501(c)(4)s and IRS Scrutiny of Conservative Organizations Applying for Tax Exemption

As attorneys who focus on tax-exempt and nonprofit law, we have been following closely the unfolding story in the news about the IRS targeting conservative groups.  The revelations are shining a spotlight on what can happen to organizations in the process of applying for tax exemption.  The IRS is accused of targeting organizations that advocate conservative viewpoints for extra scrutiny, thus slowing down the application process, and in some cases, asking inappropriate questions. See the following stories for the details:

http://www.washingtonpost.com/politics/irs-scrutiny-of-conservative-groups-involved-offices-in-dc-california-cincinnati/2013/05/14/1cdfe3b6-bca0-11e2-9b09-1638acc3942e_story.html

http://www.cnn.com/2013/05/14/politics/irs-conservative-targeting/index.html

http://www.foxnews.com/politics/2013/05/14/watchdog-irs-targeting-conservative-groups-caused-substantial-delays/

Some of the organizations subjected to heightened scrutiny and an unusual amount of questions were seeking exemption as 501(c)(3) organizations, others were seeking to be recognized as 501(c)(4) organizations.  Most people are familiar with 501(c)(3) organizations, but not so familiar with 501(c)(4)’s.  So, what is a 501(c)(4) organization?  It is a nonprofit organization that is designed to promote social welfare causes, though the term “social welfare” is not well defined.  Often they are advocacy groups that promote a particular cause.  Like their better known cousins, 501(c)(3)’s, they are exempt from paying federal income tax.  Unlike 501(c)(3)’s, contributions are not tax deductible to the donor, and they may engage in much more political activity to promote their cause.

The political activities are at the heart of the current controversy.  501(c)(4) groups may engage in lobbying and political campaign activity so long as these activities are not their primary purpose.

Interestingly, 501(c)(4) organizations, like some other types of nonprofits, are not required to apply for tax exemption.  Most 501(c)(3) organization are required to apply to the IRS to be recognized as such.  However, 501(c)(4) organizations can ”self declare” so long as they are organized and operated as a 501(c)(4).  This year, however, the IRS has sent questionnaires to some 1,300 self declared organizations in what they say is an effort to check compliance.  Some of the questions are specifically about political activity.  See:  http://philanthropy.com/blogs/philanthropytoday/irs-questions-groups-that-self-declare-they-are-tax-exempt/65337

If you are seeking tax exemption and have questions about the process or about your organization’s eligibility, please contact us at info@magillrumsey.com

On June 24, 2013 the IRS announced that it is offering a streamlined option to the organizations whose applications have been delayed because of possible political campaign issues.

More information can be found here:

http://www.irs.gov/uac/Newsroom/IRS-Offers-New-Streamlined-Option-to-Certain-501c4-Groups-Caught-in-Application-Backlog
 
Practice Area(s): Non Profit and Tax Exempt

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