IRS Loses Against Church!

By Raul Rivera

Church In Minnesota Avoids an Audit ... At Least For Now!

In February of 2009, the IRS suffered a setback in its ability to audit churches.  That setback came as a result of two federal court rulings which prohibited the IRS from auditing a church in Minneapolis, Minnesota.  In 2007, the IRS began an inquiry into the church's records.  Initially, the church complied with the IRS' requests, but later on when the IRS strayed from the original inquiry and began looking into church operations, they decided the IRS had gone too far.  The church was able to argue their case based on the claim that when the IRS originally sent out the letter of inquiry, it was not signed by the "appropriate high-level Treasury official."  Instead, it was signed by the Director of Exempt Organizations for Examinations.  The important thing to know is that regulations for Section 7611(h)(7) state that the lowest-ranking IRS official who can approve a church audit is a regional commissioner.  This position is just one level of authority below the IRS Commissioner.

Why Can't the IRS Audit Churches For Now?

In 1998, when the IRS reorganized itself, it eliminated the position of regional commissioner.  Upon elimination of that position, it arbitrarily gave auditing authority to the Director of Exempt Organizations for Examinations.  All was well with the IRS until the Minneapolis church decided to challenge the IRS' ability to perform the audit because it was not in compliance with the law.  The church no longer responded to the summons request for information and cancelled a booked meeting with the auditor.  In December of 2008, a federal court agreed with the church and dismissed the IRS' claim that the Director of Exempt Organizations for Examinations was equivalent to a regional commissioner.  Therefore, the director was not an appropriate high-level Treasury official.  The IRS immediately appealed and lost again.  The court ruled that the position of the Director of Exempt Organizations for Examinations was four levels below that of the IRS Commissioner.  The law allows a church inquiry only when it is approved by an appropriate high-level Treasury official.  Currently, other than the IRS Commissioner, there is no one legally authorized to do so. 

IRS Makes Big Effort to Change Regulation

Most people don't know that the tax code has at least two layers of enforcement.  After Congress passes tax law, and it is signed by the President, the IRS goes through a period of study and interpretation.  Once the IRS fully understands it, there is a period of waiting while they create proposed regulation to enforce the new law.  In the case of church audits, Congress stated in Section 7611(h)(7) that an audit had to be approved by an "appropriate high-level Treasury official."  After a lengthy regulation period, the IRS finally settled that an "appropriate high-level Treasury official" was a regional commissioner. 

They didn't know it then, but when the IRS reorganized in 1998 and eliminated the regional commissioner position, they really shot themselves in the foot.  Amazingly enough, no one ever challenged the IRS until 2007.  Having lost the case, the IRS immediately began to propose changes to the regulations.  These changes were published in the August 5th, 2009 edition of the Federal Register.  The IRS stated that the regulation needed to be changed to keep the law current and relevant, and that the "proposed regulations assign responsibility for making the determinations required under Section 7611(a) to the Director of Exempt Organizations." The proposed regulations will be left open for public comment until November 3, 2009. 

For now, churches can enjoy a time of relative peace and quiet.  There is no better time than the present to get your church finances in order! We will closely follow this case and keep you informed of the latest developments.


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