Recently, I was invited to an event at a local synagogue. There, I met two of my former colleagues who used to work as Revenue Agents. One of them introduced me to the rabbi. So, there we stood, a rabbi surrounded by former IRS field agents. This reminded me of one real life story.
A person was telling a joke where a sharp-witted rabbi made a total fool out of a poor IRS agent. The joke itself didn’t interest me, as I heard it many times before. What was interesting, though, was the debate generated by the joke. One of the questions raised was whether or not the IRS can audit a synagogue.
I chose not to take part in arguing. “Aren’t you a CPA?”, someone asked me. When I said no, everybody lost any interest in what I thought. But really, can a synagogue be subjected to a tax related investigation?
You could find the term “church” in the Internal Revenue Code. Here, churches are not limited to Christian temples. The term also applies to other places of worship, including synagogues and mosques.
In general, churches are not-for-profit organizations. As such, they are exempt from income tax. Unlike other not-for-profits, they are also exempt from annual (and other) filings. Now, if no annual returns are filed, how can the IRS conduct its examinations?
Well, the IRS can audit anyone and anything. This is their primary raison d’être. On one hand, the IRS examiners audit tax returns. This is done to make sure that all required information is correctly reported to the government. But, they also inspect books and records, as well as taxpayers’ activities.
Pointer 1. Even if you don’t have to file any tax returns, the IRS can still audit you.
Pointer 2. Always be prepared to explain to the IRS your income, expenses and other relevant info.
In many cases, even churches may be required to file tax related paperwork and pay taxes. In addition, they must conduct their activities within the limits imposed by the tax and other laws. So, the IRS examiners may have their hands full when auditing places of worship.
Churches do get some breaks indeed. They enjoy favorable treatment under the tax law. Also, Congress imposes special limitations on the ways the IRS may conduct its business in respect to such organizations. But there is no free ride. Churches do get audited. Just like all the others, they must comply with the applicable tax rules.