Source: https://www.everycrsreport.com/reports/96-264.html
Timestamp: 2019-04-21 08:05:26+00:00

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This report answers frequently asked questions about tax-exempt organizations. It provides basic answers and refers to sources of additional information that might be useful. The report focuses on the types of organizations described in Internal Revenue Code (IRC) Section 501(c), with the main emphasis on Section 501(c)(3) charitable organizations.
Another group of questions provides general information on how to form a tax-exempt organization, what information must be disclosed to the IRS and the public, and how an organization might lose its tax-exempt status.
The report ends with questions intended to help the reader find resources that provide information on specific organizations and additional information on tax-exempt organizations in general.
This report summarizes information with respect to tax-exempt organizations. It should not be relied on for specific tax advice. Such advice should be sought directly from the IRS or qualified tax professionals.
1. What is a tax-exempt organization?
2. What is a nonprofit (not-for-profit) organization?
3. What are the differences between Section 501(c)(3) and Section 501(c)(4) organizations?
4. Can an organization be related to another organization?
5. What is a private foundation?
6. When are donations tax deductible as charitable contributions or dues?
7. Can tax-exempt organizations lobby?
8. Can tax-exempt organizations participate in election activities?
9. How do you set up a tax-exempt organization?
10. How does an organization lose its tax-exempt status?
11. What tax records do organizations have to prepare?
12. Are tax-exempt organizations required to disclose information to the public?
13. Are there organizations that evaluate charities or report on their activities?
14. What resources provide information on general issues involving tax-exempt organizations?
One set of questions addresses some of the primary characteristics of tax-exempt organizations, including whether they may participate in lobbying and election-related activities, and defines the terms "tax-exempt," "nonprofit (not-for-profit)," and "private foundation."
Other types of organizations that qualify for tax-exempt status include social welfare organizations, labor unions, trade associations, social clubs, veterans' organizations, and fraternal organizations. A list of the types of tax-exempt organizations appears at the end of this report (Table A-1).
The term "tax-exempt organization" is often used interchangeably with the term "nonprofit organization." This can be misleading depending on the context. The term "tax-exempt organization" generally refers to an organization that meets the criteria in federal law (the IRC) to be exempt from federal income taxes. The term "nonprofit organization" can be used to mean a corporation that is not intended to be a profit-making corporation and is organized as such under state law. The status and privileges of the entity are determined under state law. The requirements vary by state but usually take into account the fact that nonprofit corporations typically do not have shareholders or the same business motives as for-profit corporations.
A nonprofit corporation is not automatically a tax-exempt organization. Because the qualifications for nonprofit status vary among states, it is possible for the term "nonprofit organization" to be broader than, narrower than, or identical to the term "tax-exempt organization." For a nonprofit organization to be exempt from federal income taxes, it must meet the statutory requirements found in the IRC and, in some cases, file an application with the IRS.
These two differences are important when an organization is choosing whether to be a Section 501(c)(3) or Section 501(c)(4) organization. If the group's agenda depends on influencing public opinion or the legislative process, it may be appropriate to form as a Section 501(c)(4) organization. Otherwise, it will usually make more sense to be a Section 501(c)(3) organization in order to have the advantage of tax-deductible contributions.
While an organization must identify itself as one type of Section 501(c) organization, it may be linked with another Section 501(c) organization under certain circumstances. For example, it is common to see a group that wants to lobby as well as conduct charitable activities set up both a Section 501(c)(4) organization and a Section 501(c)(3) organization. Another common example is for a Section 501(c)(6) trade association, such as the American Bar Association or American Medical Association, to have a similarly named foundation that conducts charitable activities. In addition, a Section 501(c) organization may be linked with another type of tax-exempt organization, such as a Section 527 political organization. (See Question 8.) In all of these situations, the organizations must be legally separate entities, and their activities and funds must be kept separate.
