Churches play a vital role in communities, offering spiritual guidance, support networks, and often crucial social services. To sustain their operations and missions, many churches organize fundraisers—from bake sales and raffles to car washes and concerts. But here’s what most people don’t realize: even a well-meaning church fundraiser can quietly violate federal tax law.

Religious institutions that are classified as 501(c)(3) nonprofits must follow strict IRS guidelines when it comes to fundraising. While churches enjoy certain legal protections, they are not immune to the rules that govern tax-exempt entities. When these rules are unknowingly broken, churches could face financial penalties, risk their tax-exempt status, or invite an IRS audit.

These violations are rarely malicious. They usually come from a lack of awareness or poor record-keeping. But that doesn’t make them any less risky. Below are eight common church fundraisers that, when handled incorrectly, can cross the line into dangerous legal territory.

8 Church Fundraisers That Quietly Violate Tax Law

1. Raffles and Lotteries Without Proper Licensing

It’s not unusual to see churches hold raffles or prize drawings to raise money for mission trips or youth programs. But depending on the state, these types of games of chance may be considered gambling and illegal if not properly licensed.

The IRS generally frowns on gambling activities conducted by tax-exempt organizations unless they’re fully compliant with local laws and appropriately reported. In some jurisdictions, even a simple prize basket raffle can require a special license or a registered nonprofit gaming permit.

Churches that skip these formalities could inadvertently break both state and federal laws, jeopardizing their tax-exempt protections and opening themselves to fines.

2. Silent Auctions That Fail to Report Fair Market Value

Silent auctions are a staple of church fundraisers, where attendees bid on donated items or services. But what many churches fail to do is provide donors with the fair market value of the goods or services received—an IRS requirement.

For instance, if someone bids $300 for a handmade quilt worth $200, the donor can only deduct $100 as a charitable contribution. If the church doesn’t provide that information in writing, the deduction may be invalid, and the church itself could be considered noncompliant.

Additionally, churches must report the total proceeds from these events and determine if any of the income is considered “unrelated business income” by the IRS.

3. Fundraisers That Benefit Specific Individuals

Churches often host fundraisers to help a congregation member with medical bills, funeral expenses, or housing needs. While the intentions are good, fundraising for a specific individual can conflict with IRS rules on charitable giving.

Donations to a 501(c)(3) must serve a public benefit, not a private interest. If a church collects money earmarked for one person, those donations may not be tax-deductible, and the church risks losing its exempt status if the practice becomes frequent.

To stay compliant, churches can create general benevolence funds and allow leadership to distribute aid based on need, not personal relationships or donor direction.

4. Political Fundraisers Masquerading as Church Events

Under IRS guidelines, 501(c)(3) organizations, including churches, are strictly prohibited from participating in political campaigns or endorsing candidates. Yet, some churches inadvertently cross this line by hosting fundraising dinners or speaker events for candidates under the guise of ministry or issue advocacy.

Even if a political candidate is invited “just to speak,” if there’s any fundraising or implied endorsement during the event, the IRS could interpret it as political activity. This can result in penalties or even revocation of tax-exempt status.

Churches must draw clear lines between civic engagement and political campaigning and avoid using any resources to promote candidates, even indirectly.

5. Youth Group Sales That Involve Unrelated Business Income

Bake sales, car washes, and handmade craft booths are usually safe ground. But when youth groups or ministries begin selling commercial products, especially on an ongoing basis, they could be earning unrelated business income (UBI).

If the products or services sold have no direct connection to the church’s mission and are similar to what for-profit businesses sell, the income is considered unrelated and must be reported on Form 990-T. Frequent violations could cause the IRS to question whether the church is operating more like a business than a charity.

To stay compliant, churches should limit these activities or ensure they directly support religious or charitable objectives.

6. Love Offerings That Go Untaxed

A “love offering” is a common practice where congregants collect money for a guest speaker, pastor, or missionary. But unless properly structured, this type of offering can raise serious tax issues.

If the offering is given in addition to a previously agreed-upon honorarium or is collected for a salaried staff member, the IRS may view it as taxable income, subject to reporting and withholding. Failure to issue a 1099 or include the payment in a W-2 can result in penalties for both the church and the recipient.

Churches often believe these offerings are exempt because they’re “gifts,” but if the funds come from an organized collection by the institution, the IRS considers them compensation.

7. Selling Donated Goods Without Documentation

Many churches host rummage sales or secondhand markets to raise money from donated goods. But if they fail to document the origin, value, and use of those goods, it can create problems for both the church and the donors.

For example, donors who give furniture or electronics worth over $500 must file IRS Form 8283, and the church may be required to complete Part IV to confirm the gift. If the item is later sold (rather than used in ministry), that must be disclosed as well.

Improper documentation can invalidate the donor’s tax deduction and raise red flags for the IRS if the church appears to be operating as a for-profit resale business.

8. Charging Admission to Religious Events Without Proper Tax Handling

Church concerts, theatrical performances, or conferences often charge admission to cover costs. But unless those funds are clearly tied to a religious or educational purpose, the IRS may view this as a taxable event.

Charging admission can create a “commerciality” issue, particularly if the event resembles secular entertainment or attracts the general public rather than the congregation. This can lead to scrutiny over whether the event supports the church’s mission or competes unfairly with for-profit venues.

Churches should clearly document how the event aligns with their spiritual mission and be prepared to report proceeds as unrelated business income, if applicable.

Good Intentions Don’t Always Mean Legal Compliance

Most churches don’t set out to break the law. They simply want to raise funds for worthy causes. But without a deep understanding of tax regulations, even small fundraising events can land religious institutions in hot water with the IRS or state authorities.

To stay protected, churches should:

• Review IRS rules for 501(c)(3) compliance regularly

• Keep detailed records of all fundraising income and expenses

• Consult with tax professionals or nonprofit attorneys when unsure

• Train volunteers and staff to understand the legal boundaries of fundraising

Have you ever seen a church fundraiser that raised legal or ethical questions? What do you think most churches get wrong about fundraising laws?

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