Church Audit Checklist: Governance, Clergy Pay, and UBI

A church audit checklist pulls together the governance records, contribution and disbursement documentation, payroll filings, bank reconciliations, and asset records a CPA will ask for before starting an engagement. Getting these in one place before the auditor arrives shortens the fieldwork, keeps costs down, and surfaces the small problems (a missing receipt, an unrecorded signer) while they are still small. The list below walks through what actually gets requested, why each item matters under federal law, and where churches most often fall short.

First Decide Which Engagement You Actually Need

Not every church needs a full audit. CPAs offer three tiers of service, and the wrong choice either wastes money or produces a report your lender or denomination will not accept.

A compilation assembles your statements into proper format with no assurance the numbers are accurate; the CPA need not even be independent. A review requires an independent CPA and provides limited assurance through inquiry and analytical procedures, and it fits most mid-sized churches with a mortgage or denominational reporting. A full audit requires independence, testing of internal controls, fraud risk assessment, and verification procedures before the CPA issues an opinion on the statements. Full audits are what significant loans and some denominational thresholds require, and they typically run $7,000 to $15,000 for a mid-sized church.

The checklist that follows is written for a full audit. A review engagement calls for most of the same documents.

Governance and Foundational Documents

Auditors start here because these papers define what the church is legally allowed to do with its money.

  • Articles of Incorporation and all amendments
  • Current bylaws
  • IRS determination letter, if the church applied for one
  • Board meeting minutes for the fiscal year
  • A current list of authorized signers on every bank account and credit card, with the board action approving each

Churches are automatically tax-exempt under Section 501(c)(3) and are not required to apply for a determination letter, but many do because donors, grantors, and banks want to see one.1Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches If your church never applied, be ready to show how you document exempt status for third parties.

In the minutes, auditors look for specific authorization of the annual budget, large expenditures, compensation packages, and any policy changes during the year. One of the most common findings is a former staff member still listed as an authorized signer months after leaving.

Contributions and Other Revenue

This is where most audit-prep time goes and where auditors find the most problems. For weekly offerings, count sheets signed by at least two unrelated counters are the primary document. The auditor compares those sheets against bank deposit slips and reports from any electronic giving platform to confirm every counted dollar reached the bank.

Contribution receipts have to meet federal substantiation rules. For any single gift of $250 or more, the church must provide a written acknowledgment stating the organization’s name, the cash amount or a description (not the value) of non-cash property, and whether any goods or services were given in return.2Internal Revenue Service. Charitable Contributions: Written Acknowledgments IRS Publication 1771 sets out the full framework.3Internal Revenue Service. Publication 1771 – Charitable Contributions – Substantiation and Disclosure Requirements

Quid Pro Quo Disclosures Over $75

When a donor gets something of value back for a payment over $75 (a fundraiser dinner, event tickets, a book), the church must give a written disclosure that limits the deductible amount to the payment minus the fair market value of what was received, and includes a good-faith estimate of that value.4Internal Revenue Service. Charitable Contributions: Quid Pro Quo Contributions Intangible religious benefits like admission to a worship service are excepted. Have samples of these disclosures ready if you hold banquets, auctions, or similar events.

Restricted Fund Documentation

If donors gave to a building fund, mission trip, benevolence fund, or any other designated purpose, the auditor will trace whether those dollars were spent on what the donor intended. Redirecting restricted gifts to general operations without donor consent is a serious finding. Keep a separate ledger or account code for each restricted fund and document every disbursement against the stated purpose.

Expenses and Disbursements

Every payment needs a paper trail from authorization to the bank. Have originals or scans of invoices and purchase orders showing the business purpose, matched to cancelled checks or digital payment confirmations. If you use purchase orders, the approved amount should match the final invoice.

Credit card statements need individual receipts for every transaction; a monthly statement alone will not satisfy the auditor. Where multiple staff carry cards, each card should be reconciled monthly and reviewed by a supervisor.

The Accountable Plan Rules

Staff reimbursements for travel, meals, and ministry purchases have to follow an accountable plan. Federal regulations require three things: a business connection to the church’s mission, substantiation of the expense within 60 days, and return of any excess reimbursement within 120 days.5eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements If the rules are not enforced, the reimbursements become taxable wages, producing back taxes and penalties. This is one of the most common payroll problems auditors find. Pull your written accountable plan and a sample of reimbursement submissions.

