Locked in the midst of a spiraling debt crisis, the government of Puerto Rico has taken a number of drastic steps to make money, such as cutting public education, hiking sales tax to be the highest in the U.S., and raising the cost of amenities such as water and electricity.
But this past week, its Treasury Department announced another, somewhat unusual tactic: cracking down on churches that abuse tax-exempt status.
According to Puerto Rican newspaper Primera Hora, the islands’ Secretary of the Treasury Juan Zaragoza recently announced a plan to begin auditing churches starting this May. Zaragoza explained the effort is part of a pilot program that began investigating more than 40 non-profit organizations in 2015, and will now focus on churches that operate as non-profits but do for-profit work without paying taxes.
The problem is that there are churches that are family businesses and where people are making a profit.
“The problem is that there are churches that are family businesses and where people are making a profit,” Zaragoza told the newspaper. “You can have a church for profit, like any other, just like a shoe store. You can operate a church as a for-profit entity, and every year you should file returns with your profits and pay.”
Although some religious groups expressed frustration regarding the announcement, Zaragoza and others allege that several local organizations have failed to comply with Department of the Treasury regulations and standards required to accrue full tax-exempt status.
“The message we’re sending here is that we have a responsibility and will oversee all groups,” he said. “This is not an attempt to demonize anyone. On the contrary, we are not giving privilege to anyone.”
“These organizations think that by just registering as a non-profit organization they gain (automatic) rights to tax exemptions,” he added. “They get incorporated and begin operations without ever requesting tax exemptions. They have spent years not paying taxes. Now they have to make retroactive payments.”
Challenging the tax-exempt status of churches is unusual in mainland America, where religious institutions are often given wide berth to operate without paying taxes — or enduring government supervision. Technically, churches are legally prohibited from operating as a for-profit company or taking explicitly political positions, but the International Revenue Service (IRS) rarely enforces such laws. Some have even openly dared the government to crack down on offending houses of worship, with little result: in 2014, more than 1,800 pastors in all 50 states and Puerto Rico participated in “Pulpit Freedom Sunday” by endorsing candidates in front of their congregations. They then mailed their sermons to the IRS, but the officials took virtually no action whatsoever.
They get incorporated and begin operations without ever requesting tax exemptions. They have spent years not paying taxes. Now they have to make retroactive payments.
But things are different in Puerto Rico, where the debt-stricken government has a vested interest in investigating organizations that are listed as churches but which operate as businesses. The territory is currently wrestling with an agonizing debt crisis, with politicians openly admitting that the government cannot pay the $72 billion it owes. Meanwhile, it has the highest unemployment rate in the nation at around 12 percent, and its poverty rate hovers around 45 percent — worse than any U.S. state.
As such, Puerto Rico stands to gain from shaking down lucrative outfits potentially masquerading as churches. While Zaragoza did not specifically say the push was a result of the nation’s debt crisis, upping tax revenues — specifically sales tax — was one of several recommendations made to the government in a July 2015 report by a group of hedge funds that control much of the island’s debt. This and other proposals within the report — which include eliminating the minimum wage, laying off teachers, and cutting workers’ benefits — have found support among Puerto Rican lawmakers desperate to alleviate the stress of the crisis, and last year the island adopted a new Value-Added Tax system (VAT) as part of a plan to inject $1.5 billion into the regional economy.
The “occasional sale of goods by Churches or religious organizations” are exempt from the new VAT system. But Zaragoza hinted that several of the churches under investigation are doing far more than making infrequent sales, opening them up to audit and making them a potential moneymaker for a tax revenue-hungry government.
“We hit the jackpot because we have realized that many of these organizations are family businesses, others have never requested tax exemption,” Zaragoza said. “We have realized that the potential (for collection) is very high.”
Still, even optimistic estimates show that the total revenues accrued from the program will only amount to “several hundred thousand dollars” — hardly enough to offset the island’s multi-billion dollar debt.
ThinkProgress contacted the Puerto Rican Treasury Department for comment on this story, but did not receive a reply by press time.