February 8, 2016
PATH Act Requires 501(c)(4) Organizations to Provide Notice to IRS after Formation
As a result of recent legislation, the Protecting Americans from Tax Hike Act of 2015 (PATH Act), signed into law by President Obama on December 18th, 2015, newly created and certain existing 501(c)(4) social welfare organizations must now file a notice with the IRS. Failure to provide notice can result in penalties.
A social welfare organization is not required to submit an application for exemption (historically, Form 1024) to the IRS, but, rather, it can “self-declare” its exempt status, provided that the organization operates under the statutory and regulatory requirements applicable to such organizations.
This legislation creates new Internal Revenue Code Section 506 – “ORGANIZATIONS REQUIRED TO NOTIFY SECRETARY OF INTENT TO OPERATE UNDER 501(c)(4)” to implement the new notice requirement.
Newly Formed 501(c)(4) Organizations – Pursuant to Sec. 506, an organization described in Sec. 501(c)(4) formed after December 18, 2015 has to provide, no later than 60 days after the organization is established, the following to the IRS (the manner in which this information is to be provided will be prescribed in a future regulation or form instructions):
- 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; and
- a user fee (to be determined).
The IRS will have the authority to extend the 60-day deadline for reasonable cause. Within 60 days after an application is submitted, the IRS must provide a letter of acknowledgement of the registration. The notice and receipt are subject to the disclosure requirements applicable to Forms 1024 and 990.
Existing 501(c)(4) Organizations – Under Sec. 506, existing organizations that have not filed a Form 1024 or at least one annual information return or notice (Form 990/990-EZ/990-N) on or before the date of enactment (December 18, 2015) must file the notice required under IRC section 506 within 180 days of enactment of the new law.
Extension of Period to Notify the IRS – The Treasury Department and the IRS intend to issue temporary regulations implementing the Section 506 notice requirements. On January 19th, the IRS issued Notice 2016-9, which extends the time for an organization to notify the IRS of its intent to operate under section 501(C)(4). An organization subject to this filing notice now has at least 60 days from the date the regulations are issued to file the required notice.
Penalties – The legislation also amends Sec. 6652(c) to impose penalties for failure to file the notice required under section 506. An organization that fails to file the notice within 60 days of formation is subject to a penalty equal to $20 per day up to a maximum of $5,000. In the event such penalty is imposed, the IRS may make written demand for this information. Failure to provide this information to the IRS by the date specified in in the written demand may result in additional penalties of $20 per day up to a maximum of $5,000 on the person failing to provide the information.
Determination Letters – Organizations that would like the additional assurance of a favorable determination must still complete an exemption application and submit it to the IRS with user fee. The exemption application will be made on a new form (not the existing Form 1024) which will be used only by Section 501(c)(4) organizations. However, as set forth in IRS Notice 2016-9, until further guidance is issued, such organizations should continue to use Form 1024.
GIFT TAX NOT TO APPLY TO CONTRIBUTIONS TO CERTAIN EXEMPT ORGANIZATIONS
In addition to the notice requirement for 501(c)(4) organizations, the PATH Act amends IRC Sec. 2501(a) to confirm that gift taxes do not apply to contributions by individuals to 501(c)(4), (c)(5), and (c)(6) organizations. This has been an open question for several years and the new provision will provide greater certainty to donors to such organizations.