The Internal Revenue Service recently announced that it will apply the special church audit protection rules in Internal Revenue Code Section 7611 to church employment tax inquiries and examinations. Prior to the recent announcement, the IRS’s official position was that the special protections applied to inquiries and examinations related to church income tax matters but not to those related to employment tax matters.
This change in policy by the IRS means that the IRS will have a much higher hurdle to jump if it wants to perform a payroll tax examination of a church. It is not yet clear what implications this development may have on the IRS’s ability to address a church’s compliance with Affordable Care Act requirements.
In a memorandum from the Small Business/Self-Employed Division, the IRS described the change as “corrected” guidance.
Section 7611 of the Internal Revenue Code, known as the “Church Audit Procedures Act,” permits the IRS to initiate a church tax inquiry or examination only if certain criteria are met. The criteria for a church tax inquiry generally include a requirement that a “high level Treasury official” must determine, based on written evidence, that the church is not exempt, that it has a liability for unrelated business income tax, or that it has otherwise engaged in taxable activities.
In 2009 litigation, a federal court ruled that the person designated by the IRS as its high level Treasury official was not a sufficiently high-level official. The IRS has yet to fully rectify that issue.
Michael E. Battsis an Editorial Advisor for Christianity Today's Church Law & Tax Team, and he is a CPA and the managing partner ofBatts Morrison Wales & Lee, P.A.,an accounting firm dedicated exclusively to serving nonprofit organizations across the United States. He is also the coauthor ofChurch Finance.
This guest post first appeared inNonprofit Special Alerts, published by Batts Morrison Wales & Lee, P.A., that covers significant state and federal developments for churches, nonprofits, and their leaders. Reprinted with permission.
Find comprehensive help understanding United States tax laws as they relate to pastors and churches with Richard Hammar's 2016 Church & Clergy Tax Guide.
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