Church Inquiries and Examinations by the IRS | A Look at Section 7611 and Its Exceptions

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Cory D. Halliburton

Cory D. Halliburton



Cory Halliburton serves as general counsel and business adviser to a nationwide nonprofit / tax-exempt client base, as well as for multi-state professional service companies. He is a results-oriented attorney, with executive-level strategy and an understanding of the intersection of law and business judgment. With a practical upbringing, he pushes for process-driven results in internal governance, strategy and compliance with employment law, and complex or unique contracts and business relationships.

He dedicated the first ten years of his practice to mainly commercial litigation matters in West Texas and the Dallas-Fort Worth Metroplex. During that experience, Mr. Halliburton transitioned his practice to a more general counsel role, with an emphasis on nonprofit and tax-exempt organizations, advising those organizations through formation, dissolution, litigation, governance, leadership succession, employment law, contracts, intellectual property, tax exemption issues, policy creation, mergers and other. He has served as borrower’s counsel for tax-exempt bond and loan transactions near $100 million aggregate; some with complex pre-issue construction, debt payoff and other debt financing challenges.

Mr. Halliburton also serves as outside legal and business advisor for executive professionals in multi-state engineering firms, with a focus on drafting and counsel on significant service agreements, employment law matters, and protection of trade secrets.

IRS Inquiries and Examinations, Generally – Sections 6201 and 7602. Generally, the IRS is authorized and required by 26 U.S.C. § 6201(a) “to make the inquiries, determinations, and assessments of all taxes” imposed by the Internal Revenue Code.

To execute on that requirement, Congress, via section 7602, granted the IRS broad latitude to issue summonses “‘[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax …, or collecting any such liability.’” United States v. Clarke, 573 U.S. 248, 250 (2014) (quoting 26 U.S.C. § 7602(a)). The IRS has the authority to issue summonses to the subject taxpayer and to third parties who may have relevant information.  See 26 U.S.C. § 7602(a)(2); Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1154 (10th Cir. 2020). If a person or entity fails to comply with a summons, the IRS can bring an enforcement proceeding in a district court. 26 U.S.C. § 7604.

The IRS must have a good faith basis for issuing a summons under section 7602. To determine if a good faith basis exists, the courts evaluate these four factors: (1) whether the investigation will be conducted pursuant to a legitimate purpose, (2) whether the inquiry may be relevant to the purpose, (3) whether the information sought is not already within the IRS’s possession, and (4) whether the administrative steps required by the Internal Revenue Code have been followed. See United States v. Powell, 379 U.S. 48, 57-58 (1964).

Church Inquiries and Examinations, Section 7611. Section 7611 of the Code provides a different and unique statutory regime for inquiries and examinations of churches. Section 7611 restricts those inquiries and examinations, including the IRS’s ability to examine “church records,” and provides a detailed process for when and how those examinations may occur. See 26 U.S.C. § 7611(a), (h) (defining “church records” as “all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors.”).  Under section 7611, the IRS may begin a church tax inquiry only if: (A) reasonable belief requirements and (B) specific notice requirements have been met.

Reasonable Belief Requirements. The “reasonable belief” requirements are met “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church—(A) may not be exempt, by reason of its status as a church, from tax under section 501(a), or (B) may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation under this title.” Id. at § 7611(a)(2)-(a)(2)(B).

Inquiry Notice Requirements. The notice requirements are met if, before beginning such inquiry, the IRS provides written notice to the church of the beginning of such inquiry. The notice must contain: an explanation of the concerns which gave rise to such inquiry, the general subject matter of such inquiry, and a general explanation of “the applicable administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.” Id. at § 7611(a)(3)-(a)(3)(B)(ii)(II).

Restrictions on Examination. Section 7611 also contains restrictions on the scope of the examination. The examinations may be made “only (A) in the case of church records, to the extent necessary to determine the liability for, and the amount of, any tax imposed by this title, and (B) in the case of religious activities, to the extent necessary to determine whether an organization claiming to be a church is a church for any period.” Id. at § 7611(b)(1)-(1)(B) (emphasis added). At least 15 days before the beginning of a church examination, the IRS must provide the required notice to both the church and the appropriate regional counsel of the IRS, and the church must be given a “reasonable time” to participate in a conference, but only if the church requests such a conference before the beginning of the examination. Id. at § 7611(b)(2)(B); see id. at § 7611(b)(3) (contents of examination notice), (d) (limitations on revocation of tax-exempt status of a church).

Exceptions for Church Examinations.  Section 7611 is made expressly inapplicable to five categories of inquiries or examinations. The restrictions and procedures section 7611 shall not apply to:

  1. any criminal investigation,
  2. any inquiry or examination relating to the tax liability of any person other than a church,
  3. any assessment under section 6851 (relating to termination assessments of income tax), section 6852 (relating to termination assessments in case of flagrant political expenditures of section 501(c)(3) organizations), or section 6861 (relating to jeopardy assessments of income taxes, etc.),
  4. any willful attempt to defeat or evade any tax imposed by this title, or
  5. any knowing failure to file a return of tax imposed by this title.

Id. at § 7611(i)-(i)(5).

Section 7611 and these five exceptions are illustrated in the two opinions noted below.

St. German of Alaska E. Orthodox Catholic Church v. United States. In St. German, the IRS investigation involved a criminal and civil investigation of a reverend in the St. German church and abbot of a monastery, to determine his correct income tax liabilities and to inquire whether he committed any offenses under the Internal Revenue laws with respect to certain real estate transactions and the reverend’s potential aiding and abetting in the preparation of false tax returns of donors due to inflated charitable contribution deductions. See St. German of Alaska E. Orthodox Cath. Church v. United States, 653 F. Supp. 1342, 1345 (S.D.N.Y. 1987), aff’d, 840 F.2d 1087 (2d Cir. 1988).

