Internal Revenue Manual - 4.76.7 Church Tax Inquiries and Examinations

Part 4. Examining Process
Chapter 76. Exempt Organizations Examination Guidelines
Section 7. Church Tax Inquiries and Examinations - IRC § 7611

4.76.7.1 (06-01-2004)
Background of IRC § 7611

Internal Revenue Service (IRS) examinations of churches (including conventions or associations of churches) are subject to special procedures because of the rights guaranteed by the First Amendment of the United States Constitution and the restrictions imposed by the Internal Revenue Code (IRC). In carrying out the IRS's obligation to enforce the tax laws applicable to churches and organizations claiming to be churches, IRS personnel must be aware of the sensitive nature of the church-state relationship and observe the restrictions on examinations of churches.
The First Amendment prohibits the Government from restricting the free exercise of religion. The courts have interpreted the First Amendment as providing for an absolute freedom of religious belief. Thus, IRS personnel engaged in church tax inquiries or examinations may not question or evaluate the content of a religious belief. However, actions undertaken as a result of religious beliefs are subject to government regulation, including taxation, when such actions implicate a compelling government interest. The government regulation of religiously motivated conduct, however, is restricted to the extent necessary to enforce that interest. Religiously motivated conduct that violates Federal, State or local law may be restricted or prohibited entirely. Although churches and religious organizations are generally exempt from income tax, certain activities of a church may be subject to tax, such as income from an unrelated business. A church may lose its tax-exempt status by engaging in conduct that violates the restrictions of the IRC. In addition, churches are generally subject to employment taxes and various excise taxes.
IRC § 7611 restricts the extent and manner of IRS contacts to determine qualification for exempt status or liability for any IRC tax of an organization that claims to be a church. Congress added IRC § 7611 by the Tax Reform Act of 1984 and superseded IRC § 7605(c). By enacting IRC § 7611, Congress intended to expand the protection provided by IRC § 7605(c) and Treas. Reg. § 301.7605-1(c), and to minimize IRS contacts with churches to only those necessary to insure compliance with the tax laws. As explained in the Conference Report accompanying the Deficit Reduction Act of 1984, H.R. Rep. No. 98-861, 98th Cong. 2d Sess. 1101 (1984), 1984-3 C.B. Vol 2 355, Congress' actions concerning church tax inquiries and examinations were motivated by two competing considerations. First, Congress was aware of the special problems, including problems of separation of church and state and the special relationship of a church to its members that arise when the IRS (or any governmental agency) examines the records of a church. These problems could be compounded by the relative inexperience of churches in dealing with the IRS and the resulting occasional misunderstandings between churches and the IRS. Although prior law imposed limitations on the examination of church records, these limitations were somewhat vague and relied heavily on internal IRS procedures to protect the rights of a church in the examination process. Additionally, there was some uncertainty regarding the scope of the investigations to which prior law applied and the nature of the records protected by the law.
While desiring to protect churches from undue interference by the IRS, Congress, in enacting IRC § 7611, recognized that an increasing number of taxpayers had used the church form primarily as a tax-avoidance device. Congress believed that the IRS must retain an unhindered ability to pursue individuals who use the church form in this manner. The Act attempts to resolve these competing considerations by providing detailed rules that the IRS is to follow in making tax inquiries to churches, both as to tax-exempt status and as to the existence of unrelated business income. These provisions emphasize the need for a speedy determination of church tax liabilities and, where possible, a determination, without unnecessary examination of church books and records. Congress believed that these provisions would protect the rights of legitimate churches without unduly hindering IRS efforts to eliminate tax-avoidance schemes posing as religious organizations. Further, Congress believed that the adoption of detailed statutory rules would reduce misunderstandings between churches and the IRS and allow for a more stable and cooperative examination process.
For application of certain IRC § 7611 procedures to IRC § 4958, see IRM 7.27.30.
IRC § 7611 applies to any inquiry or examination of a church, or convention or association of churches, initiated after December 31, 1984, to determine whether:
1. The organization qualifies for exemption under IRC § 501(a),
2. The organization qualifies as a church under IRC §§ 509(a)(1) and 170(b)(1)(A)(i),
3. The organization is carrying on unrelated trade or business activities as defined in IRC § 513,
4. The organization is otherwise engaged in activities subject to an tax under the Internal Revenue Code, or
5. An excess benefit transaction has occurred between a church and a disqualified person. (See procedures in IRM 7.27.30).
Treas. Reg. § 53.4958-8(b) states that the procedures of IRC § 7611 will be used in initiating and conducting any inquiry or examination into whether an excess benefit transaction has occurred between a church and a disqualified person. For purposes of this rule, the reasonable belief requirement to initiate a church tax inquiry is satisfied if there is a reasonable belief that IRC § 4958 tax is due from a disqualified person with respect to a transaction involving a church. See Treas. Reg. § 301.7611-1 Q 19.
The IRS must follow the procedures of IRC § 7611 in any contact with a church concerning a purpose described in IRM 4.76.7.1(5) or IRM 4.76.7.1(6) above, unless one of the exceptions described in IRM 4.76.7.3 applies. If information in the IRS's possession is not sufficient to satisfy the reasonable belief requirement of a church tax inquiry under IRC § 7611(a)(2), then the IRS should not initiate contact with the church.
IRC § 7611 limits commencement of a church tax inquiry or examination, establishes notice and conference requirements, restricts the time the IRS has to conduct a church tax inquiry and examination, and limits final adverse actions against church organizations. This IRM discusses each requirement in detail.

4.76.7.2 (06-01-2004)
Applicability of IRC § 7611

IRS personnel must observe the restrictions imposed by IRC § 7611 in any inquiry or examination of a church. Such inquiry or examination must be limited to determining whether:
1. The organization is exempt from tax under IRC § 501(a),
2. The organization is a church under IRC §§ 509(a)(1) and 170(b)(1)(A)(i),
3. The church is carrying on an unrelated trade or business as defined in IRC § 513,
4. The church is otherwise engaged in activities subject to federal tax, or
5. The church has engaged in an excess benefit transaction (See procedures in IRM 7.27.30).
The term "church" includes
1. Any organization claiming to be a church. However, see IRM 4.76.7.4.2(4), and
2. Any convention or association of churches.
IRC § 7611 applies to any examination of a school operated as part of a church or convention or association of churches. IRC § 7611, however, does not, apply to any examination of a separately organized or incorporated church-related school that does not claim to be a church or convention or association of churches.
IRS personnel must follow the restrictions of IRC § 7611 if an organization claims to be a church. The organization may directly claim to be a church, or the IRS may infer it from facts such as inclusion of the word "church" in the organization's name or any other characteristics that show the organization holds itself out to be a church. Characteristics that an organization holds itself out to be a church might include, for example:
1. Lists of church-like services outside an organization building,
2. Indications that a worship services space is in the organization's building, or
3. Indications that the head of the organization performs regular worship services.
  
  Note:
  
  If it is unclear whether the organization claims to be a church, the examiner should ask the organization during the initial contact if it claims to be a church. If there is any doubt, the examiner will consult with Area Counsel or Deputy Area Counsel (Counsel) to determine whether there are sufficient characteristics of a church to ask the organization whether it claims to be a church.
Examiners must not disregard an organization's claim to church status unless information in the examiner's possession establishes the claim to be frivolous. In such instances, before proceeding, the examiner must obtain Counsel's written opinion as to whether:
1. The basis that an organization's claim to be a church is frivolous and
2. IRC § 7611 is applicable.
Occasionally, an organization that has not previously claimed to be a church (for example, an evangelistic organization that has been recognized by the IRS as an organization described in IRC §§ 509(a)(1) and 170(b)(1)(A)(vi)) will claim to be a church after the IRS initiates an examination. The examiner will honor a claim of church status in such a case, unless it can be dismissed on the merits as frivolous, See IRM 4.76.7.2(5) for requirement of a written opinion from Counsel) or if the examination has progressed in good faith to such a point that the organization can be considered to have waived the application of IRC § 7611 for the years under examination. Factors to consider in deciding whether to apply the IRC § 7611 provisions at any stage after initiation of an examination include, but are not limited to, whether:
1. The IRS has determined the organization to be a private foundation or a public charity described in a section other than IRC §§ 509(a)(1) and 170(b)(1)(A)(i),
2. The organization has filed Form 990 and claimed public charity status under provisions other than IRC §§ 509(a)(1) and 170(b)(1)(A)(i),
3. A professional advisor, such as an attorney or accountant represented the organization and allowed the examination to proceed without asserting a claim to church status,
4. The organization previously described itself as the type of organization, specifically excluded from the application of IRC § 7611 by Treas. Reg. § 301.7611-1 A-3, such as a " church-controlled" organization, and
5. The extent to which the examination has progressed before the organization claims to be a church and whether the organization makes the claim after the examiner has discussed potentially adverse findings with the organization.
If the organization claims to be a church after an examination has progressed in good faith to a point that the examiner considers the organization has waived the application of IRC § 7611 for the years under examination, the examiner should request concurrence from Counsel that IRC § 7611 procedures need not be followed.
Any serious doubt about whether the application of IRC § 7611 has been effectively waived should be resolved in favor of the application of IRC § 7611.
The restrictions set out in IRC § 7611 apply to inquiries and examinations initiated for the purposes set forth in IRM 4.76.7.2(1), whether conducted by TEGE or any other operating division.

