Church Law and Tax 1989-03-01 Recent Developments

Audits – Churches

A recent federal court ruling addressed the issue of IRS audits of churches. The IRS issued a summons to a bank requesting the disclosure of “all items relating to all accounts” of a church because of a concern that the church was involved in an “abusive tax shelter.” The alleged scheme involved suspicious loans from an investment company to individuals who then made “charitable contributions” of the funds to a church. The IRS suspected that the church then returned the “contributions” to the investment company or the individual donors, thereby closing the “loop”. The church opposed the IRS summons, arguing that the IRS was engaged in an “audit” that had not complied with the provisions of the Church Audit Procedures Act, and that the summons sought information that was not relevant to the IRS inquiry. Both of the church’s contentions were rejected by the court. It noted that the Church Audit Procedures Act applies “only when the government is investigating the tax liability of a church,” and accordingly that it did not apply in this case since the church’s tax liability was in no way being questioned. Further, the court rejected the church’s claim that the IRS summons was overly broad, noting that federal law gives the IRS the authority to summon “any books, papers, records, or other data which may be relevant” to a particular tax inquiry. In other words, the IRS has the authority to obtain “items of even potential relevance to an ongoing investigation.” This standard was clearly satisfied, concluded the court, since information concerning the church’s bank accounts was directly relevant in proving whether or not the alleged “charitable contributions” were in fact deductible. Holy Temple Church of God in Christ, Inc. v. United States, 89-1 U.S.T.C. para. 9107 (C.D. Cal. 1988).

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