Characteristics of and Reporting Requirements for Selected Tax-Exempt Organizations

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

This report addresses the differences among the tax-exempt organizations described in Internal
Revenue Code subsections 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), and section 527—
charitable organizations, social welfare organizations, labor unions, trade associations, and
political organizations, respectively.
Each type of organization has a unique statutory definition, enjoys benefits from obtaining tax-
exempt status, is subject to statutory limitations on its activities, and must disclose certain
information to the IRS and the general public. At the end of the report is a chart that summarizes
the organizations’ characteristics and reporting requirements.

Organizational Definitions........................................................................................................1
IRC § 501(c)(3)...................................................................................................................1
IRC § 501(c)(4)...................................................................................................................2
IRC § 501(c)(5)...................................................................................................................2
IRC § 501(c)(6)...................................................................................................................2
IRC § 527............................................................................................................................2
Benefits of Tax-Exempt Status..................................................................................................3
Tax exemption.....................................................................................................................3
Deductible contributions and dues......................................................................................4
Non-tax benefits..................................................................................................................5
Disadvantages of Tax-Exempt Status........................................................................................5
Restrictions on lobbying.....................................................................................................5
Restrictions on political campaign activity.........................................................................6
Related Organizations...............................................................................................................6
Requirements for Obtaining Tax-Exempt Status.......................................................................7
IRC § 501(c) organizations.................................................................................................7
IRC § 527 organizations.....................................................................................................7
IRS Reporting Requirements....................................................................................................8
IRC § 501(c) organizations.................................................................................................8
IRC § 527 organizations.....................................................................................................9
Penalt ie s ...................................................................................................................... ...... 10
Public Disclosure of Returns...................................................................................................10
Table 1. Characteristics of and Reporting Requirements for Selected Tax-Exempt
Orga niza tions .................................................................................................................. ........... 12
Author Contact Information..........................................................................................................15

here are more than 30 types of tax-exempt organizations described in the Internal Revenue
Code (IRC). Most tax-exempt organizations fall into one of five types: the organizations
described in IRC §§ 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), and 527. This report was T

