Little-Known Form Creates Possible Pitfalls for 501c4’s
By Connie Kent Carhart, CPA
The IRS charitable classification of a 501c4 is a common classification for many fire service benevolent associations and even some of our incorporated fire companies. If your organization is a 501c4, has it filed the mandatory Form 8976 – Notice of Intent to Operate as a 501c4? If not, are you aware of the penalties for non-compliance? You could get fined $20/day up to $5,000. And these fines can also be assessed against those who are responsible for the filing (officers, board members).
The final rules for Form 8976 were issued on July 23, 2019. As a 501c4, you are required to file this one-time form. Traditionally, 501c4 organizations were not required to file applications for recognition with the IRS, they could literally deem themselves to be a 501c4. You were not “officially” recognized by the IRS as a 501c4 without filing Form 1024 – Application for Recognition of Exemption Under Section 501(a). (Form 1024-A replaced Form 1024 in 2018). But you could proceed with filing 990’s, or perhaps you did not file any returns. There was little pressure to take those additional steps of filing for recognition and many organizations did not.
Form 8976 was created to require all 501c4’s to notify the IRS of their intent to operate. And it is required to be filed even if you apply via Form 1024-A (Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code), and receive your determination letter from the IRS that you are now recognized as a 501c4. (These are for applications filed after June 8, 2016). And of course, both forms charge a user fee.
Form 8976 is due within 60 days of your formation (date you incorporated), or, if you have already been in existence, it was due within 60 days of July 23, 2019. Thankfully, there are two exceptions, and you must meet one or the other to be exempt from the penalties of not filing the Form 8976. The first is if you filed at least one 990 (including a 990EZ or 990N) prior to June 8, 2016. The second is if you applied to be recognized as a 501c4 with the IRS via Form 1024, (which must also have been done prior to June 8, 2016). It is reported that you may be able to request forgiveness of the penalties due to reasonable cause, but there is no guidance as to what is considered reasonable cause.
On January 6, 2020, the Treasury Inspector General for Tax Administration published the results of an audit of the compliance of this form’s requirements. They discovered the form is relatively unknown, identified over 9,000 organizations that should have filed and did not, and estimated there are over $48 million in potential penalties for both the organizations and the persons responsible. As a result of these recommendations, the Tax-Exempt Division of the Internal Revenue Service has committed to ensure better compliance of filing Form 8976, beginning March 15, 2021.
Should you consider converting to a 501c3?
A 501c3 has charitable activities as its primary purpose. A 501c4 is known as a social welfare organization. Both are exempt from federal income tax, both are considered a means to help “society”, but apart from volunteer fire organizations and veteran organizations, 501c4’s cannot receive tax-deductible contributions. If you are a 501c4, you will be limited as to your potential contributions from donors.
Grant-making organizations such as FEMA will ask for proof that you are recognized by the IRS as a 501c3. And of course, as a 501c4 you will be liable for Form 8976. Although IRS Publication 557 – Tax-Exempt Status for Your Organization lists volunteer fire companies as an example of a 501c4, fire and ambulance organizations also qualify as a 501c3. If you are currently a 501c4, you can apply to be recognized as a 501c3 instead by filing Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. For more information about the benefits of having your organization operate as a 501c3 corporation, please see the May/June 2019 issue of The Volunteer Firefighter (Vol. 71 Issue 6 Page 30) or contact the author.
Connie Kent Carhart, CPA has over 35 years of experience. Her specialty is assisting charitable organizations with their tax needs. She can be reached at connie.carhart@cpa.com.