Political Organization Reporting and Disclosure after HR 5596

In 2000, to make political organizations (especially political action committees) exempt under Sec. 527 more accountable, P.L. 106-230 required most political organizations to file the following forms with the IRS for tax years beginning after June 30, 2000:

• Form 8871, Political Organization Notice of 527 Status, an initial registration;

• Form 8872, Political Organization Report of Contributions and Expenditures, periodic reports on receipts and expenditures; and

• Form 990, Return of Organization Exempt from Income Tax, exempt organization informational returns.

Most organizations were also required to file Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, an income tax return, even if they had no taxable income. All of these reports were subject to public disclosure. Forms 8871 and 8872 were filed electronically and posted on the IRS Website. These requirements raised certain constitutional issues and had the effect of causing many organizations to report the same information to more than one authority. Compliance levels were low, even among many prominent political organizations, as many were simply unaware of the changes or did not fully understand them.

New Legislation

To correct some of the problems created by the 2000 legislation, HR 5596 was enacted in late 2002. Exemptions from the reporting requirements were expanded and made retroactive to July 1, 2000, and Form 1120-POL was excluded from public inspection. Many organizations delinquent on certain filings required by the 2000 legislation were rewarded with elimination of the filing requirements.

Additionally, the law created the qualified state or local political organization (QSLPO), a new category of political organization, defined by Sec. 527(e) as a political organization that meets the following requirements:

1. Its political activities relate solely to state or local public office;

2. It is subject to state law requiring it to report substantially the same information about revenues and expenditures to a state agency that it otherwise would have been required to report to the IRS;

3. The state agency makes those reports publicly available; and

4. No Federal candidate or office holder controls it, materially participates in its direction, solicits contributions for it or directs its disbursements.

QSLPOs are exempted from filings in certain situations (described below).

Current Sec. 527 Filing Requirements

Form 8871 must be filed electronically within 24 hours of a political organizations formation. The following organizations are excepted from this requirement: political committees required to report to the Federal Election Committee; campaign committees of state and local candidates; and organizations that reasonably expect receipts to be less than $25,000. If Form 8871 is required, all income (including the organizations political contributions) will be deemed taxable until the form is filed.

Form 8872 must be filed monthly, quarterly or semiannually (at the organizations option) by all organizations required to file Form 8871, except for QSLPOs. Failure to file this form can result in undisclosed contributions and expenditures being taxed at the highest corporate rate.

Form 1120-POL is required to be filed two and one-half months after year-end by any political organization with taxable income greater than $100. Taxable income is usually the organizations net investment income. HR 5596 returned Form 1120-POL to its pre-June 2000 taxable income filing threshold.

Form 990 must be filed four and one-half months after year-end by organizations with annual taxable and nontaxable gross receipts of at least $25,000. Organizations not required to file Form 8871, and caucuses or associations of state or local officials, are excepted from filing Form 990. The $25,000 gross receipts filing threshold is increased to $100,000 for QSLPOs.

Conclusion

Political organizations and their advisers must stay abreast of the changing compliance requirements for their organizations. The price for noncompliance can be unexpected taxes, penalties and interest. It is wise to continue monitoring developments in this area, including challenges to the law.

From R. Michael Sorrells, CPA, Washington, DC