developed to answer frequently asked questions about the differences among these organizations:
how they are defined; what they can and cannot do; how they obtain exempt status; and what kind
of information they must disclose to the IRS and the public. As will be seen, the same rules often
apply to the four organizations described in IRC § 501(c), while different ones apply to 527
organizations.
For purposes of this report, the term “501(c) organizations” refers to the organizations described
in IRC §§ 501(c)(3), 501(c)(4), 501(c)(5) and 501(c)(6). It should be noted that there are many
other organizations described in IRC § 501(c) and that the rules described in this report do not
necessarily apply to them.
The organizations described in IRC § 501(c)(3) are commonly referred to as “charitable
organizations.” The section describes them as:
^o^r^g^aⁿⁱ^zed^an^d^o^p^e^r^a^ted^ex^cl^u^s^iv^el^y^f^o^r^r^e^lig^io^u^s^{, c}^h^ar^itab^l^e^,^scien^t^if^ic,^testiⁿ^g^f^o^r^p^u^b^lic
^saf^e^t^y^{, l}^iter^a^r^y^{, o}^r^ed^u^c^a^tioⁿ^a^l^p^u^r^p^o^s^{es, o}^r^to^f^o^sterⁿ^a^tioⁿ^a^l^o^rⁱⁿ^terⁿ^at^ioⁿ^a^l^a^m^a^t^eu^r^sp^o^r^ts
^co^m^p^eti^tioⁿ⁽^b^u^t^oⁿ^l^y^ifⁿ^o^p^a^r^t^o^f^{its acti}^v^it^{ies i}ⁿ^v^o^l^v^{e t}^h^{e p}^r^o^v^isioⁿ^o^f^at^h^l^etic^f^acilitie^{s o}^r
^eq^uⁱ^p^m^eⁿ^t)^{, o}^r^f^o^r^th^{e p}^r^ev^en^tioⁿ^o^f^cr^u^e^lt^y^to^ch^ild^r^eⁿ^o^r^an^im^al^s^,ⁿ^o^p^a^r^t^o^f^t^h^eⁿ^e^t^e^a^rⁿⁱⁿ^g^s
^of^w^hⁱ^c^hⁱⁿ^u^r^es^t^o^t^h^{e ben}^e^fⁱ^t^of^any^pri^v^a^t^{e s}^h^are^h^ol^{der or}ⁱⁿ^di^vⁱ^du^al^{, n}^o^su^bs^t^a^ntⁱ^a^l^part^of
^th^{e act}^iv^it^{ies o}^f^w^h^ic^h^{is car}^r^yⁱⁿ^g^oⁿ^p^r^o^p^a^g^aⁿ^d^{a, o}^r^o^t^h^e^r^wⁱ^s^{e atte}^m^p^tiⁿ^g^{, to}ⁱⁿ^f^l^u^eⁿ^c^e
^legⁱ^s^l^ation^{... an}^d^w^h^ich^does^{not participate in}^{, o}^rⁱⁿ^terv^en^{e i}ⁿ⁽ⁱⁿ^c^l^u^ding^th^{e pu}^blis^hⁱ^ng^or
^dis^t^ribu^tiⁿ^g^of^s^t^ate^m^ents^{), any}^{political ca}^m^p^ai^gⁿ^oⁿ^beh^a^l^f^{of (or in}^oppos^ition^{to) a}ⁿ^y
^can^di^dat^e^f^o^{r pu}^blⁱ^c^of^fi^ce.
There are two types of 501(c)(3) organizations: public charities and private foundations. In
general, public charities receive contributions from a variety of sources, while private foundations ¹
receive contributions from limited sources and are often controlled by their donors. Due to fear
of abuse, private foundations are subject to stricter regulation than public charities. Examples of
501(c)(3) public charities include the Red Cross, churches, schools, hospitals, Boy Scouts, Girl
Scouts, animal shelters, and Little League. Examples of private foundations include the John D.
and Catherine T. MacArthur Foundation, the Ford Foundation, the Rockefeller Brothers Fund,
Inc., and the Mars Foundation.
An important limitation to note from the organizational definition is that 501(c)(3) organizations
may only engage in a non-substantial amount of lobbying and are prohibited from engaging in
political campaign activity. None of the other exempt organizations discussed in this report are
similarly limited. This issue is discussed below in the “Disadvantages of Tax-Exempt Status”
section.

¹^I^R^C^§⁵⁰^9.

