Monday, February 1, 2016

501(c)(4) Organizations Face New Reporting Requirements

Organizations claiming exemption under IRC Section 501(c)(4) have received greater attention over the past two years amidst allegations of IRS targeting based on an organization's political and/or philosophical views.  Due to what is perceived by many as widespread unacceptable activity by (c)(4) organizations, there are various attempts to increase the regulation and oversight of these organizations.  One of these attempts was recently codified into law as a part of the recently enacted Protecting Americans from Tax Hikes (PATH) legislation.  Organizations formed under 501(c)(4) are now required to file an additional notification with the IRS.


Unlike organizations organized under IRC Section 501(c)(3), organizations exempt under 501(c)(4) have the ability to operate as exempt organizations without receiving official notification of exempt status from the IRS.  These organizations are categorized as "self declarers".  The organizations have to follow the rules and file the required annual Form 990, but they do not have to file an application with the IRS to have their exempt status recognized.  An organization may file a Form 1024, Application for Recognition of Exemption under Section 501(a), if it wishes to receive IRS approval and receive a determination letter from the IRS.  

New Law

PATH has enacted IRC Section 506 requiring organizations formed under 501(c)(4) to notify the IRS of the intent to operate as a 501(c)(4) organization.  Notification must be made to the IRS within 60 days of the formation of an organization created after December 18, 2015.  Additionally, notification is required by any organization in existence at December 18, 2015 that has never filed either an exemption application, Form 1024, or an annual information return, Form 990, 990-EZ or 990-N.   The due date for notification by existing organizations is June 15, 2016.   Failure to comply with the notification requirements carries of penalty of $20 per day up to a maximum of $5,000.  

The notification includes 1) the name, address and employer identification number of the organization; 2) the state laws under which the organization was formed; 3) the date of the organization's formation; and 4) a statement of the purposes of the organization. (This notification is not a request for recognition of an organization's exempt status.  A request for determination of the organization's exempt status is required to be made in addition to the notification required under IRC Section 506.)

Extended Due Date

Due to the need for the IRS to issue regulations regarding the operation of the notification requirement, the due date for the notifications has been extended to 60 days after the issuance of the temporary regulations.  (Notice 2016-9)  Therefore, organizations are not required to provide notification at this time.  

Once this notification is fully operational, there will be very little time between an organization's date of formation and when failure to comply penalties begin to accrue.  Therefore, it is critical that professional working with and organizers of these organizations understand the substantial change  required by IRC Section 506.  The new requirement transforms an organization being able to operate as a self declared organization with no specific notification to the IRS of its existence, other than filing its annual return, to being required to immediately inform the IRS of its existence and purposes.