Certain 501 (c)(4) organizations now have a requirement to notify the IRS that they are claiming tax-exempt status under IRC section 501c4. In the video above I explain the basics of the new rules and how to comply.
Understanding the New 501(c)(4) Rules
There are many types of tax-exempt nonprofit organizations. Two of the most common are the 501(c)(3) public charity, and the 501(c)(4) social welfare organization. There are three main differences between these organizations:
- A 501(c)(3) public charity is eligible to receive donations that are deductible as a charitable contribution on the donor’s tax return. A 501(c)(4) organization can receive donations tax-free, but they are not deductible as charitable contributions on the donor’s tax return.
- A 501(c)(3) public charity is subject to strict limits as to the amount of money it can expend on lobbying to influence legislation. A 501(c)(4) organization can engage in lobbying as its primary activity.
- A 501(c)(3) public charity is absolutely prohibited from engaging in any political speech undertaken to influence an election. A 501(c)(4) organization is not prohibited from attempting to influence elections by political speech, but influencing elections cannot be the primary purpose of a 501(c)(4). Note that all election-related activities are not limited. For instance, voter registration and non-partisan voter education activities are not considered activities that influence an election and can be engaged in by a 501(c)(4) organization in an unlimited amount.
Both types of organizations are prohibited–at least in theory–from disseminating propaganda.
Since Congress and the IRS create the rules under which tax-exempt organizations operate, those official bodies have an interest in monitoring the activities of organizations claiming to be tax-exempt under the laws and regulations. Section 508 requires most 501(c)(3) organizations to let the IRS know of their existence and that they are operating under section 501(c)(3). Churches are exempt from this notice requirement.
Until now, there has been no requirement that 501(c)(4) organizations notify the IRS of their existence beyond the filing of Form 990.
Why is filing Form 990 not enough to satisfy Congress and the IRS? It has to do with time. Because 501(c)(4) organizations have the ability to influence an election, and because electioneering cannot be the primary activity of a 501(c)(4), the IRS must somehow be able to monitor the extent of the electioneering activities of c4’s in a timely fashion, and must be able to do so without violating the rights of the organizations.
Since 501(c)(4) organizations have not had a requirement to notify the IRS up front, there is no way for the IRS and Congress to monitor the political activities of these organizations. The filing of Form 990 does serve as notice to the IRS, but a tax-exempt organization can delay the filing of a tax return for quite some time. As a typical example, assume that a 501(c)(4) organization is incorporated on January 1, 2016. The following is a typical timeline for filing a Form 990:
- The organization operates for a full 12 months after formation. (Elapsed time: 12 months)
- The organization’s first return is due four and one-half months after its year end. (Elapsed time: 16 1/2 months)
- The organization is allowed extensions of the Form 990 filing deadline of up to six months. (Elapsed time: 22 1/2 months).
As you can see, a new organization may not have to submit its first filing for 22 1/2 months, which is more than enough time to exert political influence.
As part of the Protecting Americans From Tax Hikes Act of 2015, Congress added section 506 to the Internal Revenue Code. This created the new notice requirement for 501(c)(4) organizations.
Essentially, the requirement is that all new organizations claiming to be tax-exempt under section 501(c)(4) are required to notify the IRS of their existence and their intent by electronically submitting the newly created Form 8976 within 60 days of formation. That’s not much time.
I won’t go into the entire history of the implementation of this new law. Suffice it to say that when Congress passed the law, the IRS was not ready to implement it. As a result there were some extensions of time to comply and some transition rules put into place. These can be confusing. All you really need to know to meet the filing deadlines (and avoid penalties) is this:
- If the organization was formed after July 8, 2016, it has 60 days to notify the IRS by electronically submitting Form 8976.
- If the organization was formed on or before July 8, 2016, it has until September 6, 2016 to notify the IRS by electronically submitting Form 8976.
- If the organization was formed on or before July 8, 2016 and by that date has filed either Form 990 or Form 1024, it does not have to submit Form 8976.
Penalties for submitting the Form 8976 after the due date are $20 per day up to a maximum of $5,000. Penalties can be abated if the organization can show that it had reasonable cause for submitting Form 8976 after the due date.
Early reports are that the IRS website for submitting Form 8976 has some bugs that may prevent some organizations from properly completing the form. I expect that these bugs will eventually be worked out. However, if problems with the IRS website prevent an organization from filing Form 8976 by the due date, this should constitute reasonable cause for filing late.
PATH Act of 2015 (scroll to section 405)