The organizations described in IRC § 501(c)(4) are generally referred to as “social welfare
organizations.” The section describes these organizations as:
^[^c^]ⁱ^vi^c^l^e^a^g^ue^s^o^r^o^r^gaⁿⁱ^z^a^tⁱ^o^ns^no^t^o^r^gaⁿⁱ^z^e^d^fo^r^p^r^o^fⁱ^t^b^u^t^o^p^e^r^a^t^e^d^e^x^c^l^usi^v^e^l^y^fo^r^t^h^e
^prom^otion^of^s^o^cial^w^e^l^f^{are, or local as}^s^o^ciatioⁿ^s^of^e^m^plo^y^ee^s^,^th^e^m^e^m^b^ers^h^{ip of}^w^hⁱ^c^hⁱ^s
^lⁱ^mⁱ^t^e^{d t}^o^t^h^{e e}^m^p^l^o^y^ees^o^f^{a des}ⁱ^gn^at^{ed pers}^on^{or pers}^on^sⁱⁿ^{a part}ⁱ^c^u^l^ar^m^uⁿⁱ^ci^palⁱ^t^y^,^an^d
^th^{e n}^e^{t ear}ⁿⁱⁿ^g^s^of^w^h^ich^{are d}^e^v^o^{ted ex}^clusⁱ^v^el^y^{to ch}^aritabl^{e, edu}^ca^tioⁿ^a^{l, o}^r^r^ecr^eatioⁿ^a^l
^pu^rpos^es^.
Examples of 501(c)(4) organizations include the National Rifle Association and the Sierra Club.
As can be seen from the organizational definitions in IRC §§ 501(c)(3) and 501(c)(4), these
organizations have some overlapping characteristics. Both sections include organizations that
operate for charitable purposes and are restricted in that no earnings may be used to benefit
private shareholders or individuals. There are, however, two important differences between them.
First, 501(c)(3) organizations are eligible to receive tax-deductible contributions, but 501(c)(4)
organizations are not (see “Benefits of Tax-Exempt Status” section, below). Second, 501(c)(3)
organizations are more limited in the amount and types of political activity they may do (see
“Disadvantages of Tax-Exempt Status” section, below). Thus, an organization that could qualify
under either section will generally choose based on which is more important: receiving tax-
deductible contributions or participating in political activity.
IRC § 501(c)(5) organizations are described as “labor, agricultural, or horticultural
organizations.” Most of these organizations are labor unions.
The organizations described in IRC § 501(c)(6) are generally thought of as trade associations. The
section describes these organizations as:
^[b]u^sⁱⁿ^e^s^s^lea^g^u^e^s^,^c^h^a^m^ber^s^of^co^m^m^e^{rce, real es}^tate^boards^,^boa^rds^of^{trade, o}^r
^prof^es^sⁱ^on^al^f^{ootball leagu}^e^s^{... n}^o^{t org}^aⁿⁱ^zed^f^o^{r prof}^{it an}^dⁿ^o^{part of}^th^eⁿ^e^{t ear}ⁿⁱ^ngs^of
^w^hⁱ^c^hⁱⁿ^u^r^es^t^o^t^h^{e be}ⁿ^e^fi^t^of^any^pri^v^a^t^{e s}^h^are^h^ol^{der or i}ⁿ^di^vⁱ^du^al^.
Examples of 501(c)(6) organizations include the Chamber of Commerce, Jaycees, American Bar
Association, American Medical Association, and National Association of Manufacturers.
The organizations described in IRC § 527 are political organizations or funds organized and
operated primarily for accepting contributions and/or making expenditures for an exempt ²³
function. Section 527 defines an exempt function as:

²^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^S²¹⁷¹^6,^Poli^tic^{al O}^r^g^aⁿⁱ^z^a^tio^ns^Uⁿ^de^r^Se^c^tio^{n 5}²⁷^of^the^Iⁿ^te^r^nal^Re^v^e^nue
^C^ode^{, by}^Er^ik^a^L^unde^r^.

ⁱⁿ^fl^ue^ncⁱⁿ^{g o}^r^a^t^t^e^m^p^tⁱⁿ^g^t^oⁱⁿ^fl^ue^nc^e^t^h^e^se^l^e^c^tⁱ^o^n,^no^mⁱ^na^tⁱ^oⁿ^,^e^l^e^c^tⁱ^o^n,^o^r^a^ppoiⁿ^t^m^eⁿ^t^of
^an^yⁱⁿ^dⁱ^vⁱ^d^u^{al to}^an^y^Fed^e^r^a^{l, State, o}^r^lo^cal^p^u^b^{lic o}^f^fⁱ^{ce o}^r^o^f^fⁱ^{ce i}ⁿ^{a p}^o^litical
^o^r^gaⁿⁱ^z^a^tⁱ^o^n,^o^r^t^h^e^e^l^e^c^tⁱ^o^{n o}^f^P^r^e^sⁱ^d^eⁿ^tⁱ^a^l^o^r^Vice-^P^r^es^iden^ti^al^electors^,^w^h^et^h^e^r^orⁿ^o^t^s^u^ch
ⁱⁿ^divⁱ^d^u^{al or electors}^{are s}^e^lected^{, n}^o^mⁱⁿ^a^{ted, elected, or a}^p^poin^t^ed.
IRC § 527 encompasses every kind of political committee, including a candidate committee, a
political party, and a political action committee set up by a union, a corporation or a group of
politically-interested citizens. In recent years, the term “527 organization” has been used to
describe certain groups that intend to influence federal elections in ways that may be outside the
scope of federal election law; however, the tax definition of the term is not limited to such
organizations.
Organizations that qualify for tax-exempt status may receive various types of benefits from the
federal government. These include tax and non-tax benefits.
Most exempt organizations, including those described in IRC §§ 501(c)(3), 501(c)(4), 501(c)(5)
and 501(c)(6), are generally exempt from tax on their income. However, they are taxed on any ⁴
income from unrelated business activities. Additionally, 501(c) organizations, particularly
501(c)(3) organizations, are subject to tax if they engage in certain activities. Taxable activities
include making political expenditures, participating in excess lobbying and political activities,
and engaging in excess personal benefit transactions (i.e., transactions where insiders realize ⁵
unwarranted benefits from their relationship with the organization).
527 political organizations are exempt from income tax to the extent that they only have exempt
function income and engage in exempt function activities. Exempt function income is income from
such sources as contributions, membership dues and political fundraising. The funds must be
segregated to be used for an exempt function. 527 organizations are taxed if they have income
derived from other sources (e.g., investment income) or if they spend money on non-exempt
function activities.
The exemptions under IRC §§ 501 and 527 do not extend to employment taxes. Thus, if they
have employees, exempt organizations generally pay the usual employer share of taxes for Social
Security and Medicare. However, churches opposed for religious reasons to the payment of these
taxes may elect to be exempt from these taxes, and all 501(c) organizations are exempt for ⁶
employees whose wages are less than $100. Additionally, exempt organizations generally pay the
federal unemployment (FUTA) tax. However, 501(c)(3) organizations are exempt from this tax,