A Section 501(c)(3) organization is either a public charity or private foundation. Public charities have broad public support and tend to provide charitable services directly to the intended beneficiaries. Private foundations often are tightly controlled, receive significant portions of their funds from a small number of donors or a single source, and make grants to other organizations rather than directly carry out charitable activities. Because these factors create the potential for self-dealing or abuse of position by the small group controlling the entity, private foundations are more closely regulated than public charities. As such, private foundations are subject to penalty taxes for doing things such as failing to distribute a certain amount of their income each year; making investments that jeopardize their charitable purpose; having excess business holdings; and failing to maintain expenditure responsibility over certain grants.3 Section 501(c)(3) organizations are presumed to be private foundations and, if they want to be treated as a public charity, must tell the IRS how they qualify for public charity status based on the support and control tests found in IRC Section 509.
Even if a contribution is deductible, individual taxpayers may not be able to deduct the entire contribution. For example, only individuals who itemize deductions may deduct their charitable contributions,6 and Section 170 may restrict the amount of the deduction depending on the size and nature of the contribution. In addition, taxpayers must comply with certain substantiation requirements, including that (1) a written acknowledgment be obtained from the organization for any contribution that exceeds $250 in value and (2) any cash donation be substantiated by a bank record or written communication from the organization showing its name and the date and amount of the contribution.
When a contribution to a tax-exempt organization is not deductible, the organization must generally notify the potential contributor of that fact at the time of solicitation.7 An organization that fails to provide the notification faces a fine of $1,000 for each day the failure occurs, with an annual cap of $10,000.8 The fines are higher and the cap is eliminated for organizations that intentionally disregard the notification requirement.
Dues to some tax-exempt organizations, such as Section 501(c)(5) labor unions and Section 501(c)(6) trade associations, may be deductible as business expenses under IRC Section 162. If an organization conducts lobbying or political activities, Section 162(e) disallows a deduction for the portion of dues that represents lobbying or political expenditures.9 In general, an organization must notify its members of the amount that is nondeductible or be subject to a proxy tax on its lobbying or political expenditures.10 Furthermore, individuals face additional restrictions in being able to deduct their dues. For example, only individuals who itemize deductions and have significant business expenses (i.e., exceeding 2% of adjusted gross income) may deduct the dues.
Section 501(c)(3) organizations are the primary example of entities that are limited in the amount of lobbying they may do: "no substantial part" of their activities can be lobbying.12 The IRC does not define "no substantial part." In interpreting the term, courts have looked at the amount of expenditures or time spent on lobbying,13 or examined the lobbying in the broad context of the organization's purpose and activities.14 Because the "no substantial part" standard is indefinite, Section 501(c)(3) organizations, with the exception of churches and related organizations, may elect to have their lobbying activities measured by a numerical limit found in IRC Section 4911.15 Most organizations do not make this election. A Section 501(c)(3) organization that conducts substantial lobbying may lose its exempt status and face possible excise taxes under Sections 4911 and 4912. Notably, private foundations (discussed in Question 5) are taxed under IRC Section 4945 on any lobbying expenditures made during the year, regardless of whether such activities are substantial.
Although Section 501(c)(4) organizations may lobby under the tax laws, Section 18 of the Lobbying Disclosure Act of 1995 (P.L. 104-65) prohibits them from receiving federal grants, loans, or other awards if they engage in lobbying activities.17 This prohibition applies even if the lobbying is conducted with the organization's own funds. The Lobbying Disclosure Act also imposes registration and disclosure requirements on organizations with paid lobbyists whose lobbying activities exceed time and monetary limits.
For many tax-exempt organizations, the first step is to incorporate the organization. Incorporation is not required for federal tax-exempt status, but organizations incorporate for a variety of reasons, including to receive limited personal liability for their members. Formation of the organization is achieved under state law and requirements vary by state. An organization will likely need to register with the appropriate Secretary of State26 to reserve that organization's name and to enable the group to solicit charitable contributions, do business, and own property in the state. If the organization incorporates, it will also usually have to file articles of incorporation that include the organization's purposes and the names of its incorporators.
