IRS Explains Process for Addressing Employer Shared Responsibility Penalties Against Churches

On June 8, 2021, the IRS Office of Chief Counsel issued a memorandum to the Counsel of IRS Tax Exempt and Government Entities Division. The memo answers the question as to whether IRS Letter 226-J, when sent to an applicable large church employer, is a routine request from the IRS or a church tax inquiry under Section 7611.

Letter 226-J is a notification from the IRS to an applicable large employer proposing an assessment for failure to comply with the employer shared responsibility requirements (known more commonly as the employer mandate). The employer mandate applies to all types of employers, including nonprofits and churches if they had 50 or more full-time employees including equivalents in the previous calendar year. The employer may accept the proposed assessment and pay the penalty amount. Alternatively, it may challenge the proposal by correcting the previously submitted Forms 1094-C and/or 1095-C and submitting supporting documentation. If the employer does nothing, the IRS will begin procedures to collect the assessment.

Section 7611 intends to protect churches from undue interference while allowing the IRS to retain the ability to pursue individuals who inappropriately use the church form as a tax-avoidance device. Section 7611 limits a church tax inquiry to situations that determine whether a church is exempt from tax under Section 501(a) or whether a church is carrying on an unrelated trade or business or otherwise engaged in activities that may be subject to taxation. The inquiry must originate from a written, reasonable belief determination by a high-level Treasury official.

A routine IRS request, on the other hand, may include (but is not limited to) the filing or failure to file any tax return or information return by the church; compliance with income tax or FICA (Social Security) tax withholding responsibilities; information necessary to process applications for exempt status and letter ruling requests; information necessary to process and update periodically a church’s registrations for tax-free transactions (excise tax) or information identifying a church that is used to update the Cumulative List of Tax Exempt Organizations (Publication No. 78); or confirmation that a specific business is or is not owned or operated by a church. Routine requests do not trigger the Section 7611 church tax inquiry procedures.

In 2018, the Office of Chief Counsel considered whether the employer shared responsibility payment compliance program (which involves Letter 226-J) should be handled by the Section 7611 procedures when a church employer was involved. Since the law and its requirements were new at that time, the office chose to adopt a cautious approach to protect churches and applied the Section 7611 procedures to the Letter 226-J process. The office is now reversing that decision as it feels that the required involvement of a high-level Treasury official in the process is causing delayed processing of the letters and church responses. At times, this delay results in a church filing several years of incorrect forms before discovering the reporting errors. The office now feels that the result is less favorable treatment for churches.

Thus, applicable large churches that receive a Letter 226-J from the IRS should likely treat that as a routine request from the IRS and respond accordingly. It should be noted that IRS memorandums cannot be cited as precedent and only show how an IRS representative may view a different situation with similar facts.

IRS Office of Chief Counsel Memorandum AM 2021-003 »