As the IRS Exempt Organizations division indicated in its 2013 work plan, it is conducting a compliance check of self-declared tax-exempt organizations. The IRS recently mailed over 1,300 questionnaires to self-declared Section 501(c)(4), 501(c)(5), and 501(c)(6) organizations. The project is part of the IRS’ plan to gather information about self-declared exempt organizations, determine whether self-declared exempt organizations are complying with applicable tax-exempt law, and increase voluntary compliance.
The questionnaires are going to entities that claim exemption under Sections 501(c)(4), (5) or (6) and filed Form 990 in 2010 or 2011 but have not applied to the IRS for a formal determination of exemption. Unlike most Section 501(c)(3) organizations, the law permits such organizations to self-declare their tax-exempt status without applying to the IRS for formal recognition of exemption.
Content of Questionnaire
The questionnaire contains general questions about the organization including questions about the organizations’ activities, related organizations, revenue and expenses, and compensation practices. The questionnaire also includes a number of questions regarding political activity including activity related to political campaigns. The questionnaire also explores relationships between affiliated organizations, unrelated business income tax, and compensation issues.
Focus on Political Campaign Activity
While the law permits 501(c)(4), (5) or (6) organizations to engage in some political campaign activity, political campaign activity must not be their primary purpose. In recent years, 501(c)(4) organizations’ political activity has been rising. The steadily increasing 501(c)(4)s for political purposes has triggered members of Congress, the IRS and various advocacy groups focus their attention on whether such organizations are complying with the legal limits on their political campaign activities. T
Although the questionnaire is a voluntary compliance tool, the compliance check could be elevated to an audit if the organization does not complete the questionnaire or gives answers that indicate there may be compliance issues. Accordingly, organization receiving a compliance check letter regarding their self-declared tax-exempt status may want to seek advice and counsel in formulating a response.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.