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1 1 (October 16, 2023)

handle is hein.crs/govened0001 and id is 1 raw text is: Con gressionol Research Service Informing the Iegislative diebate since 1914 October 16, 2023 Church Tax Benefits Under the federal tax system, organizations that qualify as churches under Internal Revenue Code (IRC) Section 170(b)(1)(A)(i) receive more favorable tax treatment than other tax-exempt organizations. For example, the IRC generally subjects churches to fewer filing obligations than other tax-exempt organizations, restricts the government's ability to conduct church tax audits, and relieves church plans of many requirements imposed on tax-qualified retirement plans. This In Focus provides an overview of some of the tax benefits associated with church status. Tax Benefits Shared with Other Tax Exermpt Organizations Churches enjoy many of the same tax benefits granted to other tax-exempt organizations under IRC Section 501(c)(3). An organization must first qualify as a 501(c)(3) religious organization to seek church status under IRC Section 170(b)(1)(A)(i). As a 501(c)(3), a church is exempt from the federal income tax under IRC Section 501(a). Like several other tax-exempt organizations, however, churches are subject to tax on their unrelated business income under IRC Sections 511-514. The unrelated business income tax (UBIT) is a tax on an organization's gross income from the conduct of any trade or business that is regularly carried on and that is not substantially related to the organization's tax-exempt purpose. Under IRC Section 3306(c)(8), services performed for 501(c)(3)s are not considered employment for purposes of the Federal Unemployment Tax Act (FUTA). Churches therefore do not pay the FUTA tax on their employees' wages under IRC Section 3301. Churches, like some other tax-exempt organizations, can receive donations deductible by donors. Individual taxpayers who itemize their deductions, and corporations generally may deduct their charitable contributions to churches under IRC Section 170. Similarly, gifts to churches are typically deductible for gift tax purposes under IRC Section 2522, and bequests, legacies, devises, or transfers to churches usually are deductible for estate tax purposes under IRC Section 2055. Filing Obligations Compared to other tax-exempt organizations, churches have fewer filing obligations. Generally, organizations must notify the government that they are applying for recognition of exemption under IRC Section 501(c)(3) in accordance with IRC Section 508(a). Churches, their integrated auxiliaries, and conventions or associations of churches are excepted from filing an application for exemption under IRC Section 508(c)(1)(a). Tax-exempt organizations are typically required to file an annual return disclosing financial information to the Internal Revenue Service (IRS) under IRC Section 6033(a)(1). There is an exception for churches, their integrated auxiliaries, and conventions or associations of churches in IRC Section 6033(a)(3)(A)(i). As a result, these organizations may not provide the IRS with any financial details about their operations unless they are subject to the UBIT. IRC Section 6104(d)(1)(A)(ii) provides that annual returns that relate to the unrelated business income tax are available for public inspection. Unlike many other tax-exempt organizations, under IRC Section 6043(b)(1), churches, their integrated auxiliaries, and conventions or associations of churches also are not required to file an information return when they liquidate, dissolve, terminate, or experience a substantial contraction (i.e., experience a significant disposition of assets). Church Audits Under IRC Section 611 As part of the Tax Reform Act of 1984 (P.L. 98-369) Congress enacted special procedural rules under IRC Section 7611 that govern the audits of churches, organizations claiming to be churches, and conventions or associations of churches. The statute provides churches with procedural safeguards in church tax inquiries and church tax examinations. The statute does not extend these safeguards to (1) criminal investigations; (2) any inquiry or examination of any person connected with a church, such as a contributor or minister; (3) certain assessments under IRC Sections 6851, 6852, or 6861; (4) any case involving a willful attempt to defeat or evade taxes imposed by the IRC; or (5) any case involving a knowing failure to file a return for a tax imposed by the IRC. Treasury Regulation Section 301.7611-1, Q&A 4, states that routine requests for information, such as questions about filing a return, compliance with tax withholding responsibilities, and supplemental information necessary to complete mechanical processing of a return, also are outside IRC Section 7611's scope. IRC Section 7611 requires the IRS to provide a written notice to churches, organizations claiming to be churches, and conventions or associations of churches before beginning a church tax inquiry. A church tax inquiry is an initial inquest that serves as a basis for determining whether (1) an organization is a church exempt from tax under IRC Section 501(a), (2) is carrying on an unrelated trade or business (within the meaning of IRC Section 513), or (3) is engaged in activities subject to tax. The IRS may only start a church tax inquiry if an appropriate high-level Treasury official reasonably believes, based on facts and circumstances recorded in writing, that the organization may not qualify for tax exemption as a church or may not be paying tax on an unrelated trade or business or another taxable activity. IRC Section 7611(h)(7) defines an appropriate high-level Treasury official as the Secretary of the Treasury or any delegate of the Secretary whose rank is a Regional Commissioner or higher. The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) eliminated the Office of Regional Commissioner, replacing the four-region structure with a taxpayer-type structure. In

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