Unlike Section 501(c)(3) organizations, which must apply to the IRS for recognition of tax-exempt status, Section 501(c)(4) social welfare organizations, Section 501(c)(6) business leagues and others are able either to apply to the IRS for a determination letter recognizing tax-exempt status or to "self-declare" tax-exempt status by conducting operations in a manner consistent with tax-exempt status.
Until recently, if a self-declared organization later applied for a determination letter from the IRS, it would usually receive a letter recognizing its tax-exempt status retroactively to the date of that organization's formation, regardless of the length of time between the date of its formation and the date of its application to the IRS.
However, on January 7, the IRS issued Revenue Procedure 2013-9, which provides, among other things, that a self-declared organization that applies for a formal determination letter more than 27 months after its formation will now normally receive a letter recognizing its tax-exempt status from the date of its application rather than from the date of its formation. This is similar to the rules that always applied to Section 501(c)(3) organizations, which allow for retroactive recognition of determination only if the organization applies within 27 months of its formation.
In addition, the IRS recently announced it is undertaking a voluntary compliance check of more than 1,300 self-declared organizations. Selected organizations will be asked to complete a questionnaire (Form 14449) designed to provide extensive information to the IRS as to the organization's operations. Completion of the questionnaire is voluntary, but the IRS may choose to open a formal audit investigation into any organization that refuses to participate. Of course, the IRS may open a formal audit investigation in any event, based on the information disclosed by an organization that voluntarily completes the questionnaire.
The questionnaire requests information regarding revenues, expenses, activities (including political campaign activities), executive compensation and benefits. Perhaps most important, question 6 in Part I asks the organization to describe the reasons why it did not apply to the IRS for recognition of its tax exemption. The questionnaire can be found at http://www.irs.gov/pub/irs-tege/Form14449.pdf.
Of course, at this time there are ongoing congressional hearings to investigate the IRS' use of inappropriate criteria to delay the exemption applications of certain social welfare conservative groups (based on names such as "Tea Party" and "Patriot"), and it is unclear what impact this may have on the IRS' planned voluntary compliance check of self-declared organizations. As a result of this scandal, new leadership is in place at the IRS; acting IRS Commissioner Steven Miller has resigned and Lois Lerner (director of exempt organizations at the Internal Revenue Service) has been placed on administrative leave.
In addition, new regulations adopted on June 5 by New York State Attorney General Eric T. Schneiderman (which are effective immediately) now require certain disclosures by Section 501(c)(4) organizations and other nonprofits that are registered with the New York Attorney General under Article 7-A of the New York Executive Law and/or Article 8 of the New York Estates, Powers and Trusts Law.
These organizations (other than Section 501(c)(3) organizations) must now submit itemized schedules with their annual financial reports, disclosing the amount and the percentage of the organization's total expenses during the reporting period that are "election related expenditures" (those made for express election advocacy or election targeted issue advocacy, as defined in the regulations).
In addition, organizations that spend more than $10,000 per year on New York state and local elections must also disclose:
- each expenditure of $50 or more made in connection with a New York state or local election (including the recipient's name, the date, the amount and the purpose); and
each contribution of $1,000 or more received from a single donor, including the donor's name, employer (if known), the amount and date of the contribution; provided, however, that this information need not be disclosed if:
- the contribution was made to a segregated fund that is not used for electioneering in New York; or
- the organization or the donor applies for a waiver from the New York Attorney General after establishing that there is a reasonable likelihood that disclosure of donor's name will cause undue harm, threats, harassment or reprisals.
These itemized schedules will be made available to the public on the New York Attorney General's website.
AG Schneiderman explained the rationale for the new regulations in a statement, saying, "There is only one reason to funnel political spending through a 501(c)(4), and that is to hide who has bankrolled the effort. By shining a light on this dark corner of our political system, New York will serve as a model for other states, and for the federal government, to protect the integrity of nonprofits and our democracy."