The recently enacted Protecting Americans from Tax Hikes Act (“PATH Act”) imposes a new requirement for Code Section 501(c)(4) social welfare organizations to notify the IRS of their existence within sixty (60) days of their incorporation.
Application. The new notification requirement applies to social welfare organizations that are established after December 18, 2015, and on certain organizations existing on that date. Specifically, organizations that were in existence before December 18, 2015 will have to file if they have not, on or before that date:
- Filed Form 1024 requesting a formal determination exemption under Code Section 501(c)(4); and
- Filed at least one annual Form 990, Form 990-EZ or Form 990-N.
The PATH Act also amended sections 6033(f) and 6652(c), relating to required annual information returns by tax-exempt organizations and penalties for failures to file such returns, respectively. In addition, any 501(c)(4) organizations that wish to seek declaratory judgment concerning tax-exempt status may do so under Section 7428; an option previously only available to 501(c)(3) organizations.
Deadline to Provide Notice. The new law provides that organizations already in existence will have one hundred eighty (180) days from the date that PATH was enacted (or until June 15, 2016) to notify the IRS of their existence. However, the IRS issued Notice 2016-09 extending the notice date to 60 days following the release of temporary regulations interpreting newly enacted Code Section 506. The Temporary regulations will prescribe the manner in which new organizations must notify the IRS of their intent to operate under Code Section 501(c)(4).
Content of Notice. The notification must include:
- The organization’s name, address, and taxpayer identification number;
- The date of organization
- The state in which the organization was organized; and
- A statement of the organization’s purpose.
It is anticipated that the IRS will develop a form, perhaps similar to the 990-N e-postcard, to provide the required notice and that there will be a user fee associated with the form.
Late Filing Penalties. Social welfare organizations that fail to provide timely notice of their incorporation are subject to a penalty of $20 per day, up to a maximum of $5,000. A similar penalty is imposed on persons who fail to timely submit the notification in response to a written request by the Secretary. The 60-day notice period may be extended for reasonable cause.
Impact of Notice. Prior to this notice requirement, 501(c)(4) organizations could “self-declare” that they were described in Code Section 501(c)(4) without ever notifying the IRS of their existence. While the IRS would ultimately be notified of the organization’s existence when the organization submitted its Form 990 Tax Return, the initial Form 990 could, in some cases, be filed over a year after the organization’s initial formation. Thus, in election years, 501(c)(4)s could self-declare, influence the election, and dissolve before the IRS was even aware of its existence, hampering enforcement. Requiring a notice upon formation will permit the IRS to more closely monitor such organizations, particular during election years.
Self-declared Organizations. While the IRS must acknowledge the receipt of an organization’s Section 506 notice, the Section 506 notice acknowledgement will not be treated as an IRS determination of tax status. Still, the requirement to provide a notice does not prevent organizations from self-declaring their 501(c)(4) status. Organizers will still have a decision to make regarding whether they want to self-declare 501(c)(4) status or obtain a formal IRS determination of tax-exemption. Organizations that wish to obtain a formal IRS determination of their tax status will still need to submit a Form 1024 exemption application and user fee to the IRS.
 I.R.C. § 506(b).
 I.R.C. § 6652(c)(4)(A).
 I.R.C. § 6652(c)(4)(B).
 I.R.C. § 506(3).
 I.R.C. § 506(d).
 I.R.C. § 506(c).
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide. If you are seeking legal advice, contact firstname.lastname@example.org or 602-456-0071 for information about our services.