The following is the sequence of the church audit process.
- 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.
- The church is allowed a reasonable period in which to respond by furnishing a written explanation to alleviate IRS concerns.
- 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.
- 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.
- 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 Internal Revenue Code 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.
Church Audits – “Reasonable Belief” Requirement
The IRS may only initiate a church tax inquiry if the Director, Exempt Organizations Examinations, reasonably believes, based on a written statement of the facts and circumstances, that the organization: (a) may not qualify for the exemption; or (b) may not be paying tax on unrelated business or other taxable activity. This reasonable belief must be based on facts and circumstances recorded in writing.
The IRS can obtain the information supporting a reasonable belief from many sources, including but not limited to:
- Newspaper or magazine articles or ads,
- Television and radio reports,
- Internet web pages,
- Voters guides created and/or distributed by the church,
- Documents on file with the IRS (e.g. a Form 990-T filed by the church), and
- Records concerning the church in the possession of third parties or informants.
The IRS must derive the facts and circumstances forming the basis for a reasonable belief from information lawfully obtained. If this information is obtained from informants, it must not be known to be unreliable. Failure of the church to respond to repeated IRS routine requests for information is a factor in determining if there is reasonable cause for commencing a church tax inquiry.
IRM 22.214.171.124.1 (06-01-2004)
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.