The Church Audit Procedures Act – The Basics

There is a concern among many that the IRS will come sweeping down on their church, ruthlessly coming in and examining every nuance of the church, upsetting its operations, and causing general disruption and loss of reputation for the church. There are established procedures for the IRS in initiating an examination, so the above is not likely to happen. This is the first of two articles on the Church Audit Procedures Act. Here we are going to examing the basics of the law and the protections it affords to churches. In Part 2, we will examine what the church needs to be doing in the event the IRS come knocking.


The Church Audit Procedures Act was passed by Congress in 1984. Its intent was to protect churches from its constitutional separation of church and state, while allowing the IRS to fulfill its mission of compliance with the United States Tax Code. Prior to the adoption of this act the IRS relied on Code Section 7605(c), which was adopted in 1969 when Congress began imposing taxes on the unrelated business income of churches. This section provided that “books of account of a church could not be examined to determine unrelated business income tax liability, unless the principal IRS officer for an internal revenue region (i.e., IRS Regional Commissioner at the time) or higher-ranking Treasury official believed that a church may be engaged in activities generating unrelated business income tax.” This code section, however, was seen by lawmakers, practitioners, and religious leaders to be insufficient to dispel any concerns over improper government intrusion into church records and activities. The law was seen as vague and uncertain. Thus the Church Audit Procedures Act (CAPA) was passed by Congress in 1984.

Written Notice

The sequence for a church audit procedure outlined in detail in CAPA. First, 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. Presently, there is some confusion on the meaning of a “high-level Treasury official.” Obviously, the Secretary of the Treasury or IRS Commissioner would be such persons. At one time, the IRS was organized by regions and the various Regional Commissioners were viewed as qualifying. However, in 1998, the IRS reorganized and no longer had regions. Instead, the IRS was organized into divisions such as the small business division and the exempt organizations division. The IRS designated the Director of Examinations in the Exempt Organizations division of the IRS as a high-ranking Treasury official.

However, in 2009, a church in Minnesota was being audited by the IRS and challenged the audit, stating that the IRS was not in compliance with CAPA as it did not have a sufficiently high-ranking official approving church audits. The court agreed. This became a pending issue, as the IRS has yet to designate such an official and there are currently few church audits being performed. Only the most egregious violations are under tight scrutiny.


If the reasonable belief hurdle is passed, the church will 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.

The church is to be allowed a reasonable time to respond to the notice by furnishing a written explanation addressing the IRS concerns. If the church does not respond, or if its response is insufficient to satisfy the IRS, the IRS may then issue a second notice informing the church of the need to examine its books and records. This notice must be provided within 90 days of an intent to examine the records. The examination may not proceed earlier than 15 days after such notice is provided. In addition, the church must have a reasonable time to request a conference to discuss the matter.

This second notice will contain a copy of all documents the IRS has collected or prepared for use in the examination.


Assuming that the matter proceeds to an examination, the examination must be completed within two years after the examination notice date. This period may be suspended if the church or the IRS brings legal proceedings against the other; if the Secretary of Treasury is unable to proceed due to an order issued in any judicial proceeding under Sec. 7609 for a period of more than 20 days but less than six months that the church failed to comply with a reasonable request for church records or other information; or for any period mutually agreed upon by the parties. The examination is not limited to the church records or religious activities that were specified in the examination notice.

As a result of the examination, the Secretary may determine that the organization is not a church and/or send a deficiency notice of any tax involved. There is a three-year statute of limitations on revocation of tax-exempt status. If the church is found not to be an exempt church for any of the three applicable years, a six-year limitation may apply.

If the examination is for unrelated business income, the tax may be assessed for the six most recent taxable years ending before the examination notice date.


If the IRS has not substantially complied with the notice, conference or approval requirements, the examination is stayed until the court finds that all practicable steps have been taken to correct the noncompliance. A church may not be audited more than once in any five-year period for the same issue.

A church is defined as any organization claiming to be a church as well as any convention or association of churches. A church inquiry is any inquiry to serve as the basis for determination if the organization is a church or if it is carrying on unrelated trade or business activity. An examination is the audit of church records or the religious activities of any church.

This article has covered the basics of the Church Audit Procedures Act. In Part 2 of this series, we will discuss what a church can do to protect itself in the event the IRS comes knocking.

Next:  Part Two


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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