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IRS Offers Streamlined Option for Tax-Exempt 501(c)(4) Status

Posted on Mon, Jul 15, 2013

After admitting that applications from a large number of political not-for-profit groups were put on the back burner, the IRS announced it is now working to correct the situation. The goal is to create an accelerated path so qualified affected groups, that are still seeking tax-exempt status, can gain approval. Keep reading to learn the details of the new procedures.

In the wake of recent revelations that the IRS targeted certain groups for increased scrutiny when they applied for tax-exempt status, the tax agency has announced new procedures for expediting some applications. The new procedures, which are strictly optional, are available to organizations:

  • Involved in political campaign activities or issue advocacy, and
  • Have had tax-exempt status applications pending for more than 120 days, as of May 28, 2013.

The effort is part of an ongoing internal review of operations.

Does Your Not-for-Profit Qualify?

The optional expedited procedure is only available to certain Section 501(c)(4) applicants. Assuming your organization's application has been pending for more than 120 days as of May 28, 2013, and your organization's activities involve possible political campaign intervention or issue advocacy, you may receive Letter 5228.

If you receive Letter 5228: You can self-certify by representing the following:

  • Your organization devotes 60% or more of both spending and time to activities that promote social welfare as defined by Section 501(c)(4).
  • Your organization devotes less than 40% of both spending and time to political campaign intervention.
  • Your organization ensures the above thresholds apply for past, current and future activities.

Review Letter 5228 and follow the instructions. Then, sign and return pages 4-5 within 45 days of the date of your letter. The IRS will send qualified organizations a favorable determination letter within two weeks after receiving signed representations.

If you don't receive Letter 5228: If you believe your organization is eligible for the expedited option, but didn't receive a letter, double-check to ensure you meet the eligibility requirements. Assuming you're still on firm ground, call 1-877-829-5500 to find out how to proceed.

Consult with your an EHTC tax adviser if you have questions about your situation.

Beginning in June, the IRS started mailing letters, which offered the expedited option to groups caught in the targeting. These groups received, or will receive, Letter 5228, Application Notification of Expedited 501(c)(4) Option.

An organization can self-certify by signing and returning the letter if it agrees to abide by the special rules for obtaining tax-exempt status.

"The IRS is committed to improving our tax-exempt review process," stated IRS Principal Deputy Commissioner Danny Werfel in a prepared statement. "This new streamlined option gives certain groups that have waited far too long a quick and clear path to get their status resolved."

Accelerated and Simpler

The expedited option provides qualified groups with an approved determination letter. They will be granted 501(c)(4) status within two weeks if they certify that 60% or more of their time and expenses is devoted to activities promoting "social welfare" (as defined by Section 501(c)(4) of the Internal Revenue Code). At the same time, the organizations must certify their political campaign intervention involves less than 40% of their spending and time.

These thresholds apply for past, current and future years of operation. For purposes of determining eligibility for the expedited procedure, "total expenditures" include administrative, overhead, and other general expenditures. An organization may allocate those expenditures among its activities using any reasonable method.

In Letter 5228, the IRS states activities which promote the social welfare do not include expenditures incurred or time spent by the organization on:

  • Any activity benefiting select individuals or organizations, rather than the community as a whole;
  • Direct or indirect participation or intervention in any political campaign on behalf of, or in opposition to any candidate for public office;
  • Operating a social club for the benefit, pleasure, or recreation of the organization's members; and
  • Carrying on a business with the general public in a manner similar to organizations operated for profit.

For purposes of these representations, direct or indirect participation or intervention in any political campaign on behalf of, or in opposition to any candidate for public office. This includes expenditures incurred or time spent by the organization on:

  • Written (printed or electronic) or oral statements supporting or opposing the election or nomination of a candidate;
  • Financial or other support provided to, or the solicitation of such support on behalf of, any candidate, political party, political committee, or Section 527 organization;
  • Conducting a voter registration drive or "get-out-the-vote" drive that selects potential voters to assist on the basis of their preference for a particular candidate or a particular party;
  • Distributing material prepared by a candidate, political party, political committee, or Section 527 organization; and
  • Preparing and distributing a voter guide that rates, favorably or unfavorably, one or more candidates.

In addition, for purposes of determining an organization's eligibility under the optional expedited process, an organization must count, among other things, any public communication that identifies a candidate within 60 days prior to a general election or 30 days prior to a primary as political campaign intervention.

As indicated by Werfel, the IRS intends for the new procedures to promote equality, while speeding up the process. "The IRS will treat these groups fairly and review applications promptly, a step that will immediately reduce the backlog of these cases," he said. "At the same time, the IRS will work to ensure 501(c)(4) groups follow the law set by Congress..."

The IRS also emphasized it will not penalize eligible organizations that decide to forego the expedited option.

Tags: Not-for-Profit, IRS, Tax-Exempt 501(c)(4) Status, Echelbarger, EHTC