4.76.7.3 (06-01-2004)
Situations in Which IRC § 7611 Procedures Do Not Apply

IRC § 7611 specifically excludes certain IRS inquiries to churches from the restrictions it imposes. The following paragraphs describe these exclusions.

Note:

Even in cases not subject to the specific restrictions of IRC § 7611, IRS personnel should be mindful of the rights granted by the First Amendment to the Constitution, which limits government interference with the free exercise of religion to cases of compelling government interest. The IRS's legitimate interest of enforcing compliance with federal tax laws does not extend to the source and content of sincerely held religious beliefs.
The restrictions of IRC § 7611 do not apply to an examination of a religious organization that does not claim to be a church.
The restrictions of IRC § 7611 do not apply to a separately organized or incorporated church-supported school or other organization incorporated separately from the church.
The restrictions of IRC § 7611 do not apply to any assessments under IRC § 6851 (relating to termination assessments of income tax), IRC § 6852 (relating to termination assessments in case of flagrant political expenditures of IRC § 501(c)(3) organizations) or IRC § 6861 (relating to jeopardy assessments of income taxes).
The restrictions of IRC § 7611 do not apply to any criminal investigation, including an investigation of a willful attempt to defeat or evade tax or the knowing failure to file a return of tax imposed by this title. However, the possibility that an examination may result in a referral to Criminal Investigation Division does not in and of itself, take the investigation outside the scope of IRC § 7611
The restrictions of IRC § 7611 do not apply to examinations relating to the tax liability of any person other than a church. See IRM 4.76.7.1(5). For application of certain IRC § 7611 procedures to IRC § 4958 examinations, see procedures in IRM 7.27.30. For example, IRC § 7611 does not apply to examinations regarding:
1. The tax status or liability of a contributor to the church,
2. The use of church funds to benefit a particular individual or organization that might result in the denial of a contribution (for example a tuition payment that is claimed as a contribution),
3. Assignment of income, services or contributions to a church,
4. A vow of poverty with transfer of assets to a church, and
5. Social security tax, self-employment tax, or income tax withheld from wages of individuals other than a church (for example, the income tax liability of the pastor). See section 7.3(9) for the routine request exceptions to section 7611 procedures for examinations relating to these tax matters with respect to a church."
Note:

Examination of church records to determine the liability of persons or organizations other than the church cannot be used to avoid the intended purpose of IRC § 7611. For example, the IRS should not seek to examine a contributor or membership list in the possession of a church, without observing the restrictions of IRC § 7611, if the purpose for seeking the list is to determine the overall financial structure of the church, rather than verifying a contribution from an individual. The information learned during an examination of church records to determine the liability of individuals or organizations other than the church, however, may support a reasonable belief to commence a church tax inquiry.
Examiners will not initiate inquiries or examinations of church records to determine the tax status of an organization other than the church without the Area Manager's approval. The Area Manager should grant approval only when the tax status of the organization under examination cannot be resolved without information in the possession of the church.
The restrictions of IRC § 7611 do not apply to third party records. For example:
1. Records relating to the church held by a third party (acquired by a summons to which IRC § 7609 applies) such as cancelled checks in the possession of a bank. However, the IRS must follow the procedures of IRC § 7609 before examining third-party records.
2. Requests to a church for information needed to locate third-party records. Such information includes the chartered name of the church, the state and year in which it incorporated, and the location of its bank accounts.
  
  Note:
  
  Information obtained from third-party records may provide the "reasonable belief, " as discussed in IRM 4.76.7.4.1, necessary to initiate a church tax inquiry and examination. The IRS may not, however, determine a church is not entitled to exemption or assess tax on unrelated business income against a church solely on the basis of third-party records, without first complying with the procedures of IRC § 7611. The church's failure to provide information necessary to locate third-party records, however, may be a factor in determining if there is reasonable cause for commencing a church tax inquiry.
The restrictions of IRC section 7611 do not apply to routine requests, including examinations of compliance with income tax or FICA (social security) tax withholding responsibilities of a church Routine requests are requests for information the IRS needs to administer the Code, apart from requests for information needed to determine an organization's exempt status or to assess tax. Refer to IRM 25.5.8.4.1, Situations in which IRC 7611 Procedures Do Not Apply, for routine requests and matters outside the scope of IRC § 7611.

4.76.7.4 (06-01-2004)
Church Tax Inquiry

A church tax inquiry is defined as any inquiry to a church (other than an examination) that serves as a basis for determining whether the organization qualifies for tax exemption as a church, or whether it is carrying on an unrelated trade or business or otherwise engaged in activities subject to any IRC tax. An inquiry as to whether an excess benefit transaction has occurred between a church and a disqualified person also constitutes a church tax inquiry.
A church tax inquiry commences when the IRS requests information from a church other than routine requests for information discussed in IRM 25.5.8.4.1 or inquiries regarding matters that do not primarily concern the tax status or liability of the church itself, discussed in IRM 4.76.7.3 above.
The IRS may begin a church tax inquiry only when the Director, EO Examinations reasonably believes that:
1. The organization may not be exempt as a church under IRC §§ 501(a) and 170(b)(l)(A)(i),
2. The organization may be carrying on an unrelated trade or business within the meaning of IRC § 513 or may be otherwise engaged in activities subject to any IRC tax, or
3. The organization my have engaged in an excess benefit transaction under IRC § 4958.
IRC § 7611 imposes strict time limits on both church tax inquiries and church examinations. The IRS cannot send a notice of examination until at least 15 full calendar days after sending the notice of inquiry. If the IRS does not send a notice of examination within 90 calendar days from the date of the notice of tax inquiry, the IRS must terminate the inquiry with no change to the organization's tax status or liability. The 90-day time limit may be suspended by certain circumstances discussed in IRM 4.76.7.9.1.

4.76.7.4.1 (06-01-2004)
Reasonable Belief Requirements

Before a notice of church tax inquiry can be sent, the Director, EO Examinations 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.
The IRS can obtain the information supporting a reasonable belief from many sources, including but not limited to:
- Newspaper or magazine articles or ads,
- Television and radio reports (a transcript should be obtained, if possible),
- Internet web pages,
- Voters guides created and/or distributed by the church, documents on file with the IRS (e.g. a Form 990-T filed by the church), and
- Records concerning the church in the possession of third parties or informants.
The IRS must derive the facts and circumstances forming the basis for a reasonable belief from information lawfully obtained. Information obtained from informants must not be known to be unreliable.
The failure of a church to respond to repeated (two or more) inquiries concerning the tax liability of other persons or to routine IRS requests may be considered a reasonable basis to commence a church tax inquiry.
A church failure to respond to repeated (two or more) IRS requests for information needed to locate third-party records is a factor, but not a conclusive factor, in determining if there is reasonable cause for commencing a church tax inquiry.

