We run a 501(c)(3) food pantry at our church garage. We originally applied for our own exemption because of some questionable financial activities at the church seven years ago. Since then, they have never asked us any questions or interfered. The church leadership now has suggested that all of our gifts, grants and contributions go through the church so they can "have oversight" of it. Our board of directors feels that is wrong and there is no guarantee of receiving all the funds. What does the IRS say about that?
The IRS wouldn’t have anything to say about it. Gifts earmarked by the donors for your benefit would be treated as gifts to the food pantry, not the church, but would still be deductible for individual taxpayers and treated as qualifying distributions for private foundations. The IRS wouldn’t care. It wouldn’t care if the church took an overhead fee for funneling the gifts. Since neither of you pays any federal income tax, it doesn’t matter to the IRS.
Your bigger question will be your ongoing relationship with the church. You don’t say whether your board is independent or whether there is some governance relationship with the church. Whose organization is it? You don’t describe the legal relationship under which you occupy the church garage. Would you be strong enough to survive on your own if the church imposed, or significantly raised, a rental requirement for use of the garage?
If I were in your situation, I would definitely want to control the gifts to my own organization. You may now be getting some governmental grants that would not be permitted to go to the church. You may get some individual gifts that would not be given to the church because of personal religious differences or because churches, which don’t have to file an annual Form 990, normally don’t report their finances and are totally opaque. It is very unlikely that you would obtain more revenue by running the gifts through the church, and much more likely that you would receive less, without much ability to obtain an accounting. The new arrangement could also create some liability for the church if it didn’t exercise sufficient “oversight” after you had your own difficulties, such as providing tainted food to some of your clients.
It sounds like an unnecessary and unhelpful change of process.