The Internal Revenue Service has issued new procedures on how 501(c)(4) social welfare groups must comply with the recently enacted requirement to notify the IRS of their existence. (Rev. Proc. 2016-41)
The requirement was included in the 2015 tax act (See Nonprofit Issues®, January, 2016) in the aftermath of the IRS “scandal” delaying recognition of potentially political 501(c)(4) organizations. Because (c)(4) social welfare organizations, unlike 501(c)(3) charities, are not required to obtain a determination of exemption, many have failed to notify the IRS of their existence and have operated largely under the radar and unknown to the IRS. The 2015 law added a new section 506 to the Tax Code that does not require (c)(4) organizations to obtain official recognition of their status, but requires them to tell the IRS that they exist.
The IRS says that a self-proclaimed (c)(4) organization must notify the IRS of its existence by filing a new electronic Form 8976 and pay a $50 user fee for the opportunity. The Form will ask for the name and address of the organization, its Employer Identification Number, date and jurisdiction of organization, month in which its fiscal year ends, and a statement whether its purpose is to operate as a social welfare organization/civic league, or a local association of employees (that also qualify under 501(c)(4)).
The individual filing the Form must establish an IRS registration account in order to submit the form electronically. The IRS will use that account for any correspondence related to the filing, including confirmation of receipt or a notice of non-acceptance if it is not necessary or is incomplete.
The IRS confirmation of receipt of the notice, which it says will normally be issued within 60 days of receipt of an appropriate completed notice, does not confirm the (c)(4) tax status. It merely confirms that the organization has notified the IRS that it exists and claims (c)(4) status. The organization still has the option of filing for official recognition of its (c)(4) status by filing a completed Form 1024.
An organization that claims (c)(4) status but is subsequently found not to qualify upon an audit could be subject to taxes and penalties as a non-exempt organization. An organization that fails to file a Form 990 series tax information return for three consecutive years will automatically lose its exemption.
The statutory Form 8976 filing requirement does not apply to any (c)(4) organization that filed a Form 1024 application for recognition of exemption (whether or not recognized) or filed a Form 990-series annual tax information return for any year on or before December 18, 2015. The IRS, in its temporary Regulations on the issue, has said that if an organization met either of these tests prior to July 8, 2016, it doesn’t have to file the new electronic form. Existing organizations that don’t meet either of these criteria were given until September 6, 2016 to file their notifications.
Failure to file a required notification can result in a penalty on the organization of $20 per day, up to a maximum of $5000. If the IRS learns of an organization that has failed to file and sends a “written demand” requesting the organization to file by a specified date, an additional penalty can be imposed on “the person or persons responsible” if the organization fails to comply within the specified time period. The term “person” means “any officer, director, trustee, employee, member or other individual whose duty it is to submit the Form 8976,” the IRS says. If more than one person is responsible, all such persons will be jointly and severally liable for the penalty. The penalty on the responsible persons can also be $20 a day from the date of failure to comply with the request, up to a maximum of $5000.
The IRS has the authority to provide relief from a penalty if it determines that such failure was due to “reasonable cause.” The single example of reasonable cause that the IRS gives in the Rev. Proc. involves an organization formed under the laws of a foreign country that operates solely outside the United States for several years and then files promptly with the IRS when it begins activities in the U.S. Since the filing is more than 60 days after the organization’s creation, the notice technically does not comply with the law and the organization is subject to a penalty. But the IRS says it can obtain relief by filing a reasonable cause request.