IRS and the Audit of a Church
Scope of Examination
The IRS may examine church records and religious activities only to the extent necessary to determine federal tax liabilities. This includes examinations to:
IRS will determine the initial or continuing qualification of the organization under IRC § 501(c)(3), including classification as a church under IRC §§ 509(a)(1) and 170(b)(l)(A)(i),
IRS will determine the amount, if any, of tax due to unrelated business activity within the meaning of IRC § 513 or other activities that may be subject to tax, or
IRS will determine the amount of any IRC § 4958 tax due from a disqualified person with respect to a transaction involving a church.
Church records include all regularly kept church corporate and financial records, including (but not limited to) corporate minute books, contributor and membership lists, and church books of account. Church books of account include the general ledger, general journal; accounts receivable ledgers, accounts payable ledgers, cash disbursements book, cash receipts books, all subsidiary ledgers, voucher register, check register, purchases journal, sales journal, check books, savings account books, and all specialized journals. In addition, church records include private correspondence between a church and its members that is in the possession of the church.
An examination by IRS is conducted in accordance with the church examination procedures may disclose that the organization is not exempt under IRC § 501(c)(3), is subject to federal tax, or IRC § 4958 tax is due from a disqualified person with respect to a transaction involving a church, for reasons other than those that led to the examination. In such cases, the examiner may expand the examination, without additional procedural requirements, to include examination of any records necessary to resolve the new issue or issues.
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