4.76.7.4.2 (06-01-2004)
Church Information Referrals

EO personnel, as well as other operating divisions securing information, which indicates a church tax inquiry under IRC § 7611 may be warranted, should forward the information on Form 5666, EO Information Report, to the Manager, EO Classification in Dallas for consideration by the EO Referral Committee. Other operating divisions should refer to IRM 4.76.7.13.
The EO Referral Committee will review the referral to determine if the information supports a "reasonable belief " that an organization may not be exempt as a church under IRC § 501(a), may be carrying on an unrelated trade or business within the meaning of IRC § 513, may be otherwise engaged in activities subject to any IRC tax, or IRC § 4958 tax may be due from a disqualified person with respect to a transaction involving a church.
In IRC 170(c) cases in which the issue is whether the taxpayer made claimed contributions, or made them with the expectation of receiving benefits in return, W&I and other operating divisions can, without following the restrictions of IRC 7611, examine church records to the extent needed to allow or disallow all or part of the contribution deduction. IRC § 7611(i)(2) specifically provides that the restrictions do not apply to any inquiry or examination relating to the tax liability of any person other than a church. Such an examination is limited to the determination of facts and circumstances specifically relating to the tax liabilities of the person in question. Other operating divisions may provide EO Classification with an information referral, but EO Examinations need not take action unless, in its judgment, a church tax inquiry and examination is needed to address IRS concerns.
If another operating division proposes to disallow an IRC § 170 deduction because the donee organization is not described in IRC § 170(c), it will make a referral to the Manager, EO Classification in Dallas. The EO Referral Committee will review the referral to determine if the information supports a reasonable belief that the organization may not be tax exempt as a church. If the Committee determines that the information does not support a reasonable belief to initiate an IRC § 7611 inquiry, EO Classification will advise the operating division the deduction should not be disallowed on the basis that the organization is not described in IRC § 170(c).
EO Groups will not unilaterally accept a referral and request approval from the Director, EO Examinations to initiate a church tax inquiry or examination until EO Classification personnel, including the EO Referral Committee, have reviewed and assigned the referral to the Area Manager.
If the Committee determines that a church tax inquiry under IRC § 7611 may be warranted;
1. The EO Referral Committee will prepare a Committee Review Report for the Area Manager.
2. EO Classification will prepare the case file, which will include establishment on AIMS/NMF and EOIC, a copy of the Committee Report, the referral materials and the referral tracking sheet, and forward it to the Area Manager. EO Classification will input a freeze code on the AIMS account.
3. EO Classification will notify the group manager that it is sending the case to the Area Manager and updating the case on AIMS and EOIC to the group code in status 10.
4. If in concurrence that a church tax inquiry under IRC § 7611 may be warranted, the Area Manager will forward the case, including the Committee Report, to the Group Manager. The Group Manager will assign the referral to an examiner to commence procedures to request approval by the Director, EO Examinations to initiate a church tax inquiry.
5. If the Area Manager declines to proceed with the inquiry, he or she will provide an explanatory memorandum to the Director, EO Examinations through the Manager, EO Classifications. The Area Manager will attach a copy of the memorandum to the case file upon returning it to the Manager, EO Classification.
6. If the Director, EO Examinations, or the Manager, EO Classification, does not concur with the Area Manager's decision, they should arrange a conference call to discuss the case within 60 days from the date of the Area Manager's memorandum.
  
  Note:
  
  The Director, EO Examinations has final authority in all cases to determine whether to conduct a church tax inquiry.

4.76.7.4.3 (06-01-2004)
AIMS Requirements

Before forwarding a church tax inquiry case under IRC § 7611 to the EO Area Manager, EO Classification will establish the case on AIMS/NMF with Activity Code 345 for the year(s) for which the inquiry applies. If the church tax inquiry pertains to a filed Form 990-T Return, EO Classification will secure the return and establish it on AIMS/BMF with Activity Code 388077. EO Classification will also input a freeze code on the AIMS account update the status and group code on AIMS.
The examiner must prepare Form 5598, EO AIMS Correction Request, to update the activity code from 345 to 349 when he or she schedules an approved church tax examination. Examiners are responsible for insuring returns secured during the inquiry or examination are established on AIMS, if included in the inquiry or examination. Examiners should establish Forms 990-T included in the inquiry or examination on AIMS using Activity Code 388077.
The examiner will use EO Form 5599, EO AIMS Closing Record, to close a church tax inquiry or examination off AIMS/NMF, assuming no return is required. When closing the case off AIMS, the agent will include in the return file a "Dummy" Form 990 with only the church identifying information completed for the year(s) under inquiry or examination.

4.76.7.4.4 (06-01-2004)
Church Tax Inquiry Notice Requirements

The Director, Exempt Organizations Examinations must sign the church tax inquiry letter.
IRC § 7611(a)(3)(B) requires that the notice include the following:
1. An explanation of the concerns giving rise to and the general subject matter of the inquiry. This should be sufficiently specific to enable the church to understand the particular area of church activities or behavior at issue.
  
  Example:
  
  For an inquiry regarding unrelated business income, the notice should indicate the general activities of the church that may result in unrelated income, (e.g., use of a particular property or facility for other than tax exempt purposes, advertising, rental of personal property, etc). For an inquiry regarding tax-exempt status, the notice should indicate those aspects of the church operations or activities that give rise to questions about its tax-exempt status. The IRS is not required to share particular items of evidence with the church, or to identify its sources of information, if providing such information would be damaging to the inquiry or the IRS's sources;
2. A general explanation of the provisions of the Internal Revenue Code that authorize the inquiry or that otherwise may be involved in the inquiry. The language in Exhibit 4.76.7-2 , Church Tax Inquiry Notice Letter, satisfies this requirement,
3. A general explanation of applicable administrative and constitutional provisions with respect to the inquiry, including the right to a conference before the IRS begins an examination of church records. The language contained in Exhibit 4.76.7-3, Statement of Administrative and Constitutional Rights, Notice 729, satisfies this requirement.
IRC § 7611 does not preclude the IRS from expanding its inquiry beyond the concerns expressed in the notice because of facts and circumstances that subsequently come to its attention. For example, the IRS may expand an inquiry concerning unrelated business income to include questions of tax-exempt status, or vice-versa, without sending another church tax inquiry notice.

4.76.7.4.5 (06-01-2004)
Processing of Church Tax Inquiry Notice

The examiner must prepare the IRC § 7611 Church Case Time Limits and Approvals Cover Sheet, displayed in Exhibit 4.76.7-1, for all church tax inquiry and examination letters. The cover sheet must remain attached to the front of the file to insure proper routing and awareness of pertinent time periods.
It is imperative that the examiner enter (and update as needed) the 90-day Church Inquiry expiration period and the two-year Examination statutory period on the cover sheet. Usually, the examiner should compute the expiration periods and enter on the cover sheet on receipt of the file from the Director, EO Examinations. (Refer to IRM 4.76.7.9 for computation of 90-day and two year expiration periods). The cover sheet must remain with the file throughout the approval process. Each approving official will update, as appropriate, initial and date the cover sheet on approving the request.
The examiner will prepare the church tax inquiry notice for the Director, EO Examinations using the appropriate language as illustrated in Exhibit 4.76.7-2, Church Tax Inquiry Notice Letter. The Letter must be on appropriate letterhead with an explanation of the concerns giving rise to the inquiry and the general subject matter of the inquiry inserted where indicated on the letter. The examiner must attach Statement of Administrative and Constitutional Rights, Notice 729, reproduced in Exhibit 4.76.7-3, to the inquiry notice letter to satisfy the requirement of IRC § 7611(a)(3)(B).
Although not required by IRC § 7611, the notice of church tax inquiry should usually include questions relevant to the inquiry. The questions are important as the inquiry phase is intended to give the church the opportunity to satisfy all of the IRS's concerns without an examination. The particular questions asked will depend on the information in the IRS's possession and the reasons for the inquiry. The letter should ask only those questions needed to resolve the issue or issues involved. The letter should not request the church to submit materials that are records, as described in IRM 4.76.7.6(2), as these records may be inspected only on examination.
The IRS must allow the church a minimum of 15 calendar days to respond to the inquiry letter. The examiner may allow more time depending on the facts and circumstances, but should exercise precautions to insure the 90-day time limit for completing the inquiry is not exceeded. If the church requests additional time to respond to the inquiry, the examiner will consider securing a consent to extend the 90-day time limit. The examiner will ask the church to submit a written request for additional time to respond.
IRC § 7611 does not preclude the IRS from granting a conference after issuance of the inquiry notice if requested. However, the inquiry notice should not offer a conference in addition to the offer of conference required in the notice of examination.
The Director, EO Examinations must sign the church tax inquiry letter. However, before requesting the Director, EO Examination's approval, the examiner must request concurrence from Counsel that an inquiry is warranted.
The examiner will prepare a memorandum to Counsel setting forth the following:
1. Reasons for the inquiry,
2. The information upon which the decision to initiate the inquiry is based,
3. The specific provisions of the IRC section and regulations considered, and
4. An explanation of how the examiner obtained the information relied on for the proposed inquiry.
  