Whether or not the organization incorporates, it may need to file for recognition of tax-exempt status from the IRS depending on its tax status. If the organization will be a Section 501(c)(3) organization, it is generally required to file an application for tax-exempt status with the IRS.27 Some organizations that qualify for Section 501(c)(3) status, including organizations with gross receipts of normally not more than $5,000 and churches, are excused from the filing requirement. Organizations seeking Section 501(c)(3) status file IRS Form 1023. Notably, in 2014, the IRS released a simplified application form (Form 1023-EZ) for Section 501(c)(3) groups that meet certain size and other requirements (e.g., the organization must expect that its annual gross receipts will not annually exceed $50,000 for the current and next two years). An organization filing the Form 1023 or Form 1023-EZ must pay a fee, as described below. It must also obtain an employer identification number (IRS Form SS-4), even if it does not have any employees.
Other types of Section 501(c) organizations are generally not required to file an application for tax-exempt status, although they may choose to do so.28 If they so choose, these groups would file an application using the IRS Form 1024.
Organizations filing for recognition of tax-exempt status must pay a filing fee with IRS Form 8718 (User Fee for Exempt Organization Determination Letter Request). For an organization filing for exemption under Section 501 that has had annual gross receipts averaging $10,000 or less during the past four years, or for a new organization that anticipates gross receipts averaging $10,000 or less during the next four years, the application fee is $400. The application fee is $850 for a Section 501(c) organization with more than an average of $10,000 in gross receipts for the prior four years, as well as for a new Section 501(c) organization anticipating gross receipts in excess of an average of more than $10,000 in gross receipts for the coming four years.
If the IRS does not act on the application of a Section 501(c)(3) organization within 270 days, the organization may seek a declaratory judgment in federal court regarding its status.29 This provision does not apply to other types of Section 501(c) entities.
In general, once an organization has tax-exempt status, it can continue as a tax-exempt organization unless there is a material change in its character, purposes, or methods of operation. The IRS may revoke an organization's exempt status because it violates the law (e.g., if a Section 501(c)(3) organization engages in prohibited campaign activity) or because of changes in the law or regulations or for other good cause. Furthermore, the IRS can suspend the tax-exempt status of an organization that is (1) designated a terrorist organization by executive order or under authority found in the Immigration and Nationality Act, the International Emergency Economic Powers Act, or the United Nations Participation Act or (2) designated by executive order as supporting terrorism or engaging in terrorist activity.30 With the exception of organizations whose status is suspended due to terrorism issues, organizations may ask for court review of any IRS attempt to revoke their exempt status.
It does not appear possible to bring a legal suit to challenge the IRS's granting of an exemption to an organization. Although prior to 1976, third parties had been successful in bringing suits to challenge IRS policies in administering the tax laws,32 the Supreme Court in 1976 severely limited this practice by requiring plaintiffs to show a direct personal injury that is likely to be redressed by a favorable decision in the case.33 Subsequently in the 1989 case United States Catholic Conference v. Baker,34 the Second Circuit Court of Appeals reviewed the standing of various parties to force the IRS to examine the tax-exempt status of the Catholic Church because of its political activities and concluded that it would be a very rare case when a third party would have standing to bring such a suit.
Under the IRC, the application for exempt status and the annual information return (Form 990) are open to public inspection.40 In addition, Section 501(c)(3) organizations must disclose their unrelated business income tax returns (Form 990-T).
Certain information does not have to be disclosed. Organizations are generally not required to disclose the names and addresses of any contributors. Furthermore, the IRS is permitted to create exceptions to public disclosure of information relating to trade secrets, patents, processes, styles of work, or apparatus, if public disclosure would adversely affect the organization or if the information would adversely affect the national defense.
If an organization refuses to provide a copy of its returns, the requestor may file Form 13909 Tax-Exempt Organization Complaint (Referral) Form with the IRS. If an organization fails to provide the return, the IRS may assess statutory penalties under IRC Section 6652.
