QUESTION:  What are the special rules limiting or restricting IRS authority to conduct an audit of a church?

ANSWER:  Congress has imposed special limitations, found in the Church Tax Inquiries and Examinations Rules of IRC § 7611 on how and when the IRS may conduct civil tax inquiries and examinations of churches.  The IRS may only initiate a church tax inquiry if the Director, Exempt Organizations, Examinations, reasonably believes, based on a written statement of facts and circumstances, that the organizations:

• May not qualify for the exemption, or
• May not be paying tax on an unrelated business or other taxable activity.

Restrictions on church inquiries and examinations apply only ot churches (including organizations claiming to be churches if such status has not been recognized by the IRS) and conventions or associations of churches.  They do not apply to related persons or organizations.  Thus, for example, the rules do not apply to schools that, although operated by a church, are organized as separate legal entities.  Similarly, the rules do not apply to an integrated auxiliary of a church.

Restrictions on church inquiries and examinations do not apply to all church inquiries by the IRS.  The most common exception relates to routine requests for information.  For example, IRS requests for information from churches about filing of returns, compliance with income, or Social Security and Medicare Tax withholding requirements, supplemental information needed to process returns or applications, and other similar inquires are not covered by IRC § audit rulse,

Restrictions on church inquires and examinations do not apply to criminal investigations or to investigations of the tax liability of any person connected with the church (i.e. a church contributor or minister.)

The procedures of the IRC § 7611 are used in initiating and conducting any inquiry or examination into whether an excess benefit transaction has ocurred.

Tags: audit, examination, IRS, pastor; tax liability