  Note:
  
  The request should include the case file containing all of the information the examiner considered in making the decision to request approval to initiate the church tax inquiry, including the administrative file, if available. If the examiner believes the information is too voluminous to be included, he or she should include a summary, and offer Counsel the opportunity to inspect the information, if necessary.

4.76.7.4.5.1 (06-01-2004)
Area Counsel or Deputy Counsel Pre-issuance Review

The Group Manager will forward the case file, the memorandum to Counsel, a copy of the draft inquiry letter and the disk containing the draft of the inquiry letter through the Area Manager. If the church tax inquiry is based on information the examiner believes should not be disclosed to the church, the examiner will consult Counsel and Disclosure.
If Counsel does not concur that an inquiry is warranted, it will prepare a memorandum to the Area Manager setting forth the reasons and providing recommendations. If the Area Manager does not agree with Counsel, he or she will arrange a telephone conference with Counsel, the Group Manager and the examiner.
If Counsel and the Area Office cannot reach a consensus, the Director, EO Examinations will decide whether the information supports a reasonable belief that the organization may not qualify for tax exemption as a church, may be operating an unrelated trade or business, may be otherwise engaged in activities subject to tax or the church has engaged in an excess benefit transaction under IRC 4958
If Counsel agrees, a church tax inquiry is warranted it will return the file to the Group Manager. The examiner will forward the church tax inquiry notice, along with the information listed below, to the Director, EO Examinations through the Group Manager and the Area Manager in a red folder with the cover sheet attached.
1. The left side of the folder must include: the draft inquiry letter forwarded to Counsel, the memorandum to Counsel, the supporting background forwarded to Counsel and Counsel's memorandum in response including any suggested revisions to the letter.
2. The right side of the folder must include the final version of the letter for the Director, EO Examinations' signature and a disk containing the letter file.
3. The right side must also contain questions to the taxpayer and Notice 729, Statement of Administrative and Constitutional rights.
If the Director, EO Examinations approves the church tax inquiry notice, the Director's Office will mail the letter and attachments. The file must contain a photocopy of the signed and dated letter and attachments as they must be attached to any follow-up or future notice of examination. The inquiry notice letter must be mailed "certified mail, return receipt requested." The signed return receipt, or return receipt evidencing refusal to accept the letter must be attached to the file copy of the church tax inquiry notice letter.
After mailing the church inquiry notice letter, the Director, EO Examinations will expeditiously return the file directly to the examiner. The Area Manager is responsible for monitoring the statutory time limit for completing the inquiry. The examiner will enter the expiration date of the 90-day period on the cover sheet.
If the Director, EO Examinations does not approve the church tax inquiry notice, the Director will discuss the reasons with the Area Manager before returning the case file for closing or development of additional information, in a manner consistent with the procedures of IRC § 7611.

4.76.7.4.6 (06-01-2004)
Follow-up on Church Tax Inquiry Notice

If a church does not respond to the inquiry notice within the specified time, the examiner may send a follow-up request. The examiner should send the follow-up only if the facts and circumstances indicate it may be useful in resolving the inquiry and can be done without risk of exceeding the 90-day period for concluding the inquiry. The examiner should use the language contained in Exhibit 4.76.7-4 , Follow-up Church Tax Inquiry Notice, for this purpose. The examiner will attach a copy of the initial inquiry notice and all attachments, to the follow-up letter. The follow up letter will be mailed over the Director, EO Examinations' signature but may be signed by an official no lower than the Area Manager. As with the initial inquiry notice, send the follow-up "certified mail, return receipt requested." Attach the signed return receipt or receipt-evidencing refusal to accept the letter to the file copy of the letter.
If the church refuses to accept the church tax inquiry notice, the examiner will initiate procedures to issue a notice of examination, as described in IRM 4.76.7.5 , using the wording contained in Exhibit 4.76.7-5. The notice of examination will be mailed no sooner than 15 calendar days after the mailing date of the tax inquiry notice.
If the church responds but does not provide sufficient information to address the concerns stated in the inquiry notice, the examiner should, depending on the facts and circumstances, prepare a notice of examination as described in IRM 4.76.7.5, or prepare a follow-up to the church tax inquiry as described in IRM 4.76.7.4.6(1). If the examiner decides to send a follow-up letter, he or she should also consider requesting an extension of the 90-day period. Because of the 90-day period for concluding the church tax inquiry and because the notice of examination offers a conference to discuss the issues, the examiner will send a follow-up church tax inquiry notice only when information the IRS already possesses suggests the issues can be readily resolved by correspondence. Counsel should be consulted on these decisions.
The Area Manager has discretion to grant a conference if the organization requests one after receiving the church tax inquiry notice. However, the conference will not take the place of the conference required to be offered in the notice of examination. The Area Manager should usually agree to a conference if the examiner believes the issues can be resolved in a conference, and the church agrees to extend the 90-day period. Factors the Area Manager should consider in deciding whether to grant a request for a conference include:
1. The likelihood that a conference will help resolve the issues, and preclude the need to pursue the matter,
2. The effect granting a conference will have on the 90-day time limit for concluding the church tax inquiry, and
3. The effect any delay in issuing the notice of examination will have on the years subject to examination, as discussed in IRM 4.76.7.9.2, if an examination is necessary.
The response to the church tax inquiry notice letter may provide information that indicates no further action is required because:
- The church meets or continues to meet the requirements for exemption under IRC § 501(c)(3),
- The church qualifies or continues to qualify for classification as an organization described in IRC §§ 509(a)(1) and 170(b)(1)(A)(i),
- The church is not liable for unrelated business income tax, additional unrelated business income tax, or other taxes, or
- IRC § 4958 tax is not due from a disqualified person with respect to a transaction involving a church.

4.76.7.4.7 (06-01-2004)
Resolution of Church Tax Inquiry Without Examination

If the examiner determines no further action is required, he or she will prepare a letter advising the organization of this conclusion, specifying the time period covered, and the issue for which the no change is made.
1. Examiner should use the language contained in Exhibit 4.76.7-6, No-Change Notification Letter to Organization Recognized Exempt - No Examination Conducted, for an organization previously recognized as exempt by the IRS
2. Examiner should use the language contained in Exhibit 4.76.7-7, No-Change Notification Letter to Organization Not Recognized Exempt - No Examination Conducted, for an organization not previously recognized as exempt by the IRS.
Refer to 4.75.20 for Mandatory Review procedures

4.76.7.4.7.1 (06-01-2004)
Revocation of Exempt Status Without Examination

In certain exceptional circumstances the IRS may, in lieu of an examination, propose to revoke or deny an organization's exemption. IRC § 7611 does not require that the IRS formally examine church records and religious activities before it issues an adverse determination to a church. If the concerns that led to the church tax inquiry are not resolved after the church tax inquiry notice, the notice of examination, and the conference, if requested; the IRS may, in lieu of an examination, revoke (or deny, if the organization has not applied for recognition of exemption) the organization's exempt status when it possesses sufficient information to determine that the organization does not qualify for exemption.
Revocation or denial of exempt status without examination may, in exceptional circumstances, be appropriate where the facts and circumstances indicate examination will not produce information sufficient to change the determination the IRS can make based on information in its possession. For example, an examination may be unnecessary when information in the examiner’s possession establishes that the organization is operated for the private benefit of a particular individual or individuals and church records, which will be available only after issuance and enforcement of a summons, are not likely to show otherwise. However, the IRS should not initiate this revocation or denial merely because an organization will not voluntarily provide information if that information may be material to the determination of the organization's exempt status.
Revocation or denial of exempt status without examination may also be appropriate in cases in which material facts are not in dispute, but the church contests the effect of the facts on the organization's exempt status. For example, if the church does not dispute facts showing it intervened in a political campaign, but contests only the effect of the intervention on its exempt status, it may be appropriate to issue an adverse determination.
Action to revoke or deny a church's exempt status without formal examination may be taken only after the IRC § 7611 requirements of a church tax inquiry notice, a notice of examination, and conference, if requested, are satisfied.
The IRS must base the adverse determination on information showing the organization does not qualify for exempt status. The IRS may not base the adverse determination on the grounds the organization failed to establish it qualifies or continues to qualify for exemption. If the examiner does not possess sufficient information to make a determination, an examination will be initiated.
The IRS must follow the procedures in IRM 4.76.7.8 in preparing, processing, and issuing the adverse determination. The examiner will prepare a report of examination even if the examiner did not conduct a formal examination.

