CAN YOU DEFINE “CHURCH” – NEITHER CAN THE IRS

Can You Define “Church” – Neither can the IRS. A church has several tax advantages over other types of publicly supported Section 501(c)(3) organizations. It is automatically tax-exempt without applying for exempt status on Form 1023 and is also exempt from filing any annual information return. In addition, a church can be audited by the IRS only in limited circumstance and only in accordance with specific procedures (IRC Sec. 7611). Finally, a church has 15 years, instead of 10 years for other organizations, to use debt-financed real property for expansion purposes before income is taxable under IRC Sec. 514.

Neither the Internal Revenue Code nor the regulations formally define church. Therefore, the IRS developed and uses a list of 14 criteria to determine whether a religious organization is a church. Those criteria are as follows:

1. Distinct legal existence
2. Recognized creed and form of worship
3. Definite and distinct ecclesiastical government
4. Formal Code of doctrine and discipline
5. Distinct religious history
6. Membership not associated with any other church or denomination
7. Organization of ordained ministers
8. Ordained ministers selected after completing prescribed course of study
9. Literature of its own
10. Established places of worship
11. Regular congregations
12. Regular religious services
13. Sunday schools for the religious instruction of the youth
14. Schools for the preparation of its members

The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. Moreover, the 14 criteria are not of equal importance and all of them need not be met for an organization to be deemed a church. According to the IRS there is not a bright-line test for determining whether a religious organization is a church or simply a religious organization. Rather the determination is made based upon the facts and circumstances in each case. So you might say that trying to define church for tax purposes is similar to trying to define “pass interference.” It’s difficult to describe but the IRS knows it when they see it.

For exempt organization purposes, the term church is applied generically as a place of worship that includes, for example, mosques and synagogues. One thing is clear, an organization’s religious beliefs have no bearing on whether it is a church – any inquiry into those beliefs could run afoul of First Amendment religious protections.

NEW YEAR’S RESOLUTIONS FOR AUDITORS

New Year’s resolutions can be a great way to start off the New Year, but if you are like so many people you may have already broken one or more of your 2011 resolution by now. Even so, with busy season rapidly approaching, I thought that it would be good to give you some things you might want to use to update or revise your list of New Year’s resolutions if you are an auditor. The items listed are frequently found in AICPA peer reviews and PCAOB inspections. I hope they serve as a gentle reminder of things to do, or not do, in your audit, compilation, and review engagements in 2011.

GAAP Departures
• Improperly classifying certain liabilities as long-term rather than current.
• Failing to properly identify a loan as a loan to a related party.
• Improperly classifying a legal settlement as an extraordinary item.
• Failing to properly eliminate intra-entity revenues and the related costs of sales in consolidations.
• Improperly presenting investments in marketable securities at cost rather than fair value.
• Improperly accounting for asset retirement obligations.

Audit Deficiencies
• Failing to adequately test the existence, completeness, and valuation of revenue, including cutoff of revenue transactions.
• Improperly relying only on management representations when testing corroborating information was possible.
• When using substantive analytical procedures, failing to develop appropriate expectations and investigate significant unexpected differences.
• Failing to adequately test the valuation of goodwill and other long-lived assets.
• Failing to identify and evaluate conditions indicating that an entity may not be able to continue as a going concern.
• For entities that use a service organization, failing to consider the effects of the service organization on the entity’s internal control.

Reporting Deficiencies
• No dating of reports or dating them incorrectly.
• Inappropriately referring to GAAP in the accountant’s report when the financial statements were prepared on an OCBOA.
• Failing to disclose a lack of independence in a compilation report.
• Issuing an audit or review report when the accountant was not independent.

Financial Statement Presentation Items
• Failing to disclose all applicable accounting policies, such as significant advertising costs and revenue recognition.
• Misclassifying items on the cash flows statement.
• Failing to clearly segregate supplementary information or to mark it as supplementary.

HAPPY NEW YEAR and here’s to a successful and prosperous busy season.