Ballot Measure Committees Beware: Newly formed 501(c)(4) organizations now have a new filing requirementFriday, August 19, 2016
This blog post was written by Karen Blackistone Oaks, a partner with The Gober Group. She specializes in advising clients that are engaged in multi-faceted, multi-million dollar policy campaigns that incorporate a wide range of advocacy strategies.
New tax regulations are going into effect this summer for 501(c)(4) social welfare organizations. While their direct regulatory impact isn’t substantial, the consequence of these new regulations could have a significant impact on state and local ballot measure committees.
Most people are surprised that 501(c)(4) organizations have traditionally been allowed to “self-declare” their nonprofit status without filing an application or seeking a determination from the IRS confirming their tax-exempt status. That may still be the case, but new regulations that went into effect in July require a 501(c)(4) to file an electronic notice so the IRS is aware of the group’s intention to operate as a social welfare organization.
The Protecting Americans from Tax Hikes Act of 2015 (“the PATH Act”), passed in December 2015, created this new filing obligation for 501(c)(4) organizations in an attempt to regulate “pop-up” organizations that form in the months preceding an election, engage in significant political activity, and then disband before filing a tax return. The IRS recently released the form, which must be filed electronically (https://services.irs.gov/datamart/mainMenu.do), and accompanying regulations that finally went into effect in July.
In summary, the regulations require newly-formed 501(c)(4) organizations to file the new Form 8976 within 60 days of formation. Any organization formed prior to July 8, 2016, (the date the regulations were released) and that hadn’t submitted either a Form 1024, Application for Recognition of Exemption, or a Form 990 tax return (including 990-EZ or 990-N) by that date is also subject to the filing requirement and must file the Form 8976 by September 6, 2016.
Not only will this new filing obligation apply to the “pop-up” organizations that Congress was seeking to regulate, but it may have the biggest practical impact on state and local ballot measure committees. Many ballot measure committees lack sophistication and don’t have expert legal counsel in this area of the law, so they simply operate without regard for the tax implications of their activity (i.e., they assume there are no filing obligations other than filing their campaign finance reports disclosing contributions and expenditures). While this non-compliance has often gone unnoticed and without consequences, this approach can lead to significant tax penalties for the committee, the committee’s treasurer, and the committee’s donors.
The new Form 8976 filing requirement will force ballot measure committees to confront the question of their tax status – many for the first time. To be clear, ballot measure committees are usually tax-exempt pursuant to Sections 501(c)(4) or 501(c)(6) of the Internal Revenue Code. These groups generally do not qualify for exemption under Section 527, the provision that covers candidate-related political activity. Nor are ballot measure committees beyond the reach of the IRS.
And while ballot measure committees were already required to obtain an employer identification number from the IRS prior to opening a bank account, it is often the case that someone associated with the committee simply opens an account using their social security number. Failing to obtain an EIN and opening an account using someone’s social security number can create significant tax liability for the individual and for the committee’s donors.
Under the new rules, once a ballot measure committee has formed, the group must file Form 8976 within 60 days. And like all 501(c)(4) organizations, ballot measure committees must also file a tax return (the Form 990) with the IRS within 4 ½ months subsequent to the end of its tax year.
As mentioned above, the requirements to obtain an EIN and file a tax return are not new. They exist regardless of whether you decide to take the additional step of incorporating your ballot measure committee for liability protection purposes. They exist regardless of whether your ballot measure committee has ever even considered the tax implications of opening a committee. And they exist regardless of whether or not you file campaign finance reports.
So, while the new form 8976 is merely just one more step in the process for anyone wishing to form a ballot measure committee, we expect that this new filing obligation will be used by the IRS to uncover hundreds, if not thousands, of nonprofit organizations (including ballot measure committees) that are not complying with all filing requirements. In other words, we expect this one simple form to create a significant ripple effect across the nonprofit community, especially for those groups that lack sophistication and don’t have expert legal counsel in this area of the law.