4.76.7.5 (06-01-2004)
Notice of Examination

The notice of examination must not be mailed sooner than 15 calendar days after the date the notice of church tax inquiry was mailed and must be mailed at least 15 days before the date the examination begins.
The Director, EO Examinations, must sign the notice of examination.
The Director's office must provide a copy of the notice of examination to Division Counsel upon mailing the notice to the organization. Division Counsel has 15 days to provide a non-binding advisory opinion to the Director, EO Examinations. See IRM 4.76.7.5.2 concerning required review by Counsel before sending notice to the Director, EO Examinations. The examiner will prepare the transmittal memorandum to Division Counsel using the language as indicated in Exhibit 4.76.7-9. The Director, EO Examinations will consider Counsel's objections when determining whether to proceed with the examination.
The notice of examination must contain the following:
1. A copy of the church tax inquiry notice and attachments,
2. A description of the church records and activities the IRS seeks to examine,
3. An offer of a conference between the church and the IRS to resolve concerns relating to such examination, and
4. A copy of all documents collected or prepared by the IRS for use in the examination. Disclosure of this information is required by the Freedom of Information Act (5 U.S.C.552), as supplemented by IRC § 6103 (relating to disclosure and confidentiality of tax return information).
  
  Note:
  
  The IRS need not furnish to the church documents that would be exempt from disclosure under the Freedom of Information Act or IRC § 6103. The IRS is not required to furnish all documents it may have on the organization, only those used to determine that an inquiry and examination were necessary. The IRS must not provide documents that would reveal the existence or identity of a confidential informant to the church. The Area Office should consult with Area Counsel or Disclosure before withholding any documents on the grounds that disclosure would reveal the existence or identity of a confidential informant.

4.76.7.5.1 (06-01-2004)
Preparing the Notice of Examination

Under IRC § 7611(c)(1)(B), the IRS has 90 calendar days from the date of the mailing of a notice of inquiry to decide whether to initiate a church tax examination and to issue a Notice of Examination.
If the church refuses to respond to the notice of church tax inquiry or any follow-up letter, or when the church's response does not resolve the IRS's concerns, the examiner will initiate steps to issue a Notice of Examination.
To initiate a request to issue a Notice of Examination, the examiner will:
1. Prepare a draft notice of examination for the signature of the Director, EO Examinations using the applicable language contained in Exhibit 4.76.7-5. The letter must be on appropriate letterhead with the description of the records and activities the IRS seeks to examine inserted where indicated on the Exhibit.
2. Attach a copy of the church tax inquiry notice letter and attachments, plus any follow-up letter to the notice of examination. Attach a copy of all the documents the IRS collected or prepared for use in the examination. The disclosure of this information is required by the Freedom of Information Act (5 U.S.C. 552 as supplemented by IRC § 6103 (relating to disclosure and confidentiality of tax return information). If doubt exists whether any document is disclosable, the examiner should consult Counsel and Disclosure.
3. Prepare a memorandum for reviewers stating why the examination is necessary.
4. Prepare a copy of the notice of examination and all attachments for Division Counsel.
5. Prepare a transmittal memorandum from the Director, EO Examinations to Division Counsel. This memorandum should state that the notice of examination is furnished in accordance with IRC § 7611(b)(2)(A), explain why an examination is necessary and request Counsel's consideration. See Exhibit 4.76.7-9 for appropriate language. The memorandum should also state that if Division Counsel objects to the examination, it must provide an advisory opinion to the Director, EO Examinations within 15 calendar days from the mailing of the notice of examination letter.
  
  Note:
  
  This memorandum and transmittal of the Notice of Examination in accordance with IRC § 7611(B)(2)(A) is not related to the pre-issuance review mentioned in IRM 4.76.7.5.2 below.
6. Verify the accuracy of the 90-day period date on the IRC § 7611 Church Case Cover Sheet See Exhibit 4.76.7-1 and mark "expedite" .

4.76.7.5.2 (06-01-2004)
Area Counsel or Deputy Counsel Pre-Issuance Review

Before the notice of examination is sent to the Director, EO Examinations for approval, the examiner will forward a copy of the entire file, through the Area Manager, to Area/Deputy Area Counsel, who will be responsible for securing Division Counsel’s opinion as to whether an examination is warranted. The examiner, managers, Area/Deputy Area Counsel and Division Counsel will exercise all precautions, including informal contact, to ensure Counsel's (Counsel hereinafter refers to either Division Counsel or Area/Deputy Area Counsel, or both, as appropriate) review can be completed without jeopardizing the 90-day period for completing the church tax inquiry and mailing the notice of examination. After Counsel review is complete, the Notice of Examination will be sent to the Director, EO Examinations, through the Manager, EO Mandatory Review for approval.

Note:

The file will be placed in a red file folder and should include a diskette with all documents (letters, RAR, case chronology, etc.) prepared in the inquiry or examination. Inclusion of the diskette will allow Counsel to make the revisions to the notice of examination in appropriate circumstances.
Generally, if Area/Deputy Area Counsel concurs in the issuance of the notice of examination, Area/Deputy Area Counsel will secure the written opinion of Division Counsel. If Area/Deputy Area Counsel believes revisions are necessary, Area/Deputy Area Counsel will exercise discretion in whether to make the changes directly (after concurrence by the examiner) or to return the file to the examiner for revision. If the file is returned to the examiner, he/she will make any necessary revisions and return the file to Area/Deputy Area Counsel. Area/Deputy Area Counsel will prepare a recommendation memorandum and forward the matter to Division Counsel. Upon concurrence by Division Counsel (or concurrence subject to certain revisions, in which case Area/Deputy Area Counsel will make the necessary revisions after concurrence by the examiner) Area/Deputy Area Counsel will send the entire file, which will include the written opinion of Division Counsel (and which may be a facsimile copy), to the Director, EO Examinations (through the Manager, EO Mandatory Review) for approval and issuance of the notice of examination. As noted above, Counsel will exercise appropriate precautions to ensure that it timely completes its review, and will keep the examiner and the Manger, EO Mandatory Review, apprised of the status of that review. The file should be sent to the Director, EO Examinations, so that it is received no later than ten days before the expiration of the 90-day period.

Note:

Division Counsel’s pre-issuance review does not obviate the requirement of IRC § 7611(b)(2)(A) that at least 15 calendar days before the beginning of an examination, the Director, EO Examinations provide a copy of the notice of examination to Division Counsel (successor position to Regional Counsel referenced in IRC § 7611(b)(2)(A)) and to the organization.

4.76.7.5.3 (06-01-2004)
Issuance of Notice of Examination

After the Director, EO Examinations signs the notice of examination, the Director's Office will mail the notice " certified mail, return receipt requested." The file should contain a photocopy of the signed and dated letter. The signed return receipt, or return receipt evidencing refusal to accept the letter, must be attached to the file copy of the notice of examination. The Director's Office will also mail a copy to Division Counsel in accordance with IRC § 7611(b)(2)(A).
After the Director’s office mails the notice of examination, it will expeditiously return the case file to the initiating Group Manager. The examiner will calculate the two-year examination period expiration date beginning on the date of the notice of examination. The examiner will enter the two-year expiration date prominently on the IRC § 7611 Church Case Approvals sheet ( Exhibit 4.76.7-1) on top of the file and advise his or her Group Manager of the critical dates. The Area Office is responsible for monitoring the statutory time limit for completing the examination.

4.76.7.5.4 (06-01-2004)
Pre-Examination Conference

The purpose of the conference is to provide the opportunity to discuss and resolve the IRS’s concerns that gave rise to the inquiry without the need for an examination.
After the IRS issues a notice of examination, the church may request a conference at any time before the examination commences. If the church requests a conference, the IRS is required to schedule it within a reasonable time and may not proceed to examine church records and activities until after the conference.
The IRS will not allow a church to use the conference requirement to unreasonably delay an examination. This is determined by the facts and circumstances. Examples of unreasonable delays include:
1. Repeated (two or more) failures to keep scheduled appointments with the IRS,
2. Repeated (two or more) requests to reschedule a conference, unless the church provides sufficient reasons for the requests,
3. Request to schedule the conference at a date more than 30 days from the date of the notice of examination without sufficient reason and refusal to execute a consent to suspend the two-year time limit for completing the examination.
If the church requests a conference, the IRS will schedule the conference at a mutually convenient time and place.
If the church does not request a conference within 15 calendar days after the date of the notice of examination, and if Division Counsel has advised the Director, EO Examinations that it does not object to the examination, the examiner will contact the organization to arrange the examination.
If Division Counsel has not rendered an opinion to the Director, EO Examinations as to whether or not it objects to an examination, the examiner will not contact the organization to arrange the examination until 30 days after the notice of examination mailing date.
If the organization requests a conference when the examiner contacts the organization to arrange an examination, or anytime before the examination starts, the conference must be held before the examination can begin.
At least one management official and the examiner assigned to the case should attend the conference. To avoid misunderstandings, the IRS will remind the church at the meeting, in general terms, of the stages of the church audit procedures and their rights under such procedures.
After the conference, the Area Manager will decide whether to proceed with an on site examination or to close the case as a no change or no change advisory. If the church is to submit additional information, the Area Manager will wait until receipt of the information or the expiration of the time allowed for the church to submit the information before making a final decision to proceed with an examination.
IRM 4.76.7.4.7.1 discusses circumstances in which the IRS may issue an adverse determination lieu of an examination.