^(...c^on^tin^ue^d)
³^In^t^h^{is rep}^o^{rt, w}^h^en^exemp^t^f^uⁿ^c^tⁱ^oⁿ^{is ita}^lic^iz^e^d^{, i}^t^{is t}^o^e^m^pha^siz^e^tha^t^t^h^e^te^rm^re^f^e^{rs to polit}^ic^a^l^or^g^a^niz^a^tion
^e^x^e^m^{pt f}^unc^{tion a}^c^tiv^itie^{s (i.e}^{., i}ⁿ^f^l^ue^nc^ing^{or a}^tte^m^p^ting^{to i}ⁿ^f^l^ueⁿ^c^e^aⁿ^e^l^e^c^tion),^not^to^the^a^c^tiv^itie^{s of}^othe^{r ta}^x^-
^e^x^em^{pt or}^g^a^niz^a^tions^.
⁴^I^R^C^§§⁵^11-⁵¹^4.
⁵^I^R^C^§⁵²⁷⁽^f⁾^{; I}^R^C^c^h^a^p^te^r^s⁴¹^aⁿ^{d 4}²^.
⁶^{IRC §}^§³¹²¹^(a)(1⁶⁾^an^d^(b⁾⁽⁸^)(B^).

and the other 501(c) organizations are exempt if the employee’s wages are less than $50 per ⁷
calendar quarter.
Of the types of organizations discussed in this report, only 501(c)(3) organizations are eligible to ⁸
receive tax-deductible charitable contributions. The IRS determines whether an organization is
eligible to receive deductible contributions at the time it considers the organization’s application
for 501(c)(3) status. A list of the 501(c)(3) organizations eligible to receive deductible
contributions is found in IRS Publication 78, Cumulative List of Organizations Described in
Section 170(c) of the Internal Revenue Code of 1986. This publication is available on the IRS
website at http://www.irs.gov.
Charitable contributions to 501(c)(3) organizations are not deductible if the organization provides
goods or services in exchange for the contribution. If the contribution exceeds the fair market
value of the goods or services, then the amount of the excess may be deductible. When an
organization receives more than $75 in exchange for goods or services, the organization must tell ⁹
the donor how much of the contribution, if any, is tax-deductible.
Generally, there are no particular requirements placed on contributors to 501(c)(3) organizations.
However, if a contributor wants to take a tax deduction for a contribution of $250 or more, then
he or she needs to obtain “contemporaneous written acknowledgment of the contribution” from ¹⁰
the organization. The acknowledgment should include a description of the contribution, a good
faith estimate of the value of any property contributed, and a statement about whether anything
was given in return. In addition, the Pension Protection Act of 2006 (P.L. 109-280) imposes a new
requirement that 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. Contributors
also are subject to limitations on the amount that may be deducted: the deduction may not exceed
a percentage of the taxpayer’s income, only individuals who itemize deductions may take the
deduction, and higher-income taxpayers are further restricted in the amount that may be ¹¹
deducted.
When a contribution is not deductible as a charitable contribution, the organization must notify ¹²
the potential contributor of that fact at the time of solicitation. There is an exception for
organizations with annual gross receipts of less than $100,000. If this exception does not apply,
then fundraising solicitations by organizations described in IRC §§ 501(c)(4), 501(c)(5),
501(c)(6) and 527 must include a notice that the donation is not deductible. Organizations that fail
to meet this requirement face a fine of $1,000 for each day the failure occurs, with an annual cap

