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 is a very significant development related to the IRS’s authority to interact with churches.
“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,” stated Mike Batts, managing partner of BMWL. “It is not yet clear what implications this development may have on the IRS’s ability to address a church’s compliance with ACA requirements,” Batts added.
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.