4.76.7.6 (06-01-2004)
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:
1. 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),
2. 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
3. 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 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.

4.76.7.7 (06-01-2004)
Summons

A summons may be issued to a church to secure information requested during the examination, which the church refuses to provide.
If the purpose of the summons is to secure information to aid in the collection of liabilities already assessed, IRC § 7611 is not applicable.
Prepare a church summons in accordance with the instructions contained in IRM 25.5.2, Preparation of Summons. Counsel must review the proposed summons before issuance.
If a church does not comply with a summons, refer to Counsel.

4.76.7.8 (06-01-2004)
Report of Examination and Mandatory Review Requirements

The examiner must prepare a report of examination for all church examinations. No-change and no-change advisory letters issued in church examination cases must specify the time period covered and include a specific description of the issues considered in the examination. Church inquiries and examinations that result in no change require mandatory review. Group Managers must coordinate the Mandatory Review of such cases to ensure the issuance of the report of examination within the statutory 90-day time period. The reviewer may stamp the signature of the Director, EO Examinations, as the signatory for the no change letters. The examiner will use the language contained in the following Exhibits in accordance with the appropriate examination situation:
1. Exhibit 4.76.7-9, No Change Notification Letter - Organization Recognized As Exempt, for an organization previously recognized as exempt as a church,
2. Exhibit 4.76.7-10., No Change Notification Letter - Organization not Recognized as Exempt, for an organization not previously recognized as exempt as a church;
3. Exhibit 4.76.7-11., No Change Closing Letter - Organization Not Recognized as Exempt and Examination Could Not Be Completed in Two Year Period, for an organization not previously recognized as exempt as a church, and the two-year limit for completing a church tax examination imposed by IRC § 7611(c)(a)(A) is imminent but no issue(s) critical to exempt status have been identified; and;
4. Exhibit 4.76.7-12., No Change Advisory Closing Letter - Organization Recognized as Exempt as a Church and Examination Could Not Be Completed in Two Year Period, for an organization recognized as a church exempt from tax, when the two-year limit for completing a church tax examination imposed by IRC § 7611(c)(1)(A) is imminent though an issue(s) critical to exempt status remains unresolved.
  
  Note:
  
  Examiners can conclude such examinations with a no change or no change advisory letter that neither denies nor recognizes exempt status, or, that continues to recognize exempt status under IRC § 501(c)(3), as applicable. A no change letter under IRC § 7611 is not an adverse determination, and is not a basis for declaratory judgment
  
  .
Group Managers must submit change cases subject to the provisions of IRC § 7611 to EO Mandatory Review. The EO Reviewer will submit the request to Counsel for approval, and will issue the 90-day letter.
In change cases subject to the provisions of IRC § 7611, Division Counsel must approve the report of examination. Division Counsel must also determine and indicate in writing that the IRS has conducted the church tax inquiry and examination in substantial compliance with the requirements of IRC § 7611. EO Mandatory will submit the request to Counsel who will be responsible for securing Division Counsel's written approval. This requirement applies to any:
1. Determination that an organization is not exempt from tax by reason of IRC § 501(a),
2. Determination that an organization is not a church described in IRC § 170(b)(1)(A)(i),
3. Notice of deficiency of any tax involved in a church tax examination, including penalties for failure to file information returns assessed as a result of a church tax examination, for example, unrelated business income,
4. Underpayment of tax involved in a church tax examination with respect to which subchapter B of Chapter 63 (relating to deficiency procedures) does not apply.
5. Notice of deficiency of any tax IRC § 4958 tax due from a disqualified person with respect to a transaction involving a church.
The examiner should submit a proposed adverse determination to Mandatory Review at least 120 days before the two-year period will expire. Mandatory Review will submit the request for Counsel approval at least 90 days before the expiration of the two-year period.
In cases subject to the declaratory judgment procedures under IRC § 7428, IRC § 7611(g) provides that the examiner's final report is treated as the final adverse determination under IRC § 7428(a)(1) and any church receiving such a report shall be treated for purposes of IRC §§ 7428 and 7430 as having exhausted the administrative remedies available to it. Thus, IRC § 7611(g) precludes administrative appeal of the adverse determination letter. The IRS will not send a proposed adverse determination letter, "30 day letter" , but rather will send only the final adverse determination letter, "90 day letter, " with Form 4621, Report of Examination.
In such cases, Mandatory Review will mail the adverse determination "certified mail, return receipt requested, " after Counsel secures Division Counsel's written approval, and will retain the administrative file until the time for filing a declaratory judgment action under IRC § 7428 has passed.
The examiner's final report in adverse cases subject to the declaratory judgment procedures under IRC § 7428 should contain all grounds for the determination. The report, however, should be limited to IRC § 7428 issues and should not discuss positions inconsistent with the primary basis for the adverse determination. For example, the report in a revocation case should not discuss the organization's liability for unrelated business income tax (unless the basis for revocation is that the organization's primary activity is carrying on unrelated trade or business).
If the church does not timely file a petition under IRC 7428, Mandatory Review may issue a 30 day letter on any income tax due, after the 90-day period has expired.
In cases not subject to the declaratory judgment procedures under IRC § 7428, i.e., no change to exempt status or church classification under IRC § 170(b)(1)(A)(i) but liable for employment taxes, unrelated business income or other taxes; or a disqualified person is liable for IRC § 4958 tax, Mandatory Review will review the case. After securing approval of Division Counsel through Counsel, the EO Reviewer will issue the 30-day letter and the notice of deficiency, if the church does not file an appeal.

4.76.7.9 (06-01-2004)
Time Limits

The church tax inquiry period must last a minimum of 15 calendar days from the date the notice is mailed but must be concluded within 90 calendar days from the date the church tax inquiry is mailed. The period is counted from the day after the day the notice is mailed; e.g., if the notice is mailed on November 1, day one of the church tax inquiry period is November 2. If the IRS does not conclude the church tax inquiry by the 90th calendar day - by sending a notice of examination or issuing a final determination letter - the inquiry must be terminated with no change to the organization.
A church examination may not begin until at least 15 calendar days after the mailing of the notice of examination and/or after the conference, if one is requested before the examination. A final determination, 90-day letter, or final adverse determination letter must be issued within two years from the issuance of the notice of examination.

4.76.7.9.1 (06-01-2004)
Suspension of Time Limits

The running of the 90-day time period in which the IRS must issue a notice of examination and the two-year period in which the IRS has to make a final determination is suspended under the following conditions:
1. A judicial proceeding is brought by the organization against the IRS concerning a church tax inquiry or examination that is pending or being appealed, or
2. A judicial proceeding brought by the IRS against the organization or any official of the organization to compel compliance with any reasonable request of the IRS for examination of church records or religious activities is pending or being appealed, or
3. The IRS is unable to take action with respect to a church tax inquiry or examination because of an order issued in a judicial proceeding brought under IRC § 7609, or
4. The IRS and the church have agreed to a suspension of the 90-day or two-year period.
IRC § 7611(c)(2)(C) provides direct authority for obtaining a consensual extension of time for either the 90-calendar day inquiry period or the two-year examination period. If it becomes necessary to obtain an extension, the IRS should prepare a special consent form.
Exhibit 4.76.7-13 contains sample language for a consent to suspend the period to conduct an IRC § 7611 examination. The Director, EO Examinations or delegate, may execute the consent. Because IRC § 7611 contains special limitations, use of the standard 872-A is not suitable for purposes of extending the IRC § 7611 periods.
IRC § 7611(c)(2)(B) provides that the two-year time limitation on church examinations is suspended for any period in excess of 20 days but not in excess of six months, that the church fails to comply with any reasonable request for church records or other information. In such case, the two-year period for conducting an examination shall be suspended after the 20th day of the failure, but the suspension shall not last more than six months from the beginning of the refusal. This suspension provision does not apply to the 90-day period for completing a church tax inquiry so a refusal by the organization to answer questions should cause the examiner to prepare a notice of examination. The examiner should not wait six months to issue a summons for the requested information that church officials refuse to provide. The examiner should prepare a summons and forward to Counsel for review as soon as circumstances indicate that the church will not voluntarily provide the information requested.
Usually, the examiner should send a follow-up letter to the organization if it has not responded to the request at the end of the 20-day period following an unanswered information request. This notifies the organization of the suspension of the examination time-period. It is especially important to send such a letter if the organization responds to the information request but refuses to provide all of the information requested. Exhibit 4.76.7-14 provides a sample of the language to be included in this letter.
No extension of the two-year period is allowed by reason of a stay of summons proceedings against the church resulting from the IRS's noncompliance with IRC § 7611 procedures.

