Many 501(c)4 tax-exempt groups aren’t notifying the IRS

Many dark money groups that raise funds for political and social causes and don’t pay taxes aren’t notifying the Internal Revenue Service of their intent to operate as tax-exempt organizations under section 501(c)4 of the Tax Code and haven’t been penalized, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, looked at the controversial subject of 501(c)4 groups. The groups are supposed to be used for “social welfare,” but many of them are used to raise funds for various forms of political advocacy and are popular because they don’t require the organizations to disclose their donors, leading to accusations they’re being used by so-called “dark money” groups, a major issue during an election year.

Back in 2013 an earlier report from TIGTA found the IRS was filtering out applications for tax-exempt status from groups that used terms such as “Tea Party,” “Patriot” and “9/12” and giving them extra scrutiny. (TIGTA later acknowledged that the IRS was using similar ”Be On the Lookout,” or BOLO, lists for groups with the word “progressive” in their names.)

Andrew Harrer/Bloomberg

The revelations produced an uproar, with conservatives accusing the IRS of targeting Tea Party groups ahead of the 2012 election. and led to the departures of the director of the exempt organizations unit at the IRS, as well as the IRS commissioner and other top officials at the agency. The IRS set up a streamlined way for groups to self-certify themselves as 501(c)4 groups and proposed new regulations, but the problem never really went away.

In 2015, the PATH Act required 501(c)(4) organizations to notify the IRS of their existence within 60 days of being established. The PATH Act also provided for the assessment of penalties on late filers and nonfilers and, in some cases, on the officials responsible for filing the notification. Implementation of the new notification requirement meant the IRS had to develop new forms and changes to its information technology systems, along with new guidance to help taxpayers comply with the notification requirement.

The new report from TIGTA found the IRS hasn’t done enough to identify noncompliant 501(c)(4) organizations, even though it has various sources of information that would allow it to do so. Once an organization notifies the IRS of its existence, the IRS can use the information to enforce filing compliance of the required annual return.

“TIGTA identified 9,774 organizations that were potentially required to file a notification but did not,” said the report. “These organizations and their responsible officials were potentially subject to assessment of more than $48.4 million and $47.5 million in delinquency penalties, respectively. However, many of these organizations may not have understood or even been aware of the notification requirement because many of them filed other documents that informed the IRS of their existence.”

TIGTA noted that the IRS recently began assessing delinquency penalties on organizations that don’t file their notifications in time, but it didn’t assess such penalties prior to February 2019. TIGTA identified 1,719 organizations that didn’t file notifications in time before the IRS started assessing the penalty. These organizations and the responsible officials could have been subject to more than $4.8 million and $3.1 million in delinquency penalties, respectively. However, TIGTA acknowledged that some of the organizations could have reasonable cause for filing untimely notifications and might not be subject to the penalty.

TIGTA recommended that the IRS’s Exempt Organizations function determine the feasibility of working with state governments to identify new organizations that are required to file a notification with the IRS. The IRS should also do research on the organizations already identified by TIGTA for its report and determine if any compliance actions are necessary, the report suggested. TIGTA also recommended the IRS use the available information to enforce compliance of notification requirements and determine if the untimely filers had reasonable cause for filing untimely or if assessing the delinquency penalties was warranted. The IRS should also update its notices and procedures to fully implement the law, TIGTA suggested.

In response to the report, IRS management agreed to use the available information to enforce compliance and update its notices and procedures. However, the IRS didn’t agree to work with state governments, take actions to bring organizations identified by TIGTA into compliance, and determine the applicability of penalties for untimely filers. For its part, TIGTA said it believes the actions it recommended would improve the detection of noncompliant activity and ensure more consistency in how the IRS enforces the law for similar organizations.

The IRS also disagreed with some of TIGTA’s estimates: “Beyond overstating the universe of potential non-filers, the report’s estimates of associated penalties are theoretical,” wrote Tamera Ripperda, commissioner of the IRS’s Tax-Exempt and Government Entities Division, in response to the report. “TIGTA acknowledges that reasonable cause exceptions may apply, and penalties on managers would be possible in the first instance only if the organization did not submit the Form 8976 within a specified period after a demand was issued.”

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, also responded to the report. "“The watchdog report issued today shows that thousands of nonprofits eligible to engage in political activity have failed to properly disclose their existence, and the IRS isn’t doing enough to identify noncompliance or enforce penalties," he said in a statement Thursday. "The IRS is once again asleep at the wheel on enforcing rules for politically-active nonprofits, and this comes at a time when illegal dark and foreign money threatens to influence the 2020 election. Meanwhile, the Trump administration is working to finalize regulations that would eliminate donor reporting requirements for dark money organizations. It’s a one-two punch to election integrity.”