United States

IRS issues memorandum on section 501(c)(4) examination procedures

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The IRS released a memorandum, dated March 1, 2021, providing interim guidance to examiners for use in evaluating whether an organization has timely filed Form 8976, Notice of Intent to Operate Under Section 501(c)(4), and assessing applicable penalties for failure to do so.

Background

The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) imposed a new notification requirement on section 501(c)(4) organizations, referred to as a “section 506 notification.” Under this provision, an organization must generally notify the IRS that it is operating as a section 501(c)(4) organization no later than 60 days after the date of formation by electronically filing Form 8976 and paying the requisite user fee through pay.gov (currently $50). This process is described in Rev. Proc. 2016-41 and Treas. Reg. section 1.506-1.

Organizations failing to file a required notification are subject to a penalty of $20 per day, up to a maximum of $5,000. A similar penalty is imposed under section 6652(c)(4)(B) on organization managers who, in response to a written IRS request, do not submit Form 8976 by the date specified in the written request.

Procedural update

The newly released memorandum indicates that the Internal Revenue Manual will be updated to reflect procedures intended to provide guidance to examiners in performing a filing check for Form 8976 and considering whether to assess penalties for failure to timely file the notification. Under the guidance, examiners must perform a filing check for Form 8976 during all examinations of IRC section 501(c)(4) organizations. If the notification was not filed, examiners are instructed to send a written request to the organization, requiring its submission of Form 8976 by a specified date. Penalties for late filed Forms 8976 will be automatically assessed on the organization, but may be abated if the organization's failure was due to reasonable cause. An organization must provide a reasonable cause statement to qualify for such abatement.

If an organization has failed to timely file a completed Form 8976, examiners are instructed to consider the applicability of section 6652(c)(4) penalties organization managers. If, in response to a written request, a taxpayer fails to file Form 8976 by the date specified, examiners are instructed to consult with a group manager and Division Counsel to discuss applying the penalty on the organization's managers and/or taking other compliance actions. 

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