On July 17, 2006 an attorney representing several religious organizations wrote to the IRS requesting that the agency revise its new procedures for initiating audits of religious groups. According to the letter, the process is inconsistent with First Amendment protections codified by Congress in 1984, and was implemented without pubic notice or comment. The letter is the latest in a series of public criticisms of the IRS approach to oversight of religious and charitable organizations, including a recent OMB Watch report.

The letter to the IRS, written by Marcus Owens of Caplin and Drysdale in Washington, D.C., characterized the new procedures as a "clear violation" of Section 7611 of the Internal Revenue Code (IRC), which Congress passed "in order to protect churches' First Amendment rights."

Section 7611, enacted in 1984, expanded protections for religious organizations from unnecessary IRS audits by strengthening IRS procedural requirements. Section 7611 requires that all determinations to proceed with IRS inquiries into religious organizations be made by appropriate high-level Treasury officials, such as the Secretary of the Treasury or a delegate "no lower than that of a principal Internal Revenue officer for an internal revenue region." According to the conference report from the 1984 legislation, an audit is allowed to proceed only if this high-level official believes the organization may no longer qualify for its tax exemption based on "facts and circumstances recorded in writing."

Owens' letter notes, however, that the IRS has recently informally delegated this authority to a lower level within the agency, maintaining that "the IRS has become overly casual in its interpretation of the statute, setting the stage for exactly the sort of invasive governmental action that Congress feared, and contributing to a recent apparent dramatic increase in the number of church audits." The changes cited by Owens that reflect the failure to ensure the required "appropriate high level official" determination are:

• On May 9, 2006, the IRS formalized the new delegation of authority to lower-level officials in the Internal Revenue Manual (see ILM 200623061 and IRM Sec. 4.76.7.4), stating that determinations regarding audits of religious organizations are to be made by the Director of Exempt Organization Examinations (EO Exams). Owens believes this position is not senior enough, since the Director reports to a position several levels below the IRS Commissioner and has narrow responsibilities, as opposed to the broad policy perspective held by a high-level official.

   

• In a May 2005 internal memo the Director of EO Exams delegated authority downward by authorizing an "EO Referral Committee" comprised of career civil service employees to make determinations on whether to examine religious and charitable organizations for impermissible partisan activity.

   

• In October 2004, Rosie Johnson, Director of EO Exams, designated LaPaula Davis, an IRS employee at the manager level, to act as Director of EO Exams solely for the purpose of initiating inquires into religious organizations. Owens notes that "[g]iven the unsystematic and sporadic way the preceding documents were released, there may well have been other delegations that have not been made public."

The letter points out that since 1984 the IRS has changed its internal structure and there are no longer Regional Commissioners. According to Owen, the IRS is thus left with two choices: ensure that a high-level official makes the determination on whether to audit a religious group, or provide for public notice and comment on any proposed change.

The issue is important, he maintains, because the procedures provided for in Section 7611 "ensured that officials in a position to consider the broad policy implications of their actions would make the decision to initiate the inquiry and this requirement is a key component of the set of statutory safeguards that Congress enacted to ensure that churches are protected from overly intrusive IRS review."

The letter concludes by asking the IRS to revisit its policy and ensure that appropriate high-level officials are making determinations regarding inquiries into religious organizations and "reconsider whether a church tax inquiry is warranted in any of the ongoing inquiries and audits."