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Do Churches Need to Be Audited?
Congress has not imposed a blanket audit requirement on churches. Where nobody is asking, a church can still commission one. Where somebody is asking, the church should find out what that party will accept.
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855-622-9009Who Requires a Church Audit?
- A lender or insurer asks as a condition of what it provides, a denomination under its own rules, and a church board through the bylaws. Some accept a review or agreed-upon procedures instead.
- Congress added one condition. A church that expends $1,000,000 or more in federal awards in a fiscal year has to have a single audit or a program-specific audit, under 2 CFR 200.501.
- The IRS is not one of them. It examines churches under a separate set of rules, and Congress restricted when it may begin.
What a Church Audit Finds
A CPA tests how the church handles cash and traces what it did with donor funds, then tells the board what needs fixing. Our team does that work in a church audit.
Audit cost is another element that should be taken into consideration. Although it might be seen as an expense, it is better described as an investment into the long-term credibility and sustainability of the church. In accordance with the size and complexity of financial activities, an audit cost changes from $3,000 to $25,000 typically. Specific churches might also opt for lighter alternatives like external reviews or agreed-upon procedures engagements in order to lower such expenses but still achieve financial transparency.
Why Get an Audit When It Is Not Required?
A church that commissions one anyway gains:
- Donors and grantmakers get an independent account of where the money went
- The board hears about control weaknesses from somebody outside the church
- The church finds problems before an outside party does
- A lender or a grantmaker gets the document it would otherwise ask for later
- The treasurer gets a second pair of eyes on the year’s records
Does the IRS Audit Churches?
When the IRS uses the word audit about a church, it means a church tax inquiry. In one of those the IRS asks whether the church remains exempt, or whether it owes tax on an unrelated trade or business. A CPA audits the financial statements for a different purpose.
Congress restricted how the IRS may open an inquiry. Under the Church Audit Procedures Act, now section 7611 of the Internal Revenue Code:
- An appropriate high-level Treasury official has to reasonably believe the church may not qualify for exemption, or may owe tax on unrelated business activity. The official has to record the facts and circumstances behind that belief in writing.
- The IRS has to write to the church before it starts, explaining its concerns and the subject matter. In that letter the IRS has to tell the church it may ask for a conference before anyone examines church records.
- The IRS has to give at least 15 days’ notice before an examination begins, to the church and to its own regional counsel
Congress defined church records as the corporate and financial records a church keeps in the ordinary course, including minute books and lists of members and contributors.
When the IRS Does Not Have to Follow the Church Audit Procedures Act
Congress left these outside section 7611:
- An inquiry or examination into somebody else’s tax liability rather than the church’s
- A termination assessment under section 6851 or 6852, or a jeopardy assessment under section 6861
- A case involving a knowing failure to file a return or a wilful attempt to defeat or evade tax, including a failure to withhold or pay employment taxes
- Any criminal investigation
Congress scoped that third exception to knowing failure and wilful evasion, so the IRS still follows section 7611 when it inquires into the church’s own employment tax liability. The IRS steps outside section 7611 only for a routine question about withholding, or for a matter concerning an individual rather than the church.
For section 7611 purposes, Congress wrote the definition in two parts:
Included
any organization claiming to be a church, and any convention or association of churchesExcluded
separately incorporated church-supported schools, and other organizations incorporated separately from the church
Does My State Require a Church Audit?
A church registers where it asks for money, not where it is based, so a church soliciting into several states can pick up obligations in each.
Some states attach a financial statement requirement to that registration and scale it by revenue. They tie it to registration rather than to tax status, so a church cannot rely on its federal exemption here.
Where a state exempts churches from registering, that exemption covers the church. A state separately tests a school, daycare or foundation that solicits in its own name.
Ask the charity regulator in each state where the church asks for money.
Do Denominations Require a Church Audit?
Some denominations write an audit requirement into their governing documents. Others set the level by the size of the congregation:
- An internal committee below one revenue band
- A CPA review in the middle band
- An independent CPA audit above the top band
Each body sets its own bands and revises them often, so ask the conference, diocese or presbytery for its current rule.
How to Find Out If Your Church Needs an Audit
Bring the letter or the loan covenant behind the question, and we will tell you what the sender expects. Contact us for further assistance with unique church audit subjects.
Church Audit Requirement FAQs
How often should a church be audited?
No professional body sets a cadence. Whoever asks for the audit sets it. How often a church should be audited.
How much does an audit cost for a church?
Between $3,000 and $25,000, depending on the church’s size, the complexity of its finances and the level of service. What sets the price.
Are 501c3 required to have an audit?
Not as a general rule, and a church is in the same position as any other 501(c)(3). What differs is the higher bar the IRS has to clear before it examines a church.
Who audits a church?
Either an independent CPA the church hires or a volunteer the congregation appoints. What a church auditor does.
Can a church be an LLC?
Yes. An LLC can be recognized under 501(c)(3). A church may also own an LLC to hold property or run a business activity. When a church uses an LLC.
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Reviewed by George Dimov, CPA. Dimov Audit audits affordable housing and HUD-assisted projects for owners and agents across all 50 states.
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