IRS Offers Fast-Track Determination Process for 501(c)(4) Applicants



It would have been difficult to avoid the onslaught of news and related commentary over the last couple of months regarding the IRS scandal involving the criteria used to identify tax-exemption applications for review.  But it now looks like the IRS is taking steps to overhaul its internal review process and to repair its public image.  On Monday, the IRS issued an 83-page report containing an initial assessment of its recent organizational failures and “charting a path forward” for the organization.

Perhaps most significantly, the report provides an expedited process that will allow organizations whose tax-exemption applications have been identified as part of a priority backlog to receive a determination within two weeks.  The fast-track will initially be available only to organizations that filed a tax-exemption application under Section 501(c)(4) of the Internal Revenue Code more than 120 days prior to May 28, 2013, and whose applications were previously identified by the IRS as “potential political cases” (according to the IRS, there were initially 132 cases that fell into this category).  To participate in this voluntary process, groups must represent under penalty of perjury that they currently devote, and will continue to devote, less than 40 percent of both their total expenditures and total time (measured by employee and volunteer hours) to political campaign intervention activities and, as a corollary, that they devote 60 percent or more of their expenditures and time to activities that promote the social welfare.  Eligible organizations that elect not to make this representation may continue to have their application reviewed under the facts and circumstances test and the IRS has assigned additional support to assist with this review process.

The IRS report acknowledges that ineffective management “resulted in substantial delays in processing certain applications” and states that the IRS expects this fast-track mechanism, with an initial focus on 501(c)(4) applications, to quickly eliminate the existing backlog.  The IRS has not indicated whether this or a similar expedited process will be available to additional organizations at a later time.

The report is also significant in that it provides some much-lacking guidance from the IRS as to what constitutes “primarily” in the context of 501(c)(4) activities.  Although Section 501(c)(4) applies to organizations “operated exclusively for the promotion of social welfare,” the current standard provides that an organization may actually engage in some political campaign intervention or other activity so long as it is “primarily” engaged in promoting social welfare.  As the IRS noted in its report, the absence of clear and concise definitions of “primarily” and “political campaign intervention” has presented a significant challenge in the review of 501(c)(4) applications.  The IRS has set forth the 60/40 standard as part of the expedited review process in order to provide a basis for determining what is meant by “primarily”.  Additionally, solely for purposes of determining eligibility to participate in the expedited procedure, the IRS requires organizations to count as political campaign intervention activities (i) public communications identifying a candidate within 60 days before a general election or 30 days before a primary, (ii) events at which only one candidate, or candidates of only one party, are invited to speak, and (iii) grants made to other 501(c) organizations that engage in political campaign intervention.   Although these specific requirements are limited to the expedited review procedure, they may represent a further attempt by the IRS to clarify what is meant by political campaign intervention activity.

Also worth noting is that the report states that, as of June 20, 2013, the IRS has suspended the use of “be-on-the-lookout” (or “BOLO”) lists, which the IRS acknowledged were used by personnel in its Exempt Organizations unit to identify particular applications for tax exempt status to be subjected to additional scrutiny.  According to the IRS memo included in the report, the use of such lists will remain suspended until a more formal process for identifying, approving, and distributing the data included in them is established.

Note: The IRS indicated that it will be updating the status on its implementation of each of the nine recommendations set forth in the Treasury Inspector General for Tax Administration’s May 14, 2013 Report on its website.