Why State AG Investigations into Churches and Nonprofits Are Rising—and How to Prevent Them
According to ChurchLawAndTax.com, recent trends show a growing wave of investigations by state attorneys general (“AGs”) into churches and nonprofit organizations. While the IRS has historically been the primary enforcer of nonprofit laws, state AGs are increasingly stepping into this space—especially when public complaints arise or governance issues come to light.
Unlike the IRS, state AGs don’t need a high threshold of evidence to launch an investigation. This means that even minor infractions or allegations can lead to significant legal reviews and costs.
A Real-World Example
Recently, Reynolds Law Group, PLLC (“RLG”) represented a nonprofit organization during a state AG investigation related to its work-study program for clients. While no charges were brought, the investigation caused serious concern and cost thousands of dollars in legal fees and time.
Common Red Flags Triggering State AG Investigations
Several issues are fueling this increase in investigations:
Improper Loans to Board Members
Many states prohibit any loans or credit card use by board members, even on a temporary basis
Misuse of Ministry-Owned Housing
Failing to properly report the value of housing provided to staff can violate tax laws.
Personal Benefit from Church Funds
Meals, travel, or personal items purchased with ministry funds may be flagged as inurement (personal benefit)
Unrelated Business Income (“UBI”)
Income from activities not aligned with your mission, if not properly reported, can attract legal scrutiny
How Churches and Nonprofits Can Prevent Investigations
The best defense is a strong offense. Here are three proactive steps your organization can take:
1. Implement Strong Financial Controls
Establish clear checks and balances for spending, reimbursements, and asset usage. Regular internal or external audits are also highly recommended.
2. Strengthen Board Governance
Train your board on their fiduciary duties, avoid conflicts of interest, and document all major decisions
3. Adopt Written Policies That Promote Legal and Financial Integrity
Having clear, written policies demonstrates good governance and reduces the risk of missteps.
Key policies include:
Conflict of Interest Policy
Independent Compensation Policy
Confidentiality Policy
Restricted Funds Policy
Policy Prohibiting Cash Structuring
We’re Here to Help
If your church or nonprofit needs help drafting these policies or training your board, contact us today.
