On December 18, 2015, President Obama signed the Consolidated Appropriations Act, 2016 (the "Act") into law. Among the Act's many appropriations, extenders, and tax cuts are several provisions that impact the shaky relationship between the IRS and Section 501(c)(4) organizations. The provisions limit the extent to which the IRS can issue guidance affecting Section 501(c)(4) organizations, require such organizations to notify the IRS of their formation, and make other clarifying changes. At least some of these new provisions appear to be in response to the IRS's alleged targeting of conservative organizations, which came to light in May 2013 and the Act clarifies that IRS employees who take official actions for political reasons may be terminated.
Limitation on Guidance
The Act allocates $11.2 billion to the IRS, but the money comes with strings attached. The Act prohibits the IRS from using federally appropriated funds to implement any regulation, revenue ruling or other guidance not limited to a particular taxpayer relating to the standard used to determine whether a Section 501(c)(4) organization is operated exclusively for the promotion of social welfare. This restriction is aimed at preventing the IRS from developing a uniform standard to determine whether a Section 501(c)(4) organization has engaged in too much political activity, similar to regulations proposed in December 2013 and withdrawn in May 2014. The IRS is still permitted to continue to make this determination on a case-by-case basis, as it did last year.
New Notification Process
Most Section 501(c)(4) organizations are not required to request IRS recognition of their tax-exempt status. Rather, the organizations are exempt if they satisfy the requirements applicable to such organizations, including filing an annual information return (Form 990).
The Act requires a newly formed Section 501(c)(4) organization to provide the IRS notice of its formation and intent to operate as such an organization. The Act also requires Section 501(c)(4) organizations to provide additional information with their first annual information return that supports qualification for Section 501(c)(4) status, in accordance with regulations to be issued by the IRS.
The notice, together with a to-be-determined user fee, must be provided no later than 60 days following the organization's formation, unless the IRS grants an extension for reasonable cause. The notice must include:
- The name, address, and taxpayer identification number of the organization
- The date on which, and
- the state under the laws of which, the organization was organized
A statement of the purpose of the organization
Within 60 days of receipt of the notice, the IRS must issue an acknowledgment of the notice. Both the notice and acknowledgement are subject to public disclosure requirements. An organization that fails to file the notice within 60 days of its formation is subject to a per-day penalty of $20, up to a maximum of $5,000.
The new requirements are effective for organizations formed after December 18, 2015. Existing organizations that have not filed an application for exemption (Form 1024) or an annual information return (Form 990) must provide the notice by June 15, 2016.
The Joint Committee on Taxation's Technical Explanation of the Act clarifies that the notification process is in addition to, not in lieu of, an application for exemption. However, the Technical Explanation also indicates that Congress intends for the IRS to issue a new form for Section 501(c)(4) organizations to apply for exemption. Such organizations must await further guidance from the IRS on how it intends to execute the new requirements.
The Act codifies the administrative appeals process for adverse determinations and extends declaratory judgment provisions to all Section 501(c) applicants, including entities seeking exemption under Section 501(c)(4).
The Act also clarifies that the gift tax does not apply to contributions to 501(c)(4) organizations. The IRS had previously considered providing additional guidance on this topic and left open the possibility that the gift tax would apply.