IRS Inquiries and Examinations, Generally – Sections 6201 and 7602. Generally, the IRS is authorized and required by 26 U.S.C. § 6201(a) “to make the inquiries, determinations, and assessments of all taxes” imposed by the Internal Revenue Code.
To execute on that requirement, Congress, via section 7602, granted the IRS broad latitude to issue summonses “‘[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax …, or collecting any such liability.’” United States v. Clarke, 573 U.S. 248, 250 (2014) (quoting 26 U.S.C. § 7602(a)). The IRS has the authority to issue summonses to the subject taxpayer and to third parties who may have relevant information. See 26 U.S.C. § 7602(a)(2); Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1154 (10th Cir. 2020). If a person or entity fails to comply with a summons, the IRS can bring an enforcement proceeding in a district court. 26 U.S.C. § 7604.
The IRS must have a good faith basis for issuing a summons under section 7602. To determine if a good faith basis exists, the courts evaluate these four factors: (1) whether the investigation will be conducted pursuant to a legitimate purpose, (2) whether the inquiry may be relevant to the purpose, (3) whether the information sought is not already within the IRS’s possession, and (4) whether the administrative steps required by the Internal Revenue Code have been followed. See United States v. Powell, 379 U.S. 48, 57-58 (1964).
Church Inquiries and Examinations, Section 7611. Section 7611 of the Code provides a different and unique statutory regime for inquiries and examinations of churches. Section 7611 restricts those inquiries and examinations, including the IRS’s ability to examine “church records,” and provides a detailed process for when and how those examinations may occur. See 26 U.S.C. § 7611(a), (h) (defining “church records” as “all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors.”). Under section 7611, the IRS may begin a church tax inquiry only if: (A) reasonable belief requirements and (B) specific notice requirements have been met.
Reasonable Belief Requirements. The “reasonable belief” requirements are met “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church—(A) may not be exempt, by reason of its status as a church, from tax under section 501(a), or (B) may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation under this title.” Id. at § 7611(a)(2)-(a)(2)(B).