• IRS Self-Declarers Questionnaire Raises Interesting Question in Wake of EO Unit Scandal Print Article
  • November 4, 2013
  • Law Firm: Whiteford Taylor Preston L.L.P. - Baltimore Office
  • One of the quirks of the United States Tax Code is that entities designed to be exempt from income tax under Code Sections 501(c)(4), (5), or (6) are not required to specifically apply to the IRS for recognition of their tax-exempt status. Instead, these organizations can simply start their operations, “self-declare” that they are functioning as exempt entities, and file the appropriate 990-series forms with the IRS at the end of their fiscal years.

    In practice, it is common for a new 501(c)(4), (5), or (6) entity to file Form 1024, Application for Recognition of Exemption under Section 501(a), and request formal recognition by the IRS that the organization is designed to operate as a tax-exempt entity. But, the filing of a Form 1024 is not a requirement. As a result, the IRS was concerned that organizations could be improperly self-declaring themselves as “tax-exempt”.

    So, in March 2013, the IRS announced that it had sent an informational questionnaire to 1,300 self-declared 501(c)(4), (5), and (6) organizations. The stated purpose of the questionnaire was to increase the IRS’ understanding of the types of organizations that self-declare and how they satisfy the requirements of tax-exemption.  A copy of the questionnaire can be found at http://www.irs.gov/pub/irs-tege/Form14449.pdf. The questionnaire also contained a number of questions related to the organization’s political activities. At the time, all this seemed like pretty routine stuff.

    However, just two months later, the news broke that the IRS’s Exempt Organizations Unit (EO) had potentially delayed or denied exemption applications of 501(c)(4) organizations based on the applicants’ political views. The revelations of the trouble within the EO Unit have raised many questions about the IRS’ ability to administer the complex laws regarding what constitutes a tax-exempt entity. Outside of potential improper conduct by EO Unit employees, the main issue at hand was whether organizations were planning on engaging in “too much” political activity in order to be properly considered tax-exempt.

    The irony of all this is that the organizations caught up in the scandal were the ones that actually bothered to seek upfront recognition with the IRS by filing a Form 1024. One has to presume that if an entity took the time to complete a 1024, it must have believed it was properly set-up in order to be recognized as tax-exempt. However, the EO scandal clearly showed that what constitutes an acceptable level of political activity is extremely subjective. If the political activities question is so nebulous that teams of lawyers, accountants, and EO administrators struggle with it, how is a politically active self-declaring entity to know whether it is operating within the bounds of the law?

    So, one has to wonder what kind of information the IRS has received from the questionnaire’s responses. The IRS has not yet announced if and when it will make the general results of the self-declarer questionnaire available to the public. It will hardly be surprising if the data from the questionnaires serves to provide further evidence that there is a desperate need for additional guidance and clarity regarding the political activities of exempt organizations.

    For now, we will have to wait and see.