Leaning on section 7611, the church, the monastery, and their wholly-owned real estate corporation sought to quash “third-party recordkeeper” summonses served on them. The court denied their requests, stating, “Not only does the section [7611] not apply to an investigation of a person other than a church, it does not apply to any criminal investigation or any inquiry into a willful attempt to evade a tax or a knowing failure to file an income tax return under title 26.” Id. at 1349 (stating that the investigation was to determine whether the reverend “knowingly and willfully failed to file income tax returns, attempted to evade the payment of income taxes, or aided and abetted others in the preparation of false income tax returns.”).

God’s Storehouse Topeka Church v. United States. God’s Storehouse Topeka Church (the “Church”) was founded in 2009 by Richard Kloos and his wife, Pennie Kloos, and it was incorporated as a Kansas not-for-profit corporation in 2010 by Mr. Kloos and two other individuals. Mr. Kloos was President of the Church and a member of the Board of Directors. The Church self-declared as a church rather than filing an Application for Recognition of Exemption Under section 501(c)(3) of the Internal Revenue Code (IRS Form 1023). God’s Storehouse Topeka Church v. United States, No. 22-CV-04014-DDC-TJJ, 2022 WL 17830849, at *1 (D. Kan. Oct. 7, 2022).

The Church operated a thrift store that accepted donated goods and sells them to the public. In the thrift store is a space set up as a coffee shop where the Church sold coffee at cost. The Church’s website did not reveal any information about church services, a list of ministers, statements of creed, religious publications, or religious education.

Mr. Kloos is a pastor of the Church, and both Mr. and Mrs. Kloos were paid gross wages in 2019 and 2020. The Church filed multiple Forms W-2 and Forms 941 indicating it withheld employment taxes from wages paid to other employees, but did not withhold any employment taxes from the gross wages of Mr. and Mrs. Kloos in 2019 and 2020.  Also, Mr. Kloos campaigned and was elected to the Kansas State Senate in November 2020. In that effort, his campaign purchased and displayed yard signs that read “Rick Kloos Kansas Senate” above the words “Founder of God’s Storehouse.” Mr. Kloos swore the Church did not create or in any way contribute to any yard signs associated with his campaign. Id. at *1-2.

The IRS assigned an agent to determine whether the Church may have, among other things, engaged in political campaign intervention and if a church tax inquiry was warranted. The Commissioner, Tax Exempt and Government Entities Division, approved the inquiry, and the agent issued a Notice of Church Tax Inquiry (“NCTI”). It informed the Church that the IRS was issuing the notice because of concerns that the Church was operating as a thrift shop rather than as a church, may have engaged in prohibited political campaign intervention in 2020, may be liable for unrelated business income tax (“UBIT”) from the operation of a coffee shop, and may be liable for additional Form 941 employment taxes for wages paid to Mr. and Mrs. Kloos. The NCTI included a list of questions to which the IRS requested the Church’s response, but did not request any documents. The Church responded to the NCTI with answers to the questions, as well as copies of various documents.

After reviewing the Church’s response to the NCTI, the agent sought approval to begin a tax church examination, which was approved. The agent issued a Notice of Church Tax Examination (“NCTE”) to the Church. When a pre-examination conference did not resolve the IRS’s concerns, the IRS moved forward with the examination. An Information Document Request (“IDR”) was issued to the Church, which sought copies of the Church’s bank statements. The Church objected to producing the bank statements, stating the request was overly broad.

The IRS sent IRS Letter 3164-E to the Church advising of the IRS’s intent to contact third parties and informing the Church of its right to request a list of people contacted. The IRS sent a letter to the Church advising that the documents requested in the IDR, including bank statements, were delinquent, and issued a second IDR seeking the Church’s bank statements. During the course of the IRS’s church tax inquiry and examination, the Church did not produce its 2019 and 2020 bank statements, but the Church voluntarily provided nineteen categories of documents and information to the IRS.

The IRS issued a third-party administrative summons served upon the Church’s bank, directing the bank to produce fourteen categories of records pertaining to all bank accounts in the Church’s name. The Church sought to quash the summons.

The court found that the third-party recordkeeper summons fell within the section 7611(h)(4)(B)(i) statutory exception to “church records,” and therefore must be analyzed under the “Powell factors” and not the heightened “to the extent necessary” relevancy standard provided in section 7611(b)(1)(A). See Powell, 379 U.S. at 57-58 (mentioned above). The God’s Storehouse court held that the IRS made a prima facie showing of compliance with the four Powell factors, and the Church failed to meet its burden to refute the IRS’s showing under any of the Powell factors, or establish an affirmative defense to enforcement of the third-party summons. God’s Storehouse Topeka Church, 2022 WL 17830849, at *5-10 (finding that “political campaign intervention is a legitimate purpose for an IRS investigation pursuant to section 7611 and the church’s bank records in the matter were deemed relevant to that purpose.”).

Insights. This Insights blog touches but the surface of issues and considerations for IRS inquiries and examinations of churches. While special considerations are given to churches throughout many secular legal regimes, churches are not above secular law, especially tax laws, even though “paying income taxes” is not likely within the statement of faith or mission statement of most church entities. The IRS’s obligation to enforce tax laws and the broad authority given by Congress to the IRS in order for it to execute on that legal duty should give all churches pause, if not extra incentive (if needed), to ensure that the church’s organization and operation are within the scope of that which is permitted for exemption from federal income tax under section 501(c)(3) of the Code.