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.