Section 501(c)(4) social welfare organizations face stepped-up IRS filing requirements under the newly enacted “Protecting Americans from Tax Hikes” (PATH) Act, which was signed into law on December 18, 2015. 501(c)(4)s have received much attention in recent years, particularly in the wake of the U.S. Supreme Court’s Citizens United decision and the advent of so-called “dark money.” Until now, 501(c)(4)s have not been legally required to obtain the IRS’s affirmative recognition of their tax-exempt classification. Rather, organizations could simply declare such status internally, provided that they annually filed a IRS Form 990 return. The PATH Act added Section 506 to the Internal Revenue Code and it imposes new requirements on 501(c)(4)s to clarify their tax-exempt classification.
A Quick Primer on Section 501(c)(4)s
Section 501(c)(4) organizations fall into the Tax Code’s broad catchall category for organizations that benefit society but do not fit within its other exemption categories. 501(c)(4)s are nonprofit entities under state law, and they are tax-exempt organizations under the Internal Revenue Code. Unlike Section 501(c)(3) public charities, however, they do not qualify for tax-deductible contributions.
To qualify under Section 501(c)(4), organizations must be “primarily” engaged in promoting the common good and general community welfare and not be “primarily” engaged in political campaign activities. 501(c)(4)s are generally free to promote “social welfare” as they deem fit, even if that means extensive lobbying efforts.
Former Section 501(c)(4) Filing Practices
Some 501(c)(4)s have opted to seek the IRS’s written recognition of their tax-exempt status through filing an IRS Form 1024 application, for example to confirm that they are not political action committees (“PACs”). Although PACs are also tax-exempt, they must be “primarily” engaged in political campaign activities. PACs are subject to vastly different reporting requirements, including public disclosure of donors’ identities. In contrast, 501(c)(4)s are not required to make their donors’ identities public.
Some 501(c)(4)s have not sought formal recognition of their tax-exempt classification. Annual Form 990s may provide sufficient substantiation for 501(c)(4) status. But when organizations fail to file the required Form 990 returns for at least three consecutive years, they are subject to the IRS’s automatic revocation rules and will lose their tax-exempt status entirely. Without any IRS filings, however, these organizations will not have the benefit of any IRS notice regarding such revocation, since the IRS has not been notified of their existence.
New Rule for New Section 501(c)(4) Organizations
Under the PATH Act, new 501(c)(4)s created after December 18, 2015, now must notify the IRS of their intention to operate under Section 501(c)(4) within 60 days of their formation. The notice must include the organization’s name, address, and employer identification number, along with the date the organization was formed, the state in which it was organized, and a statement of the organization’s purpose.
New Rule for Previously Existing Section 501(c)(4) Organizations
The PATH Act also applies to certain previously existing 501(c)(4)s. For 501(c)(4) organizations created prior to December 18, 2015, the notification requirement is similar, just with a longer time to comply. If the organization has not filed an IRS Form 1024 application requesting official recognition of its exemption and has not previously filed an annual information return (IRS Form 990 series), the organization must notify the IRS of its existence with the same information as above by June 16, 2016. But if the organization has previously filed a Form 990, such filing will legally suffice for its IRS notification requirement.
Method of Notification and Application for Exemption
The IRS has neither established a form for the new notice requirement nor indicated where the notice should be sent. The IRS has indicated, however, that it is working on regulations related to the new Section 506 and that organizations will have at least 60 days from the date the regulations are implemented to complete their notice. For now, organizations should just wait. Once the IRS has caught up with the new legislation, there will be a user fee for submission of the notice, as well. After submission of the notice, the IRS is required to acknowledge its receipt within 60 days. Notably, the acknowledgment does not mean the IRS formally recognizes the organization’s Section 501(c)(4) tax-exempt classification; a separate form must be completed if the organization would like such assurance.
Until now, 501(c)(4) organizations wishing to have the IRS recognize their exemptions (rather than self-declaring) have used IRS Form 1024 to do so. The new Internal Revenue Code Section 506 indicates that this is no longer the case. Instead, the IRS will create a new form that clearly indicates that it is an optional form. While the PATH Act did not make clear whether organizations can use Form 1024 in the meantime, the IRS has stated that this is the proper course of action for organizations choosing to apply for exemption before the IRS has prepared a new form and adopted new regulations. (See IRS Notice 2016-09.) Notably, filing the Form 1024 will not meet the new notice requirement; the organization will still have to submit a notice as described above.
Penalties for Failure to File
If a Section 501(c)(4) organization does not timely file the new required notice with the IRS, the IRS may assess penalties of $20 per day up to $5,000 total. An extension may be available, though, for organizations with reasonable cause for late filing. The same amounts may also be assessed as penalties directly against the organization’s managers if the IRS makes a demand for submission of the notice and they do not respond.
Potential Additional Reporting for Self-Declared 501(c)(4)’s
The new Code Section 506 provides that the IRS may require additional information to support 501(c)(4) qualification, as part of a self-declared 501(c)(4)’s Form 990 return. To avoid the user fee required to submit a full exemption application, it may make sense for some organizations simply to provide the notice and then submit any extra information required with the initial return.
For optimal clarity, however, it may be prudent to file the IRS application (currently Form 1024), particularly if the organization is actively involved with politics. Leaders of existing Section 501(c)(4) organizations that have not yet filed an IRS Form 1024 should seriously consider filing it now – or using the IRS’s new form once it is issued.