Perhaps intended to police new 501(c)(4) political advocacy groups, this rule appears to require all new social welfare organizations and civic leagues to file Form 8976 self-declaring their intent to operate as a 501(c)(4) organization within the prescribed time period and pay the requisite filing fee or risk penalties.
This proposed notice requirement is in addition to the initial application for exemption from Federal income tax (Form 1024) and the annual information return (Form 990) already required by the IRS of newly formed 501(c)(4) organizations. Further, the information required in proposed Form 8976 duplicates the same information already required by the IRS in Form 1024.
The proposed rule flows from Section 506 of the Internal Revenue Code. Section 405(a) of the PATH Act recently added section 506. 1 The proposed rule implementing this new section 506 requires the notice of intent to operate as a 501(c)(4) to be filed on Form 8976, Notice of Intent to Operate Under Section 501(c)(4).2
For organizations intending to be included in an existing group exemption under Section 501(c)(4), the proposed rule would be especially onerous. The IRS often recognizes a group of organizations who are affiliated with one central organization and under its general supervision or control under a group exemption to avoid the need for each organization to apply for exemption and file annual returns individually. “A group exemption has the same effect as an individual exemption letter except that it applies to more than one organization.” 3
Group exemptions relieve administrative burdens for both the IRS and the group of affiliated, qualifying organizations. Under a group exemption, the IRS does not have to review and process separate applications for exemption for tens of thousands of subordinate chapters or clubs. Likewise, tens of thousands of subordinate chapters or clubs do not have to file an application for exemption and subsequent annual information returns. Rather, the central organization makes annual report and Form 990 filings on behalf of the group.
In addition to the initial application for group exemption (Form 1024) and the subsequent annual information returns (Form 990), a central organization is responsible for the following under a group exemption: (1) ensuring that its current subordinates continue to qualify to be exempt; (2) verifying that any new subordinates are exempt; and (3) updating the IRS on an annual basis of new subordinates, subordinates no longer to be included, and subordinates that have changed their names or addresses.
The very same information required in Form 8976 is required annually of 501(c)(4) organizations recognized under a group exemption.
Hundreds of thousands of organizations have been recognized as exempt under Section 501(c)(4) pursuant to a group exemption over the years.4 The proposed duplication could result in thousands of redundant notification filings and annual report filings per year. Each filing must be reviewed and processed by IRS staff, which is already under-resourced. And all of this at the expense of the not-for-profit organizations and American taxpayers.
Further, as a practical matter, newly formed chapters or subchapters of a 501(c)(4) organization cannot self-declare their inclusion in a group exemption, nor can a new parent organization self-declare its intent to operate under such an exemption. It is simply a different process. The parent is required to provide notice on behalf of its subordinates once recognized under the group exemption.
Accordingly, subordinates properly included under a formally recognized Section 501(c)(4) group exemption should be excluded from the requirement of independently notifying the IRS of intent to operate as a chapter or subchapter of a 501(c)(4) through Form 8976 or equivalent. Such notice is already provided annually by the central organization on behalf of its 501(c)(4) subordinates.
Moreover, with respect to 501(c)(4) organizations not recognized under group exemptions, the Section 506 notice requirement ought to be satisfied by the Form 1024 filing, which is already required and which provides the very same information requested in Section 506. For organizations seeking individual recognition of exemption, Form 8976 merely duplicates Form 1024 and, therefore, creates an undue administrative burden on the IRS as well as the not-for-profit organization filers. Thus, this appears to be little more than a fee-generating exercise.
Perhaps IRS resources would be better utilized by improving internal review and processing times for the existing Form 1024. If the IRS were current in processing the Form 1024, it would not need the duplicative notice filing of Form 8976. The IRS and Treasury Department have indicated they will review and evaluate all public comments and requests for hearing received.
2 Rev. Proc. 2016-41 (proposed revenue procedure).
3 Internal Revenue Service, Tax Exempt & Gov’t Entities Div., “Group Exemptions,” Pub. 4573 (12-2007).
4 Advisory Committee on Tax Exempt and Government Entities (ACT), “Exempt Organizations: Group Exemptions-Creating a Higher Degree of Transparency, Accountability, and Responsibility” 1 (June 15, 2011), available at https://www.irs.gov/pub/irs-tege/ACT_Group_Ruling_Rpt_061511.pdf.