⁷^{IRC §}^§³³⁰⁶^(c)(8^{) an}^d⁽¹⁰^)(A^).
⁸^{IRC §}¹⁷⁰^.^N^oⁿ^-⁵⁰¹⁽^c)(3⁾^o^r^ganⁱ^zatⁱ^oⁿ^s^t^h^at^m^a^y^r^ecei^{ve t}^a^x-d^e^d^u^c^tⁱ^b^l^e^co^nt^ri^bu^tⁱ^oⁿ^s^{are go}^vern^m^eⁿ^t^al^unⁱ^t^s^,
^vet^e^ran^s^o^r^ganⁱ^zatⁱ^oⁿ^s^,^f^r^at^ern^a^l^organⁱ^zatⁱ^oⁿ^s^,^and^cem^et^er^{y co}^m^p^anⁱ^e^s.
⁹^I^R^C^§^§⁶¹¹⁵^and⁶⁷¹⁴^.
¹⁰^I^R^C^§¹⁷⁰⁽^f⁾^.
¹¹^I^R^C^§§⁶²^,^63,⁶⁸^{, a}ⁿ^d¹⁷⁰⁽^b)^.
¹²^I^R^C^§⁶¹^13.

of $10,000.¹³ The fines are higher and the cap is eliminated for organizations that intentionally
disregard the notification requirement.
Dues to many labor unions (501(c)(5)) and trade associations (501(c)(6)) and to some charitable
(501(c)(3)) or social welfare (501(c)(4)) organizations may be tax-deductible business expenses ¹⁴
for their members. However, IRC § 162(e) restricts the use of tax-deductible dues for lobbying
purposes. If the organization lobbies, it must generally notify its members of the portion of dues ¹⁵
that is nondeductible or be subject to a proxy tax on its lobbying expenditures.
Organizations with tax-exempt status may qualify for certain non-tax benefits from the federal
government. For example, some federal grants are only available to tax-exempt organizations,
generally those described in IRC § 501(c)(3). Additionally, organizations that qualify for tax-
exempt status may qualify for favorable mailing rates. The special rates are not an automatic
benefit from receiving tax-exempt status so the organization must still apply to the United States ¹⁶
Postal Service. Tax-exempt organizations may also receive beneficial treatment under a variety
of federal laws (e.g., federal provisions relating to antitrust, securities regulation, bankruptcy, and
gambling).
There are some disadvantages to having tax-exempt status. Organizations may be restricted in
their activities, such as their ability to participate in lobbying or political campaign activity.
Additionally, organizations will have to comply with annual reporting requirements and disclose
certain information to the public [see “Reporting Requirements” and “Public Disclosure of
Returns” sections, below].
As mentioned above, 501(c)(3) organizations are the only type of organization discussed in this ¹⁷
report with a statutory definition that explicitly limits lobbying activity. Under IRC § 501(c)(3),
these organizations may only conduct a non-substantial amount of lobbying without risking their
exempt status. Additionally, they are subject to penalty taxes for making excess lobbying ¹⁸
expenditures. The other tax-exempt organizations discussed in this report may, under the

