August 20, 2009 | Read Time: 3 minutes
Following a setback in a federal-court case this year, the IRS is releasing proposed regulations that would change the procedure it follows when pursuing inquiries into churches.
The proposal appears to explain why the IRS last month cited a “procedural issue” for stopping an audit of the Warroad Community Church, in Warroad, Minn. The review focused on the content of the pastor’s sermons and whether they included any political endorsements.
A U.S. District Court judge in Minneapolis ruled in January that the Living Word Christian Center, in Brooklyn Park, Minn., did not have to comply with an IRS summons for information because the summons was authorized by a government official of insufficient rank.
Living Word argued that a 2007 letter from the IRS alerting it to an inquiry into its finances violated the Church Audit Procedures Act, a federal law that sets forth steps the tax agency must follow in examinations of churches, to protect against government intrusion into church affairs.
After that law was enacted in 1984, the Treasury Department issued regulations stating that the lowest-ranking revenue-service official who could approve a church audit was a regional commissioner, just one level of authority below the IRS commissioner.
But the tax agency was reorganized in a 1998 law that eliminated the regional-commissioner position, along with a geographic structure that divided the nation into quadrants. The new organization of the IRS is based on categories of taxpayers, such as small businesses and tax-exempt organizations.
After the reorganization, the IRS gave the authority to order a church audit to the director of exempt organizations for examinations — four management levels below the commissioner, according to an analysis by a U.S. magistrate judge who first ruled on the Living Word case.
That authority was delegated not by a formal rule-making process but by the IRS’s employee manual, which does not carry the force of law and does not have the same authority as formal regulations, the magistrate judge said.
The magistrate judge ultimately denied enforcement of the summons because, he said, the IRS official who approved the church tax inquiry was not a Treasury official of appropriately high level.
A U.S. District Court judge agreed, rejecting the IRS’s argument that the director of exempt organizations for examinations had more expertise in tax-exempt matters than did a regional commissioner and thus was a better candidate to start a church tax audit.
In its proposed rules, the IRS said that, while it disagrees with the district court’s reasoning and conclusion, it “acknowledges that it would be beneficial to revise the regulations in light of the changes in IRS organization made in the wake of” the 1998 law, “to clarify who is an appropriate high-level Treasury official.”
The IRS proposes to place the responsibility with the director of exempt organizations.
Last month the IRS told the Warroad Community Church, in Minnesota, that the revenue service was no longer pursuing an audit. In a letter to the church, the IRS said that it was closing the examination because of a “pending issue regarding the procedure used to initiate the inquiry.”
The IRS told the church it “may commence a future inquiry” after the agency resolves the procedural matter.
To read the IRS’s proposed regulations, go to: http://edocket.access.gpo.gov/2009/pdf/E9-18659.pdf.
