IRS to Hire 700 Enforcement Officers; What This Means for Churches

By Raul Rivera

This summer the IRS has been busy. In the biggest enforcement hiring move in 5 years, according to IRS Commissioner John Koskinen, the IRS started the process of hiring 600 - 700 new enforcement officers.

According to an article in the Wall Street Journal, the IRS “had 17,208 employees doing tax enforcement in 2015, down 24% from 2010, and audits of individuals are at an 11-year low.”

Although the hiring of new enforcement officers will first be directed towards small businesses and self-employed individuals, the hiring of additional audit personnel begs the question, “Could the hiring of more enforcement officers affect church audits?”

The privilege and burden of church status

Churches enjoy a unique privilege regarding its tax-exempt status. Unlike other 501(c)(3) organizations, they are exempt from filing the annual information return, Form 990. This form is used to verify that nonprofit organizations maintain compliance with section 501(c)(3).

Although churches are exempt from this requirement, all churches must still make sure its operations, activities, and records are in compliance with federal regulations that govern tax-exempt organizations.

So, if churches are exempt from having to file Form 990 each year, does that mean the IRS can just conduct a church audit at any given time? That is a common question and concern amongst pastors and church leaders that we will address next.

Can a church audit just happen?

To protect churches from unjust audit procedures, Congress enacted section 7611. This section of the tax code establishes guidelines and procedures for how the IRS may conduct a church audit.

The IRS can begin a tax inquiry against a church only when a high level IRS official has a written statement that provides reasonable evidence that a church is not operating according to its tax-exempt purpose or in a charitable manner.

The written statement that “provides reasonable evidence” includes items such as:

• Newspapers
• Church publications (bulletins)
• Magazines
• Books
• Web pages
• Documents provided by former (and sometimes current) church members
• Information on file with 3rd parties
• Form 990-T used to report unrelated business income tax

Once reasonable evidence has been provided to the IRS, does that mean they can then just come and knock on your church’s door?

NO!

At that point the IRS will send a notice to the church explaining its concerns and they will ask the church to provide certain information in order to address those concerns.

If the church does not respond or adequately address the concerns of the IRS with sufficient evidence, the IRS will send a notice that it needs to examine the church’s books and records.

The audit process cannot be initiated without significant evidence, but even in such cases your church can still survive an IRS audit. However, the obvious goal is for your church to never have to endure one.

The fail safe: self-audit procedures

Your church's greatest defense against an IRS audit is to regularly conduct a self-audit. We recommend that you do this at least once a year. Adopting this practice will help you avoid mistakes that generally tend to lead to an official IRS audit.

Our 53 step self-audit resource can help you and your church accomplish that task.

Below I will introduce 5 of those steps to you.

5 self-audit steps to take today

If you train your team in these procedures and apply them annually, you will be taking great strides in protecting your church against an IRS audit.

1. Review your board meeting minutes annually

As a charitable organization, it is imperative that all corporate actions of the church be properly documented in well maintained board meeting minutes. Your board meeting minutes are the legal history of your organization. If the minutes do not record a decision, then it as if the decision was never made from a legal standpoint.

Although it is important for churches to maintain good financial records, it can be argued that board meeting minutes are the most important records for churches to properly maintain.

This is because missing or poorly recorded board meeting minutes can be crippling in an audit. Without board meeting minutes the church has no way of demonstrating that the governing body operated in compliance with its bylaws or made decisions in the best interest of the church.

2. Review and update all compensation agreements annually

Compensation agreements for all employees and contractors should be maintained with diligence.

Incorrect documentation of board member salaries is one of the common ways that churches violate section 501(c)(3) requirements. All compensation should be carefully considered in order to be considered reasonable.

Payments and/or compensation made to board members that are not properly documented will be considered private inurement by the IRS. To avoid the misstep of private inurement, all salaries must be approved annually, by the board of directors, during a properly called board meeting.

Additionally, salary compensation agreements should include, but are not limited to, the monetary amount to be paid, what the job entails, the number of hours required, and comparability data for other similar positions.

Also make sure to review how your church compensates guest speakers and contract workers. Guest speakers and other contractors for your ministry should receive a form 1099-MISC for each tax year they receive $600 or more in payments from your ministry. Employees receive a Form W-2.

3. Review your church’s activities annually

To maintain tax-exempt status, your church must have a purpose consistent with section 501(c)(3) and must operate in agreement with that purpose. Churches are permitted tax-exempt status due to their religious purposes.

It is important to regularly assess your church's activities to ensure they are consistent with your religious and charitable purpose.

Oftentimes, a church may discover that a certain activity generates too much income. Depending on several facts and circumstances, this is referred to as unrelated business income. The problem is that too much unrelated business income will jeopardize your church’s tax-exempt status.

At our conferences, we teach pastors and church leaders that to combat unrelated business income they can simply start a ministry owned business.

4. Review your church’s printed and publicized materials annually

Since the IRS can use any printed or publicized material as a source of “reasonable belief” to begin a church inquiry, you will want to be sure to keep a close guard on these materials.

This also includes your church’s website.

It is best not to include any type of advertisements on your church’s website, which, depending on the facts and circumstances, may be considered an unrelated business activity, and could potentially jeopardize your church’s tax-exempt status.

5. Conduct an annual review all of your church’s internal governing documents

There are several documents that your church must review and maintain on a regular basis. These include:

• The church’s articles of incorporation, amendments, annual reports, charity registration, IRS approval letter, and any letters regarding the church updating its public record.
• The church’s bylaws.
• The church’s written doctrines.
• The church’s policies and procedures. (You will want to make sure that your church has a conflict of interest policy, accountable reimbursement policy, and a benevolence policy.)
• Corporate contracts such as leases and titles to property.
• Accounting and financial records.
• Current and accurate membership records.

It is also necessary for your board of directors to sign a conflict of interest statement each year. This statement indicates that they are aware of the conflict of interest policy that the church has in place and they fully understand the policy’s meeting.

If your church or ministry has not yet adopted or implemented a conflict of interest policy, give us a call today at 770-638-3444 and we will be happy to provide you with one.

Take your ministry to the next level!

I am a believer in empowering pastors and church leaders to take their church to the next level. With the IRS increasing its number of enforcement officers, taking your church to the next level in church compliance has never been more necessary.

In truth, no pastor ever wants to go through an IRS audit. Just the idea alone can rise stress to unnecessary levels. But with the right tools and discipline, your church can create a solid legal foundation that can help lessen the likelihood of your church being audited.

One way to do this is to check out our self-audit resource for churches and ministries mentioned earlier. Another easy way is to attend one of our Ultimate Church Structure Conferences with your board members.

Our aim at StartCHURCH is to always empower your ministry to succeed and go to the next level.

My only question to you now is, “Will you allow us to join you?”

 

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