With the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015, organizations exempt under Section 501(c)(4) face additional filing requirements. The IRS has just released a notice that clarifies the timeframe for complying with this new notification obligation.
Background on 501(c)(4) organizations.
501(c)(4) organizations, commonly known as social welfare organizations, must be primarily engaged in promoting the common good and general community welfare. They are exempt from federal income taxation, but are not eligible for tax-deductible contributions (unlike 501(c)(3) charities and foundations).
501(c)(4)s have been scrutinized over the last several years, largely due to their increased use in the political realm post-Citizens United. A long-standing feature of 501(c)(4) organizations (along with other non-501(c)(3) exempt organizations, such as trade associations) is that they do not have to file an application with the IRS to be recognized as tax-exempt. Rather, they can be a “self-declared” exempt organization, provided they meet all qualifications under 501(c)(4) and file an appropriate form of 990 each year.
Changes under the PATH Act.
The Path Act, which was signed into law on December 18, 2015, adds new Section 506 to the Internal Revenue Code. This requires a 501(c)(4) organization established after December 18, 2015, to provide notice to the IRS that it is operating as a 501(c)(4) organization within 60 days of its creation date. This 60-day period can be extended for reasonable cause.
In addition, the notification requirement applies to 501(c)(4) organizations that were in existence on December 18, 2015, but had not filed either a Form 1024 application for recognition of exemption or the applicable form of 990 on or before that date. In this case, notification is due no later than June 15, 2016, which is 180 days after the PATH Act’s enactment date.
For both new and covered existing organizations, the notification must include: (1) the name, address, and taxpayer identification number of the organization; (2) the date on which, and the state under the laws of which, the organization was organized; and (3) a statement of the purpose of the organization. The IRS must send the organization an acknowledgement of the receipt of its notification within 60 days.
The PATH Act also includes a provision allowing the IRS to impose penalties of $20 per day, up to a maximum of $5,000, for late filing of the notice.
New IRS Notice.
Notice 2016-9 clarifies that the due date for providing the notification is extended until at least 60 days from the date that the IRS issues temporary regulations implementing the notice requirement. No penalties will apply to an organization that submits the notification by the due date provided in the regulations.
Further, the notice clarifies that the IRS’s statutorily mandated acknowledgment that it received a notification under new Section 506 is not a determination that the organization qualifies for 501(c)(4) exempt status. Such a determination still must be separately requested using Form 1024.
Finally, the filing of Form 1024 continues to be optional and will not relieve an organization of the requirement to file the notification required under Section 506.