4.76.7.9.2 (06-01-2004)
Limitation on Years Subject to Examination

The statute of limitation periods under subchapter A of Chapter 66 (relating to limitations on assessment and collection) apply to church examinations except for the situations below.
If the organization has not filed a return, an examination concerning exempt status is limited to the three completed tax-years immediately preceding the date of issuance of the notice of examination. The IRS may add an additional three years to this period if the organization is not exempt for any year of the three-year period immediately preceding the issuance year of the notice of examination, so that the examination may cover a six-year period immediately preceding the year of issuance of the notice of examination. Examination of additional years does not extend the two-year period, for completing the examination. The IRS may examine church records of a year earlier than the third or sixth completed taxable year only to the extent relevant to a determination of tax-exempt status during the three or six year period.
For purposes of examining church records for the additional three years, a church is considered not to be exempt for any of the three most recently completed taxable years preceding the examination notice date when the Director, EO Examinations, without delegation to a subordinate official, agrees in writing with the findings of the examiner that the church is not exempt for any one of the three most recently completed taxable years. Consultation with Counsel is advisable before forwarding a request to the Director, EO Examinations for concurrence. The examiner will set forth his findings for the three most recently completed taxable years in a summary report and forward it to the Director, EO Examinations through the Group Manager and the Area Manager, with a recommendation for expansion of the examination to six years. This report is not a final adverse determination. The declaratory judgment procedures under IRC § 7428, therefore, will not be available to the church until the IRS makes a final adverse determination (which includes a final revenue agent's report and a 90 day letter) with respect to the expanded six-year examination.
If the organization has not filed a return and the examination concerns unrelated business income tax under IRC § 511, the IRS may assess or collect tax for the six most recently completed taxable years preceding the date on which the notice of examination is sent. The IRS may examine church records of a year earlier than the sixth year only to the extent relevant to a determination of unrelated business income tax liability during the six-year period.
For examinations involving issues other than revocation of exempt status or unrelated business income, for example, examinations relating to social security or other employment taxes, no limitation period applies if the church did not file a return.

4.76.7.9.3 (06-01-2004)
Non-Compliance by IRS with Church Examination Procedures

If the IRS has not substantially complied with the church examination procedures, a summons enforcement proceeding brought by the IRS to gain access to church records may be stayed by the Court until the IRS complies with IRC § 7611 procedures.
The IRS has not complied with the church examination procedures when the non-compliance is substantial and relates to the following:
1. The requirements relating to the Notice of Church Tax Inquiry and the Notice of Examination,
2. The requirement that the Director, EO Examinations approve the commencement of a church tax inquiry, or
3. The requirement that an offer of a conference with the church be made and held if requested.
The two-year period for completing a church examination will not be suspended during stays of summons proceedings resulting from violations described in IRM 4.76.7.9.3(2) above.
In determining whether a stay is necessary, a court will consider the good faith effort of the IRS and the effect of any failure to comply with church examination procedures.
There is no remedy, other than a stay of IRS summons enforcement action, for IRS non-compliance with the procedures of IRC § 7611. Division Counsel, however, may not approve final adverse actions resulting from a church tax examination unless there has been substantial compliance with the IRC § 7611 requirements.

4.76.7.9.4 (06-01-2004)
Limitations on Additional Inquiries and Examinations

The IRS cannot begin a subsequent church tax inquiry or examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency of assessment, or a request for a significant change in church operations, including a significant change in accounting practices.
The five-year limitation period referred to above begins the date the notice of examination was mailed to the church in connection with a previous examination. If the IRS previously issued a church tax inquiry notice, but did not proceed to issue a notice of examination, the five-year limitation period begins on the date the notice of inquiry was mailed. If the 90-day period or the two-year period was suspended in the earlier inquiry or examination as described in IRM 4.76.7.9.1, the five-year limitation period is extended for a time equal to the length of the earlier suspension, unless the prior examination was actually concluded within two years of the notice of examination.
The five-year limitation on a church inquiry or examination does not apply under the following conditions:
1. Written approval is obtained from the Commissioner Tax Exempt/Government Entities, or
2. The issues involved are not the same as or similar to the issues involved in the previous inquiry or examination. A determination of similarity of issues depends on the substance rather than legal classification.
  
  Example:
  
  unrelated business income from a different source will be considered as involving a different issue.

4.76.7.10 (06-01-2004)
Referrals to State Attorneys General

In accordance with the procedures outlined in IRC § 6104(c) and Treas. Reg. § 301.6104-3, the IRS will notify appropriate state officials, including the appropriate State Attorneys General, of any final decision that an organization which claims to be a church is not entitled to initial or continuing qualification as an organization described in IRC § 501(c)(3).

4.76.7.11 (06-01-2004)
Claims to Church Status

Under IRC § 508(c), churches are not required to apply for recognition of exemption with the IRS to be treated as an organization described in IRC § 501(c)(3). If a church meets the requirements of IRC § 501(c)(3), it is exempt from Federal income tax.
The filing of an incomplete Form 1023 or the filing of a Form 1023, Application for Recognition of Exemption, that fails to establish an organization's exemption under IRC § 501(c)(3) does not affect the organization's entitlement to claim church status and the application of IRC § 7611 concerning restrictions on the examination of churches.
An individual may claim a charitable contribution deduction to a church that the IRS has not recognized as tax exempt. Such deduction is not barred solely because the church has never applied for recognition of exempt status. Similarly, when an organization has applied but has not provided the IRS with sufficient information upon which to make a favorable determination of exempt status, a charitable deduction is not automatically barred.

4.76.7.12 (06-01-2004)
Coordination of IRC § 170(c) Deduction Cases

In IRC § 170(c) cases in which the issue is whether the taxpayer made claimed contributions, or made them with the expectation of receiving benefits in return, other operating divisions can, without following the restrictions of IRC § 7611, examine church records to the extent needed to allow or disallow the contribution deduction. IRC § 7611(i)(2) specifically provides that the restrictions do not apply to any inquiry or examination relating to the tax liability of any person other than a church. Such an examination is limited to the determination of facts and circumstances specifically relating to the tax liabilities of the person in question. Another operating division may provide the Manager, EO Classification an information referral; however, EO Examinations need not take action if the information does not support the "reasonable belief" requirement that the organization may not be tax exempt as a church.
If another operating division proposes to disallow an IRC § 170 deduction on the grounds that the donee organization is not described in IRC § 170(c), it will make a referral to the Manager, EO Classification. The EO Referral Committee will review the referral to determine if the information supports a reasonable belief that the organization may not be tax exempt as a church. If the information does not support a reasonable belief that the organization may not be tax exempt as a church, EO Classification will advise the operating division that the information is not sufficient to initiate a church tax inquiry and the deduction should not be disallowed on the basis that the organization is not described in IRC § 170(c).
In some instances, an individual may claim that he or she is entitled to the parsonage allowance exclusion from income under IRC § 107. In such cases, if another operating division determines the individual has not performed services that are ordinarily the duties of a minister of the gospel, it will not be necessary for EO Examinations to examine the church. However, if another operating division considers an examination of the church is necessary to determine whether the individual did perform services in accordance with the tenets and practices of the church, the operating division will make a referral to the Manager, EO Classification. The EO Referral Committee will review the referral to determine if the information supports a "reasonable belief that the organization may not be tax-exempt as a church" necessary to initiate a church tax inquiry under IRC § 7611. If the information in the referral does not support the reasonable belief requirement, EO Classification will advise the operating division making the referral that it does not have a basis to initiate action.

