Under Scrutiny: The IRS Is Taking a Closer Look at 501(c)(4), 501(c)(5), and 501(c)(6) Organizations
If you are a nonprofit organization that recently received this nine-page questionnaire from the IRS (IRS Form 14449), there’s no need to panic, but it may be a good time to reconnect with nonprofit legal counsel. The questionnaire is not an audit and receiving it does not mean that the IRS believes that your organization has done something wrong. The IRS is issuing the questionnaire as part of a compliance project. This year, IRS Exempt Organizations group will send the questionnaire to more than 1,000 501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural or horticultural organizations, and 501(c)(6) business leagues. These organizations are referred to as “self-declared” organizations because, unlike 501(c)(3) organizations, they are not required to apply to the IRS for recognition of tax-exempt status (though for practical reasons many of these organizations do apply for recognition of exempt status).
The purpose of the questionnaire is to learn more about self-declared tax-exempt organizations and to determine whether they are currently complying with the law; it is also meant to educate organizations and encourage voluntary compliance. An organization that receives the questionnaire has 60 days from the date of the cover letter to respond. An additional 30 days may be granted if needed. After the questionnaires have been collected and reviewed, the IRS may choose to commence formal examinations of a number of the organizations that completed questionnaires. For more information about the difference between a compliance check and an IRS examination (or audit), see IRS Publication 4386. After the examination period, the IRS will quantify its data and release the findings to the public.
The questionnaire consists of a wide range of questions relating to the operations of your organization, including its lobbying activities, revenue sources, and compensation to officers and directors. Many of the questions seem straight-forward; however, the questionnaire does include traps for the unwary. Receiving the questionnaire offers the opportunity for your organization to reconnect with legal counsel to better understand your organization’s compliance obligations. An attorney with experience in nonprofit law can guide you through the questions, point out what the IRS is looking for, and help you avoid traps that could lead to an in-depth IRS examination.
The questionnaire is voluntary and failure to complete it will not automatically result in the loss of exempt status. However, the IRS may choose to pursue an examination of any organization that chooses not to complete the questionnaire. More information about the questionnaire can be found here on the IRS website.