Payroll and Clergy Compensation

Payroll is the most compliance-heavy area, mainly because ministers are not taxed like anyone else. Have these ready:

Housing Allowance Designation

A minister can exclude a housing allowance from gross income, but only up to the least of three amounts: what the church’s governing body officially designated in advance of payment, what the minister actually spent on housing, or the fair rental value of the home with furnishings and utilities.10Office of the Law Revision Counsel. 26 USC 107 – Rental Value of Parsonages

“In advance” is doing real work in that sentence. If the board did not formally designate the allowance before payments began, the exclusion is lost for that period. Auditors will look for the board resolution or minutes setting the amount before the start of the tax year (or before the minister’s start date) and check that the number is reasonable against local fair rental values.11Internal Revenue Service. Ministers’ Compensation and Housing Allowance

Clergy Dual Status

A minister employed by a church is a W-2 employee for income tax but self-employed for Social Security and Medicare, paying SECA rather than having FICA withheld.12Internal Revenue Service. Publication 517 – Social Security and Other Information for Members of the Clergy and Religious Workers The church should not withhold Social Security or Medicare from a minister’s pay. Many churches get this wrong. The auditor will check that clergy payroll was processed under both systems correctly.

Contractor Classification

Beyond the 1099-NEC filing itself, auditors look at whether workers labeled as contractors are really employees based on how much control the church exercises over their work. Misclassification produces liability for unpaid employment taxes.

Conflict of Interest and Insider Compensation

Have your written conflict of interest policy ready, along with signed disclosure statements from board members and officers. The policy should require disclosure of any financial or personal interest that could influence a church decision, and abstention from votes involving a conflict.

The IRS backs up these principles through excess benefit transaction rules. When a church insider (a pastor, board member, or other person with substantial influence) receives compensation or benefits beyond what is reasonable for the services provided, the excess amount triggers a 25% tax on the insider. Any board member who knowingly approved the transaction can be personally liable for a 10% tax. If the excess is not repaid within the correction period, an additional 200% tax applies.13Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions

To defend against this, keep documented comparability data showing that compensation packages were benchmarked against similar organizations before approval. A board vote on salary with no market research behind it is a red flag even when the amount is reasonable. The process matters as much as the number.

Unrelated Business Income

Churches owe income tax on activities unrelated to their religious mission. Renting the parking lot to a weekday business, running a coffee shop open to the public, or selling bulletin advertising can all generate unrelated business income. If gross income from these activities reaches $1,000 or more in a year, the church must file Form 990-T and pay tax on the net.14Internal Revenue Service. Instructions for Form 990-T (2025)

This one catches churches off guard because they are otherwise exempt from Form 990 filing. The threshold is measured on gross income (receipts minus cost of goods sold), not net profit. Pull together rental agreements, advertising contracts, and records for any revenue that is not directly tied to worship, education, or charitable programs so the auditor can decide whether a 990-T is owed.

Bank Statements, Reconciliations, and Fixed Assets

Gather every monthly bank and investment statement for the fiscal year, along with year-end reconciliation reports that tie to your internal ledger. Outstanding checks, deposits in transit, and unexplained adjustments are exactly what an auditor is trained to flag. If reconciliations were done monthly all year, this step is quick. If nobody reconciled since last audit season, expect extra billable hours.

For physical assets, have:

  • Property deeds and vehicle titles
  • An updated equipment inventory (sound systems, computers, furniture) with purchase dates, cost, and depreciation schedules
  • Insurance policies at current replacement value
  • Loan agreements and current mortgage statements showing principal balance, interest rate, and payment history

How Long to Keep Church Records

The IRS recommends keeping most tax-related financial records for at least three years from the filing date, extending to six years if more than 25% of gross income may have gone unreported, and indefinitely if no return was filed.15Internal Revenue Service. How Long Should I Keep Records? Employment tax records should be kept at least four years. Articles of incorporation, bylaws, and the IRS determination letter are permanent records. When in doubt, keep it longer.

What a CPA Audit Is Not

A voluntary audit by your CPA is a private engagement your church controls. It is not an IRS church tax inquiry, which is a separate federal process with its own rules. Under 26 USC 7611, the IRS cannot start a church tax inquiry unless a high-level Treasury official has a documented, reasonable belief the church does not qualify for exemption or is engaged in taxable activity, and the church has notice and conference rights before any examination begins.16Office of the Law Revision Counsel. 26 USC 7611 – Restrictions on Church Tax Inquiries and Examinations17Internal Revenue Service. 4.70.19 Church Tax Inquiries and Examinations Under IRC 7611 Those protections are worth knowing about, but nothing in them changes the checklist above. The documents an outside CPA needs are the same documents that let a church answer any question about its finances confidently, whoever is asking.