¹³^I^R^C^§⁶⁷^10.
¹⁴^{IRC §}¹⁶^{2. O}ⁿ^ly^indivⁱ^dua^{ls w}^h^o^ite^mⁱ^z^e^de^duc^{tions m}^a^y^ta^ke^the^de^duc^ti^on^a^nd^hig^h^e^r-inc^om^e^ta^xpa^y^e^rs^w^{ill be}
^r^e^s^t^rⁱ^c^t^e^d^{in t}^h^e^a^m^{ount t}^h^a^t^m^a^y^be^de^d^u^c^t^e^d^{. I}^R^C^§§⁶²^,^63,^aⁿ^d^{68. A}^ddi^tio^na^lly^{, only}^itemⁱ^z^e^r^s^w^{ith s}^ubs^ta^ntia^l
^e^x^pe^nse^s^tha^t^qua^lif^y^{to be}^de^d^u^c^t^e^d^a^s^mⁱ^sc^e^lla^ne^{ous ite}^mⁱ^z^e^d^de^duc^tio^{ns w}^{ill be}^a^b^le^t^o^be^ne^f^{it f}^r^o^m^the^de^duc^tio^n.
^{IRC §}⁶⁷^.
¹⁵^I^R^C^§⁶⁰³³⁽^e⁾^.⁵⁰¹⁽^c⁾⁽³⁾^or^g^a^niz^a^tions^a^r^e^e^x^em^{pt f}^r^o^m^this^r^e^quir^e^m^e^nt.
¹⁶^{For m}^o^re^inf^o^rm^a^{tion o}ⁿ^the^pre^f^e^r^eⁿ^tia^{l m}^a^iling^ra^te^{s, se}^e^USP^S^Publ^ic^a^tion⁴^17,^No^npro^{fit Sta}ⁿ^d^a^rd^M^a^il
^Eligi^b^ility^,^a^v^a^ila^ble^a^t^htt^p^://pe^.^u^s^ps.g^ov^/c^pim^/^f^t^p/pu^bs/^P^u^b⁴^17/^Pu^b41^7.^pdf^.
¹⁷^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^L³³³⁷^7,^Tax^-^Ex^e^m^{pt O}^r^gan^iz^ati^ons^:^Poli^tic^{al Ac}^tⁱ^v^ity^Re^s^t^rⁱ^c^tions^an^d
^Disclo^su^{re Req}^uⁱ^remen^t^s^,^by^Er^ika^L^unde^r^.
¹⁸^I^R^C^§^§⁴⁹¹¹^,⁴⁹¹²^,^an^{d 49}⁴⁵^.

Internal Revenue Code, participate in lobbying so long as it is consistent with the qualifications in
their organizational definitions.
Section 18 of the Lobbying Disclosure Act of 1995, P.L. 104-65, prohibits organizations
described in IRC § 501(c)(4) from receiving federal grants, loans, or other awards if they engage
in lobbying activities, even if they conduct the lobbying with their own funds. As originally
passed, section 18 also applied to 501(c)(4) organizations that received government contracts, but
the section was amended by P.L. 104-99 to delete that restriction. The Lobbying Disclosure Act
imposes registration and disclosure requirements on any organizations that have paid lobbyists
whose lobbying activities exceed certain time and monetary limits. (For more information, see
CRS Report 96-809, Lobbying Regulations on Non-Profit Organizations, by Jack Maskell.)
With the exception of 527 organizations, the organizations discussed in this report are restricted ¹⁹
in some manner by the Internal Revenue Code from participating in political campaign activity.
The purpose of 527 organizations, of course, is to participate in such activity.
The organizational definition in IRC § 501(c)(3) prohibits those organizations from participating
in political campaign activity. An organization that violates the prohibition may lose its exempt
status and/or be subject to penalty taxes under IRC §§ 4945 and 4955.
The Internal Revenue Code allows 501(c)(4), 501(c)(5), and 501(c)(6) organizations to participate
in political campaign activity so long as such activities are consistent with the organization’s
exempt purpose. However, under IRC § 527(f), any 501(c) organization that makes an
expenditure for an exempt function is subject to tax on the lesser of its net investment income or
the amount of the expenditure. The tax rate is the highest corporate tax rate, with an allowance for
capital gains. This provision provides an inducement for these organizations with substantial
investment income to conduct their campaign activity through an affiliated 527 organization [see
the “Related Organizations” section, below].
Finally, it should be noted that while the tax laws permit organizations described in IRC §§
501(c)(4), 501(c)(5), and 501(c)(6) to engage in political campaign activity, the election laws ban
corporations and labor unions from making any contribution or expenditure in connection with ²⁰
federal elections. This ban applies whether a corporation is for-profit or tax-exempt. Exceptions
may arise from the definitions used in election law, but it is important to note that the election
laws do not necessarily correspond to the tax laws. This is another inducement for 501(c)
organizations to set up a 527 organization. Of course, 527 organizations must also abide by
applicable election laws.
It is not unusual for different types of exempt organizations to form affiliates or related
organizations to more effectively perform their missions. For example, labor unions often have a

