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October 30, 2012

The No-Stress Audit

Two steps to help ease worry if your tax return is selected for examination.

Most church staffs dread an audit. Disturbing questions surround the experience: Does the IRS distrust us? Will we have to pay more out of our already slim budget? Thankfully, much of this worry is unwarranted. Most church tax returns are accepted as filed. Tax returns the IRS ends up selecting for an examination (or audit) are chosen based on a high probability for error or discrepancies among forms. An examination of your return does not suggest a suspicion of dishonesty. Many audits are closed without any change in reported tax. Some even result in refunds. Knowing what to expect if your church is audited can help relieve anxiety.

What to expect

If your return is selected for examination, you will be contacted by the IRS and asked to assemble records supporting the items on your return under investigation. The IRS determines the place and method of examination, but it will consider your wishes. The information exchange may be conducted by correspondence, or it may take place in your home, your place of business, an IRS office, or the office of your attorney or accountant.

During the audit, you may act on your own behalf. Otherwise, an attorney, CPA, enrolled agent (someone enrolled to practice before the IRS), or the person who prepared and signed your return may represent or accompany you. If you choose this option, you must furnish your representative with power of attorney (Form 2848).

Once the examination is complete, you will be advised of any proposed change in your taxes and the reasons for them. You will be asked to sign a form indicating that you agree with the changes. You may pay any additional tax at this time.

Right to appeal

If you do not agree with the proposed changes, you still have options. If you decide not to sign the agreement form, the examiner will explain your appeal rights. You may request an immediate meeting with a supervisor to explain your position if your examination takes place in an IRS office. When an agreement is reached, your case will be closed. If an agreement is not reached at this meeting or if your examination occurs outside of an IRS office, you will be sent (1) a letter notifying you of your right to appeal within 30 days; (2) a copy of the examination report explaining the proposed adjustments; (3) an agreement or waiver form; and (4) a copy of IRS Publication 5 (which explains your appeal rights in detail).

If, after receiving the examiner’s report, you decide to agree with it, simply sign the agreement or waiver form and return it to the examiner. If you still do not agree with the examination report, you may appeal your case within the IRS or take it immediately to the federal courts. For a complete explanation, obtain a copy of IRS Publication 556.

This article was adapted from Richard Hammar’s 2012 Church & Clergy Tax Guide, an invaluable resource for year-round information on taxes pertaining to ministers and their churches.

Richard Hammar is senior editor for Church Law & Tax Report, and Church Finance Today. He serves as legal counsel to the Assembly of God denomination. He is an attorney and CPA, specializing in legal and tax issues for churches and clergy. A graduate of Harvard Law School, he is the author of more than 100 books, including the annual Church & Clergy Tax Guide, the Compensation Handbook for Church Staff, and his landmark work, Reducing the Risk: Keeping Your Ministry Safe from Child Sexual Abuse.

Related Tags: IRS, pastors, payroll, Richard Hammar, tax, taxes

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