Part 10: Church Audits & IRS Examinations — 2025 Compliance Rules and Limits

Church Audits & IRS Examinations — 2025 Compliance Rules and Limits

Churches enjoy broad constitutional protections under the First Amendment,
but they are still subject to certain IRS review procedures.
This 2025 guide explains when and how the IRS may examine a church’s records,
what rights churches have during an audit, and how to stay fully compliant
under the latest OBBBA and IRS Publication 1828.

1️⃣ IRS Authority and the Church Audit Procedure Act

The Church Audit Procedure Act (CAPA), enacted in 1984, strictly limits IRS access to church records.
The IRS may not conduct a financial examination of a church without prior approval from a high-level official known as the “appropriate high-level Treasury official.”

• IRS inquiries must be initiated by the Director of Exempt Organizations Examination (or above).
• The church must receive a written “Notice of Church Tax Inquiry” explaining the specific concerns.
• The church has at least 15 days to respond before any further action.

2️⃣ What the IRS Can and Cannot Do

The IRS may examine a church only for three legitimate purposes:

• ✅ To verify eligibility for tax-exempt status (§501(c)(3))
• ✅ To confirm that income is not benefiting private individuals (inurement)
• ✅ To ensure compliance with employment-tax or UBIT rules

However, the IRS cannot:

• 🚫 Inspect church records without written notice and proper authorization
• 🚫 Demand disclosure of donor names unless directly relevant to a proven issue
• 🚫 Evaluate the content of sermons or religious teachings

3️⃣ How the Audit Process Works

1. Step 1 – Notice of Church Tax Inquiry (Letter 3212):
   Explains the IRS’s concerns – usually related to income, employment taxes, or unrelated business activity.
2. Step 2 – Church Response:
   The church has 15 days to reply. Many inquiries end here if documentation resolves the issue.
3. Step 3 – Formal Examination (Letter 3215):
   Issued only if the Director approves after reviewing the church’s response.
4. Step 4 – Field Visit (Optional):
   Conducted at the church’s office; the IRS may inspect financials but not participate in worship activities.
5. Step 5 – Final Report & Appeal Rights:
   The church may appeal through the IRS Office of Appeals before any revocation or tax assessment.

4️⃣ Recordkeeping & Best Practices

Churches should maintain clear and accessible records for at least three years after filing or from the date an information return would have been due.
Even though churches are not required to file Form 990, maintaining internal records is vital for transparency.

• 📘 General ledger, bank statements, payroll, housing-allowance designations
• 🧾 Minutes of board meetings, contribution logs, major-donor acknowledgments
• 🗄️ Property records, UBIT activities, and employment-tax filings

5️⃣ EA Compliance Tips

• ✅ Respond promptly and professionally to any IRS letter – never ignore it.
• ✅ Involve a qualified Enrolled Agent (EA) or tax professional familiar with church law.
• ✅ Keep donor data confidential – never send full giving lists to the IRS unless legally required.
• ✅ Educate staff annually about political-activity and inurement restrictions.

💬 Frequently Asked Questions

Q1. Can the IRS randomly audit a church?
❌ No. CAPA requires written approval from a high-level Treasury official and clear evidence of potential non-compliance.

Q2. Can a church be forced to file Form 990?
❌ No. Churches are automatically exempt from Form 990 filings, but they must keep internal records.

Q3. What triggers most IRS inquiries?
⚠️ Excessive compensation, private inurement, or UBIT (unrelated business income) are the most common triggers.

Q4. Are payroll or employment-tax audits considered “church audits”?
✅ Not necessarily. Payroll audits are separate and do not require CAPA authorization.

Reference Links

• IRS Publication 1828 – Tax Guide for Churches and Religious Organizations (2025)
• 2025 Guide to Trusts Eligible as S Corporation Shareholders
• Form W-2 is more than just a piece of paper

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