¹⁹^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^L³³³⁷^7,^Tax^-^Ex^e^m^{pt O}^r^gan^iz^ati^ons^:^Poli^tic^{al Ac}^tⁱ^v^ity^Re^s^t^rⁱ^c^tions^an^d
^Disclo^su^{re Req}^uⁱ^remen^t^s^,^by^Er^ika^L^unde^r^.
²⁰^{2 U}^.^S^.^C^.^{§ 4}⁴¹^b^.

related 501(c)(3) scholarship fund, which is eligible to receive tax-deductible contributions, and a
527 political action committee, which can conduct campaign/endorsement activities that the
union cannot legally carry on inside the union itself. Similarly, a trade association might have a
lobbying affiliate, a charitable affiliate, and a political action committee. So long as the entities
carefully observe the requirements that the organizations be separate, these types of relationships
are not prohibited.
In general, the organizations described in IRC §§ 501(c)(3), (c)(4), (c)(5) and (c)(6) must apply to
the IRS to be recognized as tax-exempt, while 527 organizations must notify the IRS of their
existence.
Before an organization described in IRC §§ 501(c)(3), (c)(4), (c)(5), or (c)(6) can apply for
exempt status, it generally must be established under state law as whatever type of organization it
intends to be, which is usually a nonprofit corporation. This process will typically include
developing articles of incorporation and bylaws. The organization must also obtain an employer
identification number (EIN) from the IRS, which can be done online. The organization may then
apply to the IRS for tax-exempt status.
501(c)(3) organizations file Package 1023 with the IRS.²¹ Some organizations do not have to
apply, including churches, very small organizations, and organizations that are essentially
subsidiaries of organizations with a group exemption letter. If the application is filed within 27
months of the organization’s formation, the exemption will generally be effective back to the date
of formation. If the organization does not file its application in a timely manner, it will not be
treated as an exempt organization for the period between its formation and IRS recognition of its
status.
501(c)(4), (c)(5), and (c)(6) organizations file Package 1024, filling out the sections relevant to
their organizational type. There is no particular deadline for filing. The recognition of exempt
status will be effective back to the date of the organization’s formation so long as the
organization’s activities and purposes have not changed over time. If the organization has altered
its activities or substantially amended its charter to qualify for exempt status, then the recognition
of its status will be effective as of a date determined by the IRS.
With several exceptions, organizations must notify the IRS of their 527 status by electronically
filing Form 8871 within 24 hours of formation. They must also obtain an EIN. The exceptions are
political organizations that are required to report to the FEC as a political committee, are political
committees of non-federal candidates or state or local committees of a political party, or
anticipate having annual gross receipts of less than $25,000. An organization that fails to register

²¹^For^aⁿ^ov^e^r^vⁱ^e^w^o^f^the^a^pplic^a^tⁱ^o^{n pr}^oc^e^s^s^f^o^r^I^R^C^{§ 5}⁰¹⁽^c⁾⁽³⁾^or^g^a^niz^a^tions^{, s}^e^e^C^R^S^R^e^por^{t R}^S²¹⁸⁹²^,^A^pplic^ati^on
^P^r^o^{cess f}^o^{r S}^eekiⁿ^g^Â^§⁵⁰¹⁽^c)(³⁾^T^a^x-E^xemp^t^St^a^t^u^s^{, by}^Er^ik^a^L^unde^r^.