Any return or application that must be disclosed to the public by the organization must also be made publicly available by the IRS.43 The information may be obtained from the IRS by using Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization. In addition, the IRS has some information submitted by Section 527 political organizations on its website.
The organizations listed under Question 13 also provide information on various tax-exempt organizations. In particular, GuideStar [www.guidestar.org] may have copies of the organization's recent Form 990s on its website.
The following are examples of organizations that report on the activities of charities. The information comes from the organizations' websites.
Charity Watch (formerly the American Institute of Philanthropy) is a nonprofit charity watchdog and information service that provides ratings, opinions, and other information on the financial and managerial practices of selected charities. Access to the reports is not free, but the website does list charities that have received the highest grades.
The BBB Wise Giving Alliance collects information and prepares reports on several hundred national charitable organizations. The Alliance does not recommend or rate charities, but serves to report information on the organization's background, staff and governance, financial status and fund raising practices. The report will also state whether the charity meets the Alliance's standards for charitable solicitations. These reports are available on the Alliance's website.
The GuideStar website contains information on more than 1 million organizations. Notably, the site contains the annual returns (Form 990) for many organizations. Access to recent Form 990s and certain other information is free (although registration is required); more in-depth information is available for a membership fee.
The following organizations provide further information on general topics related to tax-exempt organizations, including management, accountability, and fund-raising practices.
The Independent Sector is a coalition of charitable organizations and others interested in the nonprofit sector. A prime focus of the group is to help nonprofit organizations implement effective accountability and ethical standards, and the group's website includes various standards and models to address these issues. The group also provides information on public policy issues of interest to nonprofit organizations and conducts and publishes research on various aspects of charitable giving and volunteering in the United States.
The Federal Trade Commission (FTC) website offers information to consumers, businesses, and nonprofit organizations about how to guard against charity fraud. The site provides numerous FTC articles highlighting common scam practices and offering advice on safe methods to donate, as well as ways to determine if a charitable organization is legitimate, such as a Charity Checklist, available at http://www.consumer.ftc.gov/articles/0074-giving-charity.
The Society for Nonprofit Organizations (SNPO) is an organization whose purpose is to provide a forum for the exchange of information on nonprofit organizations, offering services to directors, board members, volunteers, and anyone interested in nonprofit organizations operations. It offers professional support services and referral services to members and maintains an information center of books, periodicals, and tapes.
A list of the type of entities found in IRC Chapter 1, Subchapter F ("Exempt Organizations") is provided in Table A-1.
[author name scrubbed], former Legislative Attorney, is the initial author of this report.
The IRS recognizes that an organization qualifying under Section 501(c)(4) may also meet the criteria to qualify under Section 501(c)(3). See 26 C.F.R. §1.501(c)(4)-1(a)(2)(i).
For a policy discussion of the charitable contribution deduction, see CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by [author name scrubbed] and [author name scrubbed].
For an economic analysis related to individuals who do not itemize deductions, see CRS Report RL31108, Economic Analysis of the Charitable Contribution Deduction for Non-Itemizers, by [author name scrubbed].
For more information, see CRS Report R42381, Deductibility of Corporate Campaign Expenditures, by [author name scrubbed].
For more information, see CRS Report RL33377, Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by [author name scrubbed].
IRC §501(c)(3). Section 501(c)(29) organizations are similarly limited. Some organizations appear to be generally prohibited from lobbying—those described in Sections 501(c)(2), (c)(17), (c)(18), (c)(21), (c)(22), (c)(24), and (c)(25). Most of these are trusts that must use their income exclusively for the purposes for which they are established.
