Church Audit Procedures Act

In 1984 Congress enacted the Church Audit Procedures Act providing churches with important protection and guidelines relating to an IRS audit. Section 7602 of the tax code provides the authority under which IRS may examine individuals and organizations. Section 7611 of the tax code provides important protection for churches regarding IRS inquiries and tax examinations.

What is a church tax inquiry? An IRS inquiry determines:

1. Does the church qualify for tax exemption?

2. Is the church involved in an unrelated business or trade?

3. Is the church involved in other activities subject to tax?

If the IRS believes that the church may have activities that jeopardize the tax-exempt status, or involved in unreported taxes, then the IRS may proceed with certain inquiries.

How does the IRS proceed with an inquiry? 

The IRS may proceed with an inquiry if an appropriate high-ranking Treasury officer reasonably belives that written evidence supports one of the three items above and the IRS sends a written inquiry. This inquiry may include the following:

(1). specific concerns supporting the inquiry

(2). general subject matter

(3). applicable tax code and administrative/constitutional provisions

(4). right to an informal conference with the IRS.

If an examination notice is not completed, the church tax inquiries must be completed within 90 days of the written notification.

Can your church substantiate it’s exemption? Are there any activities resulting in unreported taxable income? Understand the rules and reporting requirements.

Responding to an IRS inquiry takes time and resources.