Organizations that claim federal tax-exempt status under Section 501(c)(4) must comply with new procedures for notifying the IRS of their intent to operate under Section 501(c)(4), or face potential penalties. The IRS has announced that organizations formed on or before July 8, 2016 that have not formally applied for Section 501(c)(4) status or filed an IRS Form 990 are required to file a Form 8976, Notice of Intent to Operate Under Section 501(c)(4), with the IRS by Sept. 6, 2016. Organizations formed after July 8, 2016 that claim Section 501(c)(4) status must file the Form 8976 within 60 days of their date of formation.
Organizations that claim Section 501(c)(4) tax-exempt status, such as organizations formed to support campaigns for referenda and initiatives and other organizations formed to promote social welfare, often through legislative lobbying and limited electioneering activities, are not technically required to apply to the IRS for recognition of Section 501(c)(4) status. Many organizations do apply, in order to ensure that the IRS will treat them as exempt from federal income tax. But some Section 501(c)(4) organizations have historically been formed for an election cycle and dissolved shortly afterwards without ever filing an application for exemption or the required annual information Form 990. Regulatory authorities have had limited ability to identify such organizations and enforce compliance.
The U.S. Congress addressed this issue in December 2015 by adding a new provision to the Internal Revenue Code: Section 506. The new provision requires any organization that intends to operate as a Section 501(c)(4) organization to provide notice of its intention to the IRS within 60 days of its formation.
The new notice requirement applies to organizations that claim Section 501(c)(4) status regardless of the nature of their activities. It applies equally, for example, to nonprofit healthcare organizations, associations of employees, and organizations primarily engaged in lobbying.
While the new Section 506 went into effect on Dec. 18, 2015, the IRS delayed implementing the notice requirement until it could issue additional guidance. On Jan. 19, 2016, the IRS issued Notice 2016-09, which extended the due date for submitting the notice of intent to operate as a Section 501(c)(4) organization until at least 60 days from the issuance date of implementing regulations, in order to provide adequate transition time for organizations to comply with the new requirement.
On July 8, 2016, the IRS issued temporary implementing regulations (Treasury Regulation § 1.506-1T), along with Revenue Procedure 2016-41, which describes the process for a Section 501(c)(4) organization to satisfy the notice requirement. Accordingly, the Section 506 notice requirement is now operative and the first due date of Sept. 6, 2016 is rapidly approaching.
Organizations Required to File the Notice
Under the procedures released on July 8, 2016, an organization that claims Section 501(c)(4) status is subject to the 60-day notice requirement and must file a Form 8976 if:
- It was organized after July 8, 2016; or
- It was organized on or before July 8, 2016, and did not either apply to the IRS for a determination of Section 501(c)(4) status on IRS Form 1024 or file at least one annual information return with the IRS on IRS Form 990, 990-EZ or 990-N on or before July 8, 2016.
An organization is not required to file the notice on Form 8976 if it applied to the IRS for a determination of Section 501(c)(4) status on IRS Form 1024 or filed at least one annual information return on IRS Form 990, 990-EZ or 990-N on or before July 8, 2016.
Form 8976 is a one-time filing, rather than an annual filing. Only organizations that claim status under Section 501(c)(4) must file the Form 8976. Section 501(c)(3), 501(c)(6), and other categories of tax-exempt organizations are not required to file Form 8976.
An organization that is required to file the notice on Form 8976 must generally file within 60 days of its date of organization, subject to the exception noted below for organizations organized on or before July 8, 2016. For a corporation, the date of organization is the date on which its charter or articles of incorporation were approved by the appropriate state official. For an organization formed as an unincorporated association, the date of organization is the date on which its constitution or articles of association were adopted.
An organization that was organized on or before July 8, 2016, and did not either apply to the IRS for a determination of Section 501(c)(4) status on IRS Form 1024 or file at least one annual information return on IRS Form 990, 990-EZ or 990-N on before July 8, 2016, must file the notice on or before Sept. 6, 2016.
How to File Form 8976
The Form 8976 must be completed and submitted online through the IRS’s Form 8976 Electronic Notice Registration System, available at https://services.irs.gov/registration/. An individual authorized to submit the notice on behalf of the organization must first create an account tied to a specific email address before completing and submitting the Form 8976.
To complete the Form 8976, the organization must provide the following information:
- Employer Identification Number,
- Date of organization,
- State or other jurisdiction of organization,
- Month that its annual accounting period ends, and
- Whether its purpose is to operate as: (i) a social welfare organization/civic league, or (ii) local association of employees (the categories of Section 501(c)(4) organizations that are set out in the Internal Revenue Code).
In addition, the individual submitting the Form 8976 must attest that the information provided is correct and that he or she is authorized to submit the notice on behalf of the organization.
A user fee of $50 applies, and must be paid online at www.pay.gov.
IRS Acknowledgement of Receipt
Under the procedures set out in the temporary regulations, when an organization properly submits the Form 8976 with the user fee, the IRS will send the organization an electronic acknowledgement of its receipt of the notice within 60 days. Separately, the electronic platform for submitting the Form 8976 will also automatically send a confirmation of transmittal to the organization when the Form is submitted. This automatic confirmation is not the same as the IRS acknowledgement of receipt and does not confirm that the Form 8976 was properly completed and received with the user fee.
Relationship to Form 1024 Application for Recognition of Exemption under Section 501(c)(4)
Organizations should be aware that providing notice to the IRS on Form 8976 is not an application to the IRS for recognition of the organization’s tax-exempt status as a Section 501(c)(4) organization, and the IRS acknowledgement of receipt of the Form is not a determination that the organization qualifies under Section 501(c)(4).
An organization that wishes to obtain assurance that the IRS will treat it as a Section 501(c)(4) organization must still submit the much more detailed IRS Form 1024 application, as was the case prior to the new notice requirement. For many organizations, it will still be desirable to apply for Section 501(c)(4) status using the Form 1024. Organizations planning to file an IRS Form 1024 application after July 8, 2016 should note, however, that they are still nonetheless required to comply with the Section 506 requirement to file Form 8976 within 60 days of formation.
Relationship to Annual Form 990 Information Return Filing Requirement
Whether or not an organization that claims Section 501(c)(4) status submits a timely notice on Form 8976, it must still file an annual information return with the IRS on Form 990, 990-EZ or 990-N. Failure to file the annual information return for three consecutive years will result in automatic revocation of federal tax-exempt status.
Penalties for Failure to Provide Notice
An organization that fails to submit a completed Form 8976 by the due date is subject to a penalty of $20 for each day during which the failure continues, up to $5,000.
The IRS may send a written demand to an organization that has failed to file a timely Form 8976, requesting that the organization submit the Form by a specific date. If the organization fails to do so, the IRS may impose a penalty on the person(s) responsible for the failure of $20 for each day after the date specified in the demand during which the failure continues, up to $5,000.