decisions Leading to Misallocation of Limited Funds

$5,000–$30,000 per year in misdirected or sub‑optimally allocated benevolence dollars in a typical medium church, effectively reducing impact per dollar and increasing follow‑up requests from inadequately helped cases.

Under-Documentation and Untracked Benevolence Disbursements Causing Hidden Revenue and Reporting Gaps

$2,000–$20,000 per year in untracked cash leakage and unreconciled benevolence outflows for small to mid‑sized churches, plus indirect loss from diminished donor confidence when reports do not reconcile.

Manual, Paper-Based Benevolence Processes Increasing Administrative Cost per Case

$3,000–$25,000 per year in staff time and overhead for mid‑sized congregations processing dozens to hundreds of requests manually (estimated at 0.25–1.0 FTE equivalent).

Slow Approval and Disbursement of Benevolence Leaving Urgent Bills Unpaid

$50–$300 per affected case in late fees, reconnection charges, or eviction‑related costs borne by recipients and sometimes subsequently covered by additional church benevolence; across dozens of cases this can reach $2,000–$10,000 per year.

Pastoral and Staff Capacity Consumed by Casework and Rework in Benevolence Processing

$5,000–$30,000 per year in lost productive capacity (pastoral and administrative hours diverted from higher‑value activities) in medium‑sized churches.

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