Recently, an IRS official was quoted as saying that the IRS had suspended auditing churches. Does this mean that the IRS has thrown up its hands and given up on enforcing the tax code against churches? The answer is “no,” the IRS has not given up and the tax code still applies to churches.
The IRS official was Russell Renwicks with the Tax-Exempt and Government Entities division. He said that the IRS had received some complaints about potential violations of the tax code by churches this election cycle. But he stated, “We are holding any potential church audits in abeyance.” What did he mean by this?
Mr. Renwick’s statement stems from a 2009 court ruling involving the IRS’ regulations related to church audits. These regulations began in 1984 when Congress passed the Church Audit Procedures Act (CAPA). CAPA instituted several rules the IRS was required to follow when auditing any churches, and was passed to protect the constitutional rights of churches.
One of the requirements of CAPA is that an IRS official at the level of Regional Commissioner or above approve any church audits prior to the IRS contacting the church. The IRS followed this requirement until 1998 when Congress reorganized the IRS. After 1998, the IRS was no longer organized by regions of the country. Instead, it became organized by the constituency it served. So, until 1998, the IRS had regions like the Midwest region or the Northeast region. After 1998, the IRS has divisions such as the small business division and the exempt organizations division.
One consequence of Congress reorganizing the IRS was that the position of Regional Commissioner no longer existed because there were no “regions” in need of a commissioner. So the IRS designated the Director of Examinations in the Exempt Organizations division of the IRS to fulfill the requirement in CAPA previously fulfilled by the Regional Commissioners.
In 2009, a church in Minnesota was being audited by the IRS and challenged the audit. The argument raised by the church was that the IRS was not complying with CAPA because it did not have a sufficiently high level official approving church audits. A federal district court agreed and stopped the IRS’ audit of the church.
After this ruling, the IRS, to the best of our knowledge, shut down all of the church audits that it had ongoing, including one church audit handled by Alliance Defending Freedom. The IRS stated that it was closing the church audit “because of a pending issue regarding the procedure used to initiate the inquiry.” The “pending issue” was the Minnesota court’s ruling that the IRS was not in compliance with CAPA.
Since that time, the IRS has not been auditing any churches to the best of our knowledge. It has proposed new regulations to designate a higher official in the ranks of the IRS to approve all church audits but it has never finalized those regulations. No one really knows what the delay is, but we believe that the IRS will finalize its regulations at some point and will once again begin auditing churches.
In addition, the IRS still believes it has the authority to audit churches. Its website discusses the requirements for instituting a church audit. And that website was updated as late as November, 2012.
So when Mr. Renwicks said that the IRS was holding church audits in abeyance, he did not mean that the IRS was giving up and saying that it will never audit churches again. All Mr. Renwicks said was that it was holding church audits in abeyance until it finalized its new regulations. And we should remember that the IRS has the ability to go back in time and audit churches that it believes has violated the tax code during this time that it is not auditing churches.
And the IRS later came out and explicitly disavowed that Mr. Renwicks’ statement should be interpreted in a way to suggest that the IRS has given up on enforcing the tax code against churches. The news story on this issue stated:
In response to queries from NBC News, the IRS disavowed comments by a regional official of its division overseeing tax-exempt organizations, who said last month that the agency was “holding any potential church audits in abeyance” while it revises its regulations in light of the 2009 ruling.
Dean Patterson, a spokesman for the IRS, said the official “misspoke,” adding: “The IRS continues to run a balanced program that follows up on potential non-compliance, while ensuring the appropriate oversight and review to determine that compliance activities are necessary and appropriate.”
The important point for churches to remember is that the IRS has not given up on enforcing the tax code against churches. Churches must still be aware of the IRS regulations. We have great resources on our website about those regulations to help churches understand their rights.
And we also must not give up on challenging the constitutionality of the Johnson Amendment and the IRS’ enforcement of that law. Alliance Defending Freedom believes that the Johnson Amendment is unconstitutional and the IRS’ attempts to censor a pastor’s sermon from the pulpit violate the First Amendment. For more information on this legal challenge, visit www.pulpitfreedom.org.
Alliance Defending Freedom stands ready to protect and defend the rights of churches, especially in relation to the IRS. It is important that churches know and act on the right information in this critical area. If you have any specific question regarding what your church can do, please contact us and one of our attorneys will help.