4.76.7.13 (06-01-2004)
Coordinated Procedures

Representatives from other operating divisions may conduct periodic meetings to discuss developments in the program relating to examination of alleged churches and related individuals and to discuss problems that arise. EO representatives should attend, when asked.

4.76.7.14 (06-01-2004)
Legal Considerations

To be recognized as a religious organization described in IRC § 501(c)(3), an organization must establish that it is in fact "religious" ; that it is organized and operated in conformity with the basic principles of charity law; and that it does not violate any of the specific prohibitions of IRC § 501(c)(3) and the regulations thereunder. An organization will be considered "religious" only if its members have a sincere and meaningful belief in whatever doctrine is espoused, and this belief occupies in the lives of those members a place parallel to that filled by God in the lives of traditionally religious persons. Under the First Amendment, the IRS is precluded from considering the content or sources of a doctrine which is alleged to constitute a particular religion, and can make no attempt to evaluate the content of whatever doctrine a particular organization claims is religious. However, a mere allegation that a specific doctrine is religious is not sufficient to warrant that doctrine's designation as a religion.
When examining a church, examiners should be alert for evidence that income assigned to the church or order by an individual has been set aside for, or used for, the benefit and enjoyment of the individual. Such evidence could indicate inurement of the organization's earnings or private benefit, and would be relevant not only to the issue of exempt status under IRC § 501(c)(3) and the deductibility of the assigned income under IRC § 170, but, also, the possibility of an excess benefit transaction with a disqualified person under IRC § 4958.
Rev. Rul. 78-232, 1978-1 C.B. 69, provides that an individual who claims to be a minister, organizes a church, deposits salary checks for salary earned from outside employment in the church's bank account, and uses the funds of the account for lodging, food, clothing and other living expenses, is not entitled to a charitable deduction under IRC § 170 for the amount of the salary checks. Under the circumstances described, allowance of a charitable deduction was precluded not only because the benefits which the donor reasonably expected to obtain by making the transfer were sufficiently substantial to provide a quid pro quo for it, but also because the donee "church" was not a qualified recipient under IRC § 170(c)(2). The facts of the case indicated that the donee organization was operated for the private purposes of the taxpayer, rather than for exclusively exempt purposes, as required by the statute. Furthermore, since funds of the donee organization were used by or on behalf of the taxpayer, there was inurement of the type proscribed by the statute.
Rev. Rul. 69-266, 1969-1 C.B. 151, similarly provides that an organization formed and operated by its creator essentially as an attempt to reduce his/her personal Federal income tax liability while still enjoying the benefits of his/her earnings, is not exempt under IRC § 501(c)(3). Like the recipient church in Rev. Rul. 78-232, supra, the organization was operated for a private purpose, rather than for exclusively exempt purposes.

4.76.7.15 (06-01-2004)
Church Related Private School Examinations

If the church-related private school is a separate legal entity, the pre-examination procedures and the advance approval and notification procedures of this IRM will not apply. If the school actually claims to be a church, the IRS must follow IRC § 7611 procedures.
Refer to the guidelines for private school examinations contained in IRM 7.8.1.3.4.3 though 7.8.1.3.4.6.

4.76.7.15.1 (06-01-2004)
Pre-examination Letter Requirements

In accordance with the pre-examination procedures of this Chapter, except as modified here, the examiner will send the school a pre-examination letter requesting, at a minimum, the specific information listed in (2) below. The letter should also refer to the following:
1. Rev. Rul. 75-231, 1975-1 C.B. 158 , setting forth the IRS's position that organizations, including churches, which operate schools must have a racially nondiscriminatory policy as to students to be recognized as exempt from Federal income tax;
2. Rev. Proc. 75-50, 1975-2 C.B. 587 providing guidelines and record keeping requirements for determining whether private schools have racially nondiscriminatory policies as to students;
3. That the purpose of requesting the specified information is to ascertain whether an examination is necessary in order to determine compliance with Rev. Rul. 75-231 and Rev. Proc. 75-50.
4. That the information is being requested in accordance with the procedures specified in Treas. Reg. § 301.7605-1(c)(2). These procedures provide, in part, that before concluding an examination is necessary, the IRS will attempt to obtain necessary information by written request to the organization.
At a minimum, in the pre-examination letter the examiner will request sufficient information to determine if the school is in compliance with Rev. Rul. 75-231 and Rev. Proc. 75-50. The examiner should request the following specific information in the pre-examination letter.
1. Does the school have a racially and ethnically nondiscriminatory policy as to students by statement in its charter, bylaws, resolution of its governing body, or other governing instrument. If "Yes" , in what document is the statement made and what is the specific language of the statement? If "No," explain.
2. Has the school publicized its racially and ethnically nondiscriminatory policy during the periods of solicitation for students or, in the absence of such a program, during registration periods in a manner that makes such policy known to all segments of the general community served by the school? If "Yes" , describe. Also, if the school publicized the policy in one or more newspaper advertisements, furnish a copy of the most recent advertisement. If the school did not publicize its racially and ethnically nondiscriminatory policy, explain.
3. Does the school include a statement of its racially and ethnically nondiscriminatory policy in all brochures and catalogues dealing with student admissions, programs, and scholarships, and include a reference to this policy in other written advertisements, including its web site, used to inform prospective students of its programs? If "Yes" , submit all brochures, catalogues and other written advertisements used during the last academic year if the school is not currently in session, or for the present academic year if the school is currently in session. If " No," explain.
4. Is the school affiliated with, related to, or directly controlled or supervised by a church, or a convention or an association of churches? If "Yes," is the school separately incorporated?
5. Does the school discriminate in any way on the basis of race or ethnic origin with respect to students' rights or privileges, admissions policies, employment of faculty or administrative staff, scholarships or other financial assistance, educational policies, use of facilities, athletic programs, or other extra-curricular activities? If "Yes," to any of the foregoing, explain. If "No" to any of the foregoing, describe the action, if any, that supports such conclusion.
6. Does the school receive any financial aid or assistance from a governmental agency? Has the school's right to such aid ever been revoked or suspended? If "Yes" to either of the foregoing, explain.
7. Does the school maintain the following: records indicating the racial/ethnic composition of its student body, faculty, and administrative staff; records sufficient to document that scholarship and other financial assistance is awarded on a racially and ethnically nondiscriminatory basis; copies of all catalogues, brochures, and advertising dealing with student admissions, programs, and scholarships; and copies of all materials used by or on behalf of the school to solicit contributions? If "No " to any of the foregoing, explain.
8. Submit representative copies of all materials used to solicit contributions during the last academic year if the school is not currently in session, or during the present academic year if the school is currently in session.
9. Have any statements been made after November 6, 1975, purporting to be on behalf of the school, which are contrary to the school's publicity of a racially and ethnically nondiscriminatory policy as to students? If "Yes," has the school publicly disavowed or repudiated such statements, to the extent that the school or its principal officials were aware of such statements? Explain.
10. Provide data showing the racial and ethnic composition of enrolled students, faculty, and administrative staff at the close of the last academic year, if the school is not currently in session, or for the start of the present academic year, if the school is currently in session.
11. Provide data showing the racial and ethnic composition of enrolled students who have received scholarship and loan funds, and the amount of such scholarship and loan funds. (This data may be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty or administrative staff to submit information to the school that the school otherwise does not require).
  
  Note:
  
  To the extent that any of these categories of information have been included in a report(s) filed with an agency or agencies of Federal, State or local Government, copies of such report(s) will be acceptable if current within one year. Describe the method by which racial/ethnic composition is determined for the school records or governmental report purposes.

4.76.7.15.2 (06-01-2004)
Completion of Pre-examination

Upon completion of the pre-examination procedures, the IRS will furnish the organization an appropriate letter. If the organization has satisfactorily furnished the requested information and the examiner determines no examination is necessary, the examiner will draft a letter to the organization. The letter will state that the IRS has completed its inquiry, that it appears the school has complied with Rev. Rul. 75-231 and Rev. Proc. 75-50 and, therefore, no examination is necessary. If, however, the examiner determines an examination is necessary to determine compliance with Rev. Rul. 75-231 and. Rev Proc. 75-50, the examiner will follow the advance notification procedures contained in IRM 4.76.7.5.
In the case of church-related schools that are not separate legal entities, the examiner will generally limit the examination to determining whether the school's operations comply with the racially nondiscriminatory requirements. Therefore, the examiner should also so limit the examination report. If questions arise about the issuance of the report, the examiner should request advice from Counsel.