IRS Inquiries and Audit Restrictions

There is a fear of the IRS, and in may cases, rightfully so. But the IRS cannot just arbitrarily “Come in” and investigate a church, unless they have a very good reason to do so. EG – if the church withholds payroll taxes and then does not report and send those monies in – this WILL get the IRS in bed with the church, and they [the IRS] will then have their reason to look at everything else

A REPRINT OF A PORTION OFF THE IRS WEBSITE:  Reprinted here, for the benefit of pastors and church leaders, is information copied directly from the IRS’ Web page at:

Restrictions on Church Inquiries and Examinations:

Restrictions on church inquiries and examinations apply only to churches (including organizations claiming to be churches if such status has not been recognized by 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 integrated auxiliaries 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 inquiries are not covered by the special church audit rules.  Restrictions on church inquiries and examinations do not apply to criminal investigations or to investigations of the tax liability of any person connected with the church, e.g., a contributor or minister.  The procedures of IRC section 7611 will be used in initiating and conducting any inquiry or examination into whether an excess benefit transaction (as that term is used in IRC section 4958) has occurred between a church and an insider.

Audit Process  -  Following is the sequence of the audit process.

  1. If the reasonable belief requirement is met, the IRS must begin an inquiry by providing a church with written notice containing an explanation of its concerns.
  2. The church is allowed a reasonable period in which to respond by furnishing a written explanation to alleviate IRS concerns.
  3. If the church fails to respond within the required time, or if its response is not sufficient to alleviate IRS concerns, the IRS may, generally within 90 days, issue a second notice, informing the church of the need to examine its books and records.
  4. After issuance of a second notice, but before commencement of an examination of its books and records, the church may request a conference with an IRS official to discuss IRS concerns. The second notice will contain a copy of all documents collected or prepared by the IRS for use in the examination and subject to disclosure under the Freedom of Information Act, as supplemented by IRC section 6103 relating to disclosure and confidentiality of tax return information.
  5. Generally, examination of a church’s books and records must be completed within two years from the date of the second notice from the IRS.  If at any time during the inquiry process the church supplies information sufficient to alleviate the concerns of the IRS, the matter will be closed without examination of the church’s books and records. There are additional safeguards for the protection of churches under IRC section 7611. For example, the IRS cannot begin a subsequent examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency of assessment, or a request for a significant change in church operations, including a significant change in accounting practices.

In order to be tax exempt, there are several other points to be aware of as well.  I have written 36 On-Line Articles, answering many of the questions church leaders have.  Check out the Online Articles in the menu bar.

If this discourse is of interest to you, or if you would like more information about similar issues, please consider purchasing our Church Administration “How To” Manual. This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated again in January, 2011, for the 12th time, since its original publication in 1991. All our materials are guaranteed – or your money back.

Take a look at our SAMPLES Manual, where we have published more than 100 sample Church Policies and Minutes of Board Meetings, and our  Samples – Addendum Manual, for even more Sample Minutes, where we have addressed how a church can Ratify it’s 1st Board of Directors [Organizational] Meeting when the By-Laws were adopted. It also addresses several other Ratification issues; And has even more Sample Minutes.

The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE.

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