See Seasongood v. Comm'r, 227 F.2d 907 (6th Cir. 1955) (where the court found that an organization whose lobbying was about 5% of its activities was not engaged in a substantial amount of lobbying); League of Women Voters v. United States, 180 F. Supp. 379 (Ct. Cl. 1960) (where the court looked at the amount of hours the organization spent on legislative activities); Haswell v. United States, 205 Ct. Cl. 421 (Ct. Cl. 1975) (where the court found the fact that between 19% and 20.5% of the organization's expenditures were for lobbying was evidence that the organization violated the "no substantial part" rule).
See Christian Echoes Nat'l Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972); Kuper v. Commissioner, 332 F.2d 562 (3rd Cir. 1964); Dulles v. Johnson, 273 F.2d 362 (2nd Cir. 1959); Krohn v. United States, 246 F. Supp. 341 (D. Colo. 1965).
See footnote 12 for exceptions.
For more information, see CRS Report 96-809, Lobbying Regulations on Non-Profit Organizations, by [author name scrubbed].
IRC §501(c)(3). Other entities not allowed to engage in campaign activity are those described in Sections 501(c)(2), (c)(17), (c)(18), (c)(21), (c)(22), (c)(24), (c)(25), and (c)(29). Most of these are trusts that must use their income exclusively for the purposes for which they are established.
See also CRS Report R42684, Political Ads: Issue Advocacy or Campaign Activity Under the Tax Code?, by [author name scrubbed].
See footnote 19 for exceptions.
See, e.g., CRS Report R40183, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by [author name scrubbed] and [author name scrubbed].
For more information, see CRS Report RS21716, Political Organizations Under Section 527 of the Internal Revenue Code, by [author name scrubbed].
The National Association of State Charity Officials website provides links to state offices that regulate charitable solicitations at http://www.nasconet.org/. The site includes the unified registration form for charities seeking to solicit in multiple states.
All IRS forms and instructions mentioned in this report are available on the IRS website at http://www.irs.gov. Additionally, IRS Publication 557, Tax-Exempt Status for Your Organization, contains helpful information and is also available on the agency's website.
Besides §501(c)(3) organizations, the only other types of §501(c) organizations that must file an application for tax-exempt status are §501(c)(9) voluntary employees' benefits trusts (VEBAs) and §501(c)(17) supplement unemployment compensation benefits trusts. See IRC §505(c).
IRC §7428 (also providing similar relief for §521 cooperatives).
See e.g., Green v. Kennedy, 309 F.Supp. 1127 (D.D.C. 1970) (where a class action was brought to force the IRS to stop granting exempt status to racially discriminatory private schools) and its subsequent history found at 398 U.S. 956 (1970), 330 F.Supp. 1150 (D.D.C. 1971), culminating in a summary affirmance, Coit v. Green, 404 U.S. 997 (1971)).
Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26 (1976).
United States Catholic Conference v. Baker, 885 F.2d 1020 (2nd Cir. 1989).
Some organizations do not have to file any information return, such as churches and certain church-related organizations. IRC §6033(a)(3).
IRC §6652(c)(1)(A). The maximum penalty is the lesser of $10,000 or 5% of the organization's gross receipts. For organizations exceeding $1 million in gross receipts, the maximum penalty is $50,000.
For more information, see IRS Publication 15, Circular E, Employer's Tax Guide.
For more information on §527 reporting requirements, see CRS Report RS21716, Political Organizations Under Section 527 of the Internal Revenue Code, by [author name scrubbed].
IRC §6104(d). If an organization is denied exempt status, its application for exemption is not open to public inspection.
IRC §6104(d)(4); see also 26 C.F.R. 301.6104(d)-2, which states that a tax-exempt organization can make its annual information return "widely available" by posting the document on an Internet page established and maintained by the organization or by having the document posted, as part of a database of similar documents of other tax-exempt organizations, on an Internet page established and maintained by another entity. This regulation also states what criteria must be met for a document to be considered widely available (e.g., the website must inform readers that the document is available and how it can be downloaded, the document must be an exact reproduction and be accessible without special hardware or software).
See 26 C.F.R. 301.610(d)-3 for discussion of what constitutes harassment.

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