The IRS in Notice 2016-9 gave social welfare organizations additional time to notify the IRS of their intent to operate under IRC §501(c)(4) under IRC §506 that was added by the Protecting Americans from Tax Hikes Act of 2015 (PATH). This new requirement applies to §501(c)(4) social welfare organizations established after December 18, 2015 and certain other organizations already in existence.
The due date for notifications of intent to operate under IRC §501(c)(4) will be no earlier than 60 days after the publication of regulations that will prescribe the manner in which such organizations must notify the IRS. At that point they will submit the information required by IRC §506.
No penalties for failure to file the required information will be imposed during this period before the first due date. It is important to note that this only gives new organizations additional time, but does not exempt them from having to eventually file the necessary information with the IRS.
This notification to the IRS does not amount to determination by the IRS that the organization qualifies for tax exempt status. Rather, the organizations may, at their option, separately request a determination that it qualifies for tax-exempt status under IRC §501(c)(4).
As the notice explains:
Although an organization may apply to the IRS for recognition that the organization qualifies for section 501(c)(4) tax-exempt status, there is no requirement to do so (except as provided in section 6033(j)(2) for organizations that fail to file required information returns or notices). Accordingly, an organization described in section 501(c)(4) that files the required annual information return or notice, as applicable, need not seek an IRS determination of its qualification for tax-exempt status.
The downside of not requesting the determination is that the IRS may determine that the organization never actually did qualify for tax-exempt status. Obviously there could be a significant negative tax impact of such a situation, which is why organizations are allowed to request such a ruling.
The new notification provision in the IRC is described in the notice:
Section 506 requires an organization described in section 501(c)(4), no later than 60 days after the organization is established, to notify the Secretary (in the manner prescribed by regulations) that it is operating as a section 501(c)(4) organization. For certain existing organizations, the notification is due no later than June 15, 2016, 180 days after the date of enactment of the PATH Act. Section 506(b) provides that the notification must include: (1) the name, address, and taxpayer identification number of the organization; (2) the date on which, and the State under the laws of which, the organization was organized; and (3) a statement of the purpose of the organization. Section 506(c) requires the Secretary to send the organization an acknowledgement of the receipt of its notification within 60 days. Section 506(d) permits the Secretary to extend the 60-day notification period for reasonable cause. Section 506(e) provides that the Secretary shall impose a reasonable user fee for submission of the notification. Finally, section 506(f) provides that, upon request by an organization to be treated as an organization described in section 501(c)(4), the Secretary may issue a determination with respect to treatment as a section 501(c)(4) organization, and that the organization's request will be treated as an application for exemption from taxation under section 501(a) subject to public inspection under section 6104.
Section 405(b) of the PATH Act amended section 6033(f) to require a section 501(c)(4) organization submitting the section 506 notification to include with its first annual information return filed thereafter any additional information prescribed by regulation that supports the organization's treatment as an organization described in section 501(c)(4).
Section 405(c) of the PATH Act amended section 6652(c) to impose penalties for failure to file the notification by the date and in the manner prescribed in section 506 (and implementing regulations). In particular, section 6652(c)(4)(A) imposes a penalty on an organization that fails to submit the notification equal to $20 per day for each day the failure continues, up to a maximum of $5,000. Additionally, section 6652(c)(4)(B) imposes a similar penalty on persons who fail to timely submit the notification in response to a written request by the Secretary.
Section 405(f) of the PATH Act provides that, in general, the section 506 notification requirement and the related amendments to sections 6033 and 6652 apply to organizations described in section 501(c)(4) that are established after December 18, 2015, the date of enactment of the PATH Act. Section 405(f)(2) of the PATH Act provides that these provisions also apply to any other section 501(c)(4) organization that had not, on or before the date of enactment: (1) applied for a written determination of recognition as an organization described in section 501(c)(4) (using Form 1024, "Application for Recognition of Exemption Under Section 501(a)"); or (2) filed at least one annual information return or notice required under section 6033(a)(1) or 6033(i) (that is, a Form 990, "Return of Organization Exempt From Income Tax," or, if eligible, Form 990-EZ, "Short Form Return of Organization Exempt From Income Tax" or Form 990-N (e-Postcard)). Existing organizations described in section 405(f)(2) of the PATH Act have until June 15, 2016 (180 days after the date of enactment) to submit the section 506 notification.
Under these rules the IRS will acknowledge the receipt of the notice, but this is not a determination that the organization actually qualifies to be a §501(c)(4) tax-exempt organization. Rather, as the notice provides:
…[S]ection 506(f) provides that an organization seeking IRS recognition of its tax-exempt status may separately request such a determination. Section 506(f) provides that such a request will be treated as an application for exemption from taxation under section 501(a) and therefore will be subject to public inspection under section 6104. Until further guidance is issued, organizations requesting IRS recognition of exempt status under section 501(c)(4) should continue to use the Form 1024. The filing of Form 1024 is optional and will not relieve an organization of the requirement to file the section 506 notification.