Religious institutions in the United States enjoy broad exemptions from federal taxes, but in Puerto Rico this month, officials are beginning the unprecedented move of auditing churches that abuse their tax-exempt status as part of the island’s efforts to combat its crippling debt crisis.
The move is the most recent in a series of drastic steps the island is taking to address its $72 billion in debt. Other efforts include raising the cost of utilities such as water and gas, gutting school funding, and hiking the sales tax to 11.5 percent –the highest in the United States.
The decision to audit churches is highly unusual, especially in the mainland United States where religious organizations historically enjoy protections against taxes.
But in Puerto Rico, treasury officials are aiming to crack down on organizations that abuse their tax-exempt status for illegal profit.
“The problem is that there are churches that are family businesses, and where people are profiting,” said Juan Zaragoza, Puerto Rico’s finance minister to the newspaper Primera Hora in April.
“You can have a church for profit, like any other, like a shoe store. You can operate a church as an entity for-profit and every year yields returns,” he said.
Zaragoza announced the plan to audit religious organizations as part of a pilot program that began last year with auditing more than 40 non-profit entities. Now, the program is extending to churches.
“The message we’re sending here is that we have a responsibility and will oversee all groups,” said Zaragoza. “This is not an attempt to demonize anyone. On the contrary, we are not giving privilege to anyone.”
So far, the pilot program has recovered “several hundred thousand dollars,” a small fraction of the island’s $72 million-dollar debt.
In the U.S., religious organizations have enjoyed informal tax exemption since the country’s founding. In 1894, an official tax exemption was implemented, and today all 50 US states and the District of Columbia exempt churches from paying property tax.
Estimates put the value of untaxed church properties in the United States between $300 and $500 billion.
In the United States, the IRS begins a church tax inquiry rarely, only if an “appropriate high-level Treasury official reasonably believes, on the basis of facts and circumstances recorded in writing, that an organization claiming to be a church” is unqualified for tax exemption or is engaged in other taxable trade unrelated to its role as a church, according to the IRS website.
Such church audits in the U.S. are infrequent and sporadic. In 2014, more than 1,800 pastors in the U.S. and Puerto Rico participated in a Pulpit Freedom Sunday, where they preached sermons endorsing or opposing political candidates to protest the Johnson Amendment, which prohibits non-profit organizations from engaging in political activities.
IRS officials, however, took almost no action against the participating churches.
But the current crackdown in Puerto Rico is enough for some churches on the island to be concerned.
“Not all religious organizations are equal,” said Luis Rivera Maldonado, treasurer of the Puerto Rican Union Conference of the Seventh-Day Adventist Church, who is concerned that the audit will set a “very negative” precedent.
“Before issuing widespread views, representatives of the government should educate themselves about the work of the religious sector,” Maldonado said.
“Our religious organization eases the burden of the state, complementing the services that the government provides the community, at a lower cost,” he said.
Crux Magazine contacted both the Puerto Rican Treasury Department and also local Catholic officials for comment, but did not receive immediate responses.
