New federal tax legislation and rulings affecting exempt organizations - Updated August 1, 2016
Deadline of September 6, 2016 to avoid penalties of up to $5,000.
Congress recently added new Internal Revenue Code (IRC) Section 506, affecting organizations that intend to gain exempt status recognition under IRC Section 501(c)(4). The Internal Revenue Service (IRS) issued new Treasury Regulations Section 1.506-1 on July 8, 2016. This regulation contains a 60 day effective date, making September 6, 2016 the last date to comply with this Regulation to avoid potential penalties.
The Code section requires that any organizations intending to seek recognition of exempt status under IRC Section 501(c)(4) must provide advance notice to the IRS within the first 60 days of the organization's existence or face possible penalties. The Regulation requires that existing organizations have until September 6, 2016 to notify IRS of the intent to seek exempt status to avoid possible penalties.
What are the penalties? $20 per day to a maximum of $5,000 if you miss the September 6, 2016 deadline.
Can you get out of these penalties? Unknown at this time. The Treasury Decision 9775 that announced the Regulations states that no penalty will be imposed if the failure to file Form 8976 is "due to reasonable cause." I (Gary Porter) have spoken with the IRS tax attorney that wrote this language requesting an interpretation of what would constitute "reasonable cause." IRS is not willing to commit to any kind of an answer at this point in time. Translation? they're still feeling their way through this mess they created.
How do you notify IRS of intent to operate as a IRC Section 501(c)(4) organization? File Form 8976. This is an E-Form, meaning it may only be filed online. We have not even been able to obtain a copy of the Form to determine the information required, although we suspect it is exactly the information spelled out in the Regulations; (1) the name, address, and taxpayer identification number of the organization; (2) the date on which, and the state or other jurisdiction under the laws of which, the organization was organized; and (3) a statement of the purpose of the organization. Also, IRS has established a $50 fee for processing this Form. Presumably, you must pay this via credit card at the time you file the Form 8976 online.
Who should consider this? If you're a condominium, cooperative, or timeshare association, you will not qualify. If you are a planned development, you MAY qualify if you permit public access, are yourself a community, or effectively cover the same geographic territory as a governmental agency.
If you're not sure, call me (Gary Porter, CPA) at (805) 496-1883 for a free consultation. I've helped approximately 100 associations gain tax exempt status under IRC Section 501(c)(4) over the years, including 20 gated associations.
Also see Outline and Power Point presentation I made on this topic at the CAI Law Seminar in New Orleans in January 2016. This included a discussion of IRC Section 506, but the other citations noted above had not been issued at that time.