New Tax Reporting Requirements for Political Organizations

Signed by President Clinton on July 1, 2000, P.L. 106-230 imposes three different reporting and disclosure requirements on all political organizations described as Sec. 527 organizations:

1. An initial notice to the IRS of an organization's Sec. 527 status;

2. Periodic reports on contributors and expenditures; and

3. Modified annual returns.

In October 2000, the Service released Rev. Rul. 2000-49, to provide guidance on applying the new law to various types of political organizations.

Background

Virtually all political organizations are Sec. 527 political organizations. Many Sec. 527 organizations report to the Federal Election Commission and file Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, with the IRS if they have taxable income under the Sec. 527 rules. By structuring activities so that they do not expressly engage in advocacy, certain organizations stayed outside the scope of Federal Election Campaign Act (FECA) criteria for political committees. The lack of Federal oversight of certain Sec. 527 organizations' political activities attracted those who wanted to participate anonymously in the political process, while alarming those who believed that there should be full disclosure of all political activities.

Forms, Exemptions and Deadlines

Form 8871: Political Organization Notice of Section 527 Status. In general, the requirement to file Form 8871 applies to Sec. 527 organizations. However, the following organizations are not subject to the notice and filing requirements:

1. Organizations required to report under FECA;

2. Organizations qualified under Sec. 501(c) that fall under Sec. 527(f)(1), which requires the filing of Form 1120-POL because they have made "exempt function" expenditures; or

3. Organizations that do not expect their gross receipts to exceed $25,000.

For newly formed organizations, Rev. Rul. 2000-49 states that if an organization reasonably anticipates that its annual gross receipts will be less than $25,000 for its first six tax years, it is not required to file Form 8871. However, if an organization does have annual gross receipts of $25,000 or more for any tax year, it is required to file Form 8871 within 30 days of receiving $25,000.

Separately segregated funds. Many exempt and nonexempt organizations have established separately segregated funds under Sec. 527(f)(3). As a result, these funds are treated as separate organizations for reporting and filing purposes. As such, they do not meet the exception afforded Sec. 501(c) organizations filing due to exempt-function expenditures and, unless they meet a different exception, are presently subject to the new requirements.

State and local committees. Due to the explicit exception to the application of the new rules for organizations required to report under FECA, many state and local organizations erroneously believed they were not subject to the reporting requirements, as they are required to report under similar state statutes and do not report under FECA. The Service clarified that, unless an organization meets a different exception, the new rules do apply to organizations that only participate in state and local activities. (However, there has been discussion on Capitol Hill that the next session of Congress may consider amendments to the statute to exempt such organizations from the requirements.)

Organizations already in existence on July 1, 2000, must have filed Form 8871 by July 31, 2000. An organization established on or after July 1, 2000, must transmit the notice within 24 hours after the date on which the organization is established. A failure to file Form 8871 will preclude the organization from being treated under Sec. 527. This would subject all gross receipts (less applicable deductions) to tax, similar to any other taxable organization. In addition, all political expenditures would be nondeductible under Sec. 162(e), thus subjecting all income to tax (with very few offsetting deductions).

Form 8872: Political Organization Report of Contributions and Expenditures. As noted, organizations required to File Form 8871 may also be required to file Form 8872 and provide information detailing their receipts and expenditures. Three exceptions exist for not filing Form 8872:

1. Organizations excepted from the requirement to file a Form 8871;

2. Political committees of a state or local candidate, including political committees of state or local officeholders; and

3. State and local committees of political parties.

All other political organizations (including state and local political action committees) are subject to the new reporting requirements, even if they file reports with state or local election agencies.

Form 8872 includes the name, address and (if an individual) the occupation and employer of any person to whom expenditures are made that aggregate $500 or more in a calendar year and the amount of such expenditure. The report must also include the name, address and (if an individual) the occupation and employer of any person who contributes in the aggregate $200 or more in a calendar year and the amount of such contribution. However, an organization is not required to report independent expenditures made by a person expressly advocating the election or defeat of a clearly identified candidate for Federal office, if the expenditures are made without cooperation or consultation with any such candidate (or any authorized committee or agent of such candidate) and are not made in concert with (or at the request or suggestion of) any such candidate (or authorized committee or agent of such candidate).

An organization can choose to File Form 8872 on a monthly basis or quarterly/semi-annual basis, but it must file on the same basis for the entire calendar year. In addition, depending on whether in the current year there is a general election for a Federal office, the due dates will change. Organizations should either consult the instructions to Form 8872 or Rev. Rul. 2000-49 for the due dates for their specific organization.

Form 1120-POL. In general, political organizations with taxable income in excess of the $100 specific deduction are required to file an annual income tax return on Form 1120-POL. For tax years beginning after June 30, 2000, a political organization with $25,000 or more in gross receipts for the tax year is also required to file Form 1120-POL, without regard to whether it has taxable income. Form 1120-POL is due on or before the fifteenth day of the third month after the close of the organization's tax year.

Form 990: Return of Organization Exempt from Income Tax. Prior to the new law, Sec. 527 organizations were not required to file Form 990. However, for tax years beginning after June 30, 2000, organizations required to file tax returns are also required to file Form 990. The filing thresholds afforded other organizations required to file Form 990 apply to Sec. 527 organizations. For example, organizations with gross receipts less than $100,000 and assets under $250,000 may file Form 990EZ; organizations with gross receipts under $25,000 are not required to file Form 990 or Form 990EZ. Form 990 is due on or before the fifteenth day of the fifth month after the close of the organization's tax year.

A political organization that fails to file Form 1120-POL or Form 990, or fails to include required information on those returns, is subject to a penalty of $20 per day for every day such failure continues. The maximum penalty imposed for any one return is the lesser of $10,000 or 5% of the organization's gross receipts for the year. The penalty is increased to $100 per day (with a maximum penalty of $50,000) for organizations with gross receipts exceeding $1 million for any year.

Additional Information

Public inspection requirements. Forms 8871, 8872, 1120-POL and 990 are all subject to the Sec. 6104 public inspection requirements. Similar to the requirements of other Sec. 501(c) organizations, political organizations must maintain copies of their returns subject to public inspection at their location. The organizations must also provide a copy of the returns to any person requesting a copy in person or in writing without charge, other than a reasonable charge for reproduction and postage. If an organization's returns are "widely available," organizations are not required to respond to requests for copies if they provide the Website address at which the returns are available. Returns for the previous three years must be made available.

Forms 8871 and 8872 filed by organizations are available on the IRS Website at www.irs.gov/polorgs. The availability of these documents on the Web meets the "widely available" standard for the public inspection requirements.

EINs. Before filing Form 8871, a political organization must have its own employer identification number (EIN), even if it does not have any employees.

From Randy Snowling, J.D., Don Herskovitz, J.D., and Jennifer Deutsch, CPA, Washington, DC