IRS Concludes Church Audit Procedures Apply to Employment Tax Inquiries

In Memorandum SBSE-04-1215-0085, the Small Business/Self-Employed Division of the IRS has determined that the church audit procedures set forth in section 7611 of the Internal Revenue Code apply to church employment tax inquiries.  Under Code section 7611, the IRS may begin a church tax inquiry only by satisfying statutory “reasonable belief requirements” and “notice requirements.” 

The former is satisfied “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church … may not be exempt, by reason of its status as a church, from tax under section 501(a), or … may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation ….”  

The latter is satisfied “if, before beginning such inquiry, the Secretary [of the Treasury] provides written notice to the church of the beginning of such inquiry.” The notice must explain “the concerns which gave rise to such inquiry,” “the general subject matter of such inquiry,” and “the applicable … administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and … provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.” 

Code section 7611 also restricts the scope of church examinations and limits the period for conducting them.

Prior to the guidance in the recent memorandum, IRS examiners were instructed that Code section 7611 audit procedures do not apply to employment tax inquiries.  But now examiners are instructed as follows:

Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact the Program Manager, Exam, Programs and Review (EPR) in TE/GE Exempt Organizations Examinations.

This new guidance is effective upon issuance (12/17/2015).

JRB