IRS Suspends Church Tax Audits Until New Regulations Are Finalized

Photo Credit: IRS

The ongoing drama between the Internal Revenue Service (IRS) and American churches over government regulations and tax exempt, 501(c)(3) status forges on. Earlier this month, pastors came together for “Pulpit Freedom Sunday,” an effort to challenge current tax regulations that forbid them from explicitly endorsing candidates from the pulpit.

While the faith leaders aren’t looking to become hubs of political activism, they partake in the annual event to argue that the government shouldn’t be controlling — or curtailing — pastoral messaging. The goal of the project is to incite the IRS to investigate (participating pastors mail videos of their politicized sermons to the IRS) churches on these grounds so that the “Johnson Amendment,” which hampers church’s rights to endorse candidates, can be challenged in court.

Interestingly, just weeks after 1,000 pastors participated in the effort, the IRS has temporarily suspended church audits while amendments to the regulatory structure are considered. On his blog “Religion Clause, Howard Friedman, professor of law emeritus at the University of Toledo, explained this change, which is apparently based upon a 2009 court case — and an influx of complaints against churches that have become too politically active:

BNA Daily Report for Executives dated 10/22/2012 (subscription required) reports that the the Internal Revenue Service has temporarily suspended tax audits of churches pending final adoption of IRS rule changes to clarify which high level Treasury official has authority to make a determination under IRC Sec. 7611 that there are reasonable grounds to begin a church tax inquiry…At an American Law Institute Continuing Legal Education conference, IRS speaker Russell Renwicks, area group manager from the Mid-Atlantic region of the Tax-Exempt and Government Entities division, said the IRS has been bombarded with complaints about churches becoming involved in the elections, but it has been unable to respond even to potentially egregious cases. The rule changes are necessitated by a 2009 Minnesota federal district court ruling…

“We are holding any potential church audits in abeyance,” Renwicks told BNA.com, going on to say that even the egregious cases are being held until final rules are finalized.

The decision to suspend inquiries, as noted in Friedman’s analysis, stems from a February 3, 2009, court ruling in which the IRS lost a legal battle with the Living Word Christian Center in Brooklyn Park, Minnesota. The IRS began investigating the church in April 2007 after it came to light that the Rev. Mac Hammond had endorsed U.S. Rep. Michele Bachmann from the pulpit. This action, if corroborated, violates the Johnson Amendment and is, thus, not permitted for churches under current tax law.

IRS Suspends Church Tax Audits Until New Regulations Are Finalized

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While investigating the endorsement allegation, the IRS also found that the church had leased planes owned by Hammond and that the pastor borrowed money from the house of worship, which later forgave a portion of his debt, The Chronicle of Philanthropy reported at the time. This led the IRS to question the church’s 501(c)(3) status. The government then requested documentation from Living Word Christian Center — an action that was challenged in court.

In the end, a judge ruled that the church didn’t have to comply with the IRS summons, because it did not come from a government official of sufficient rank. At the time, the Chronicle of Philanthropy wrote, “Some tax-law experts have said that the IRS’s defeat could spur challenges to audits by other churches and force the IRS to engage in a lengthy, formal rule-making process to determine who has the authority to order an investigation into a church’s finances.”

The government is now attempting to solidify the regulations that led to this courtroom loss. The current IRS rules read, in part, “Before a notice of church tax inquiry can be sent, the Designated Official must ‘reasonably believe’ it is necessary. Congress believed such high-level approval of the initial contact is essential to achieving its purposes in enacting IRC § 7611. This reasonable belief must be based on facts and circumstances recorded in writing.”

So far, it seems the experts were right, specifically when it comes to the amount of time it has taken the government to address the issue. In August 2009, Friedman wrote a previous post about this case; the debate and official policy-making is yet to be settled:

BNA Daily Report for Executives [subscription required] reports that the Internal Revenue Service, in proposed regulations that will be published in tomorrow’s Federal Register, is attempting to clarify which high level Treasury official has authority to make a determination under IRC Sec. 7611 that there are reasonable grounds to begin a church tax inquiry…The Code section, in an attempt to obtain an objective appraisal of the need for this type of delicate examination, requires that a “reasonable belief” determination be made by an official whose “rank is no lower than that of a principal Internal Revenue officer for an internal revenue region.” A 1998 IRS reorganization created confusion over who that official should be. In February, a Minnesota federal district court held that the Director of Exempt Organization Examinations was not a high enough official to satisfy the statutory requirement…The new regulations propose giving the authority to the Director of Exempt Organizations…reports that there are likely to be many comments from the non-profit sector on the proposal.

Now, it seems that rule-making process is in full bloom. Three years after Friedman wrote about the proposed changes, nothing official is on the books and the IRS is suspending church inquiries while it attempts to make clarifications. For a full history of the Johnson Amendment and the controversial issue of tax law as it pertains to American churches, read this.

Church image property of ShutterStock.com.

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