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IRS: Church Audit Protection Act Applies to Payroll Tax Examinations



The IRS has taken a new official position on the applicability of the Church Audit Protection Act, and it is good news for churches.

The Church Audit Protection Act (Code Section 7611 of the Internal Revenue Code) specifies that the IRS cannot initiate a church tax inquiry or examination unless certain criteria are met. In brief, there must be a reasonable belief by an appropriate high-level Treasury official that the church either is not exempt by reason of its status as a church, or may be carrying on unrelated trade or business whose income is subject to tax as unrelated business taxable income. Secondly, the church must receive a written notice from the IRS containing a written explanation of its concerns. This notice must explain the concerns giving rise to such an inquiry, the general subject matter of the inquiry, and a general explanation of the applicable administrative and constitutional provisions with respect to the inquiry.

Up to this point, the official position of the IRS has been that the Church Audit Protection act was applicable to church income tax matters only. In a recent memorandum the IRS has issued “corrected” guidance for Code Section 7611. This memorandum specifies that Code Section 7611 also applies to church employment tax inquiries and examinations. In brief, this means that the Church Audit Protection act covers payroll taxes, which had not previously been the case.

This means that the IRS now has a much higher hurdle if it wishes to perform a payroll tax examination of a church. This decision may also impact the IRS’s ability to address compliance with the Affordable Care Act by churches, but the implications in this area are not clear at this point.

This step continues the long-standing tradition of the IRS not involving itself in church matters unless the church is acting in an egregious manner.

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Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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One thought on “IRS: Church Audit Protection Act Applies to Payroll Tax Examinations

  1. Avatar Ted Leibowitz says:

    Just allows for more potential fraud to take place. Recently a number of church officials have been nailed for embezzlement, so this is just their request to protect themselves. What a racket. And not only the US Treasury gets screwed, but the church members themselves. Nice!

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