On December 18, 2015, President Obama signed the Protecting Americans From Tax Hikes Act of 2015 (PATH Act). The PATH Act contains more than 100 separate provisions and adds Section 506 to the Internal Revenue Code (I.R.C. §506). Section 506 imposes filing requirements (enforced by penalties) on new and certain existing I.R.C. §501(c)(4) organizations (the §506 Requirements). I.R.C. §506 calls into question the strategy of "self-declaring" I.R.C. §501(c)(4) status.
What are the I.R.C. §506 Requirements?
Under I.R.C. §506, organizations must file an initial notification (the Initial Notification) together with a user fee, and must provide supporting information (the Supporting Information) with the first Form 990-series return filed after submitting the Initial Notification.
What Are the Initial Notification and User Fee?
Section 506(a) requires the issuance of regulations (currently un-promulgated) prescribing a form and method for making the Initial Notification. The Initial Notification is required to include:
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; and
A statement of the purpose of the organization.1
Within 60 days of receipt of the Initial Notification, the IRS is required to send the organization an acknowledgement of receipt of the Initial Notification.2 Section 506(e) requires the Secretary of the Treasury to impose "a reasonable user fee," but it has yet to be established.
What is the Supporting Information?
The Supporting Information (provided with the first filed Form 990) is information supporting the organization's treatment as an I.R.C. §501(c)(4) organization. Regulations will prescribe the specific information required.3
When Must the Initial Notification Be Filed?
Organizations formed after December 18, 2015 must file the Initial Notification within 60 days of being established,4 and those formed on or before December 18, 2015 must file it by June 15, 2016.5
The deadline may be extended for new organizations for reasonable cause;6 however, there is no provision for an extension for existing organizations.
What are the Penalties for Failing to Provide the Initial Notification or Supporting Information?
The PATH Act imposes a penalty of $20 per day, up to a maximum of $5,000 on organizations that fail to timely file the Initial Notification.7 The PATH Act also penalizes organization manager(s) $20 per day, up to a maximum of $5,000, if after demand by the IRS, they fail to provide the Initial Notification.8
The Supporting Information is required under I.R.C. §6033(f), as amended by the PATH Act. Section 6652(c)(1) provides the penalties for a failure to include information required to be shown on a return filed under I.R.C. §6033(a)(1).
What Organizations are Subject to the §506 Requirements?
Organizations organized after December 18, 2015 are subject to the I.R.C. §506 Requirements.9 Also, any existing organization that did not apply for a written determination of its I.R.C. §501(c)(4) status by December 18, 2015, and that has not filed at least one Form 990-series return is subject to the §506 Requirements.10 The §506 Requirements do not apply to organizations that applied for recognition of their I.R.C. §501(c)(4) status by December 18, 2015 or to "self-declared" I.R.C. §501(c)(4) organizations that have filed at least one Form 990-series return.
Does an Organization Still Have to File Form 1024 to Obtain Certainty Regarding its I.R.C. §501(c)(4) Status?
Yes. An organization that wants certainty regarding its qualification as an I.R.C. §501(c)(4) organization must file Form 1024, Application for Recognition Under Section 501(a). The Form 1024 is in addition to, and not in lieu of, the §506 Requirements, and the IRS is not required to issue a determination letter following the filing of the Supporting Information.11
Conclusion
The §506 Requirements change the landscape for I.R.C. §501(c)(4) organizations. Newly formed organizations must file the Initial Notices within a very short time frame and far sooner that many actions are taken in the normal course of formation. Section 506 also imposes an additional user fee; although it is required to be "reasonable," the fee nevertheless is one for which a start-up organization must budget. Failure to comply with the §506 Requirements will subject an organization, and potentially its managers, to new penalties. Finally, from a practitioner's perspective, the §506 Requirements call into question the continued advisability of the strategy of having an organization "self-declare" its I.R.C. §501(c)(4) status.
Footnotes
1. I.R.C. §506(b).
2. I.R.C. §506(c).
3. I.R.C. §6033(f)(2) (as added by PATH Act §405(b)(3)).
4. I.R.C. §506(a).
5. PATH Act §405(f)(2) (requiring existing organizations to file Initial Notification within 180 days of date of enactment).
6. I.R.C. §506(d).
7. I.R.C. §6652(c)(4)(A) (as added by PATH Act §405(c)).
8. I.R.C. §6652(c)(4)(B) (as added by PATH Act §405(c)).
9. PATH Act §405(f)(1).
10. PATH Act §405(f)(2).
11. I.R.C. §506(f); Joint Committee on Taxation, "Technical Explanation of the Revenue Provisions of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40," (JCX-144-15), Dec. 17, 2015, at 241.
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