with the IRS will be taxed at the maximum corporate tax rate on all gross receipts (less certain
expenses) for the period of the failure.
In general, tax-exempt organizations must report information to the IRS by filing information and
tax returns. While the reporting requirements are similar for 501(c) organizations and 527
organizations, 527 organizations have an additional requirement to report information on their
expenditures and contributions.
The organizations described in IRC §§ 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) must file
several returns with the IRS: information returns, income tax returns, and employment tax
returns.
Under IRC § 6033, these organizations must file an annual information return [Form 990 series].
Exceptions exist for churches and certain small organizations. The return asks for information
concerning such things as sources of revenue, functional expenses, disbursements, and the names
and compensation of officers, directors, and trustees. IRC § 6033(b) further requires that

501(c)(3) organizations report information concerning such things as:

• the names and addresses of and amounts given by all substantial contributors
(generally donors of gifts in excess of $5,000)—this information is included on
the form’s Schedule B;
• for 501(c)(3) organizations that have elected a numerical measurement of the
substantiality of their lobbying expenditures: their lobbying expenditures, the
permissible amount of their lobbying expenditures, their grassroots lobbying
expenditures, and the permissible amount of grassroots lobbying expenditures;
• information about transfers to and relationships with other 501(c) or 527
organizations; and
• information about any taxes imposed for excess lobbying or political
expenditures and excess benefit transactions.
IRC § 6033(f) requires that 501(c)(4) organizations furnish the same information regarding
excess benefit transactions.
With respect to income tax returns, all the 501(c) organizations described in this report that
conduct business activities unrelated to their exempt purpose must file a Form 990-T.
Furthermore, a 501(c) organization that makes an expenditure for an exempt function will need to
file a Form 1120-POL and one that has been assessed a penalty tax must file Form 4720.
501(c) organizations file the usual employment tax returns for income tax withholding and social
security and medicare taxes (Form 941), income reporting (W-2, W-3, Form 1099), and
unemployment tax (Form 940).

Like 501(c) organizations, 527 organizations must file information returns, income tax returns,
and employment tax returns. 527 organizations with gross receipts of at least $25,000 ($100,000
for certain state and local organizations) must file an annual information return (Form 990 ²²
series). 527 organizations are not required to file Form 990 if they are state or local committees
of a political party, political committees of a state or local candidate, required to report to the FEC
as a political committee, caucuses or associations of state or local officials, authorized
committees of a candidate for federal office under FECA § 301(6), national committees of a
political party under FECA § 301(14), or congressional campaign committees of a political party
committee. As discussed above, Form 990 includes such information as the organization’s
revenue sources and expenses. Additionally, like 501(c)(3) organizations, 527 organizations must
report contributions of at least $5,000 on the form’s Schedule B.

527 organizations with taxable income over $100 must file a tax return (Form 1120-POL).²³

Additionally, 527 organizations with employees are required to file the usual employment tax
returns, including those for income tax withholding and social security and medicare taxes (Form

941), income reporting (W-2, W-3, Form 1099), and unemployment tax reporting (Form 940).

527 organizations have an additional reporting requirement that 501(c) organizations are not
subject to. 527 organizations must file periodic disclosures of contributions and expenditures with ²⁴
the IRS (Form 8872). The disclosure requirements do not apply to political organizations that
have annual gross receipts of less than $25,000; are political committees of a state or local
candidate, state or local committees of a political party; or are required to report to the FEC as a
political committee or, if a state or local political organization, required to report similar
information to a state. The requirements also do not apply to any expenditure that is an
expenditure that expressly advocates for a candidate but is made without the candidate’s
cooperation.
A periodic report must include (1) the name, address, occupation, and employer of any
contributor who makes a contribution during the reporting period and has given at least $200
during the year, along with the amount and date of the contribution, and (2) the amount, date, and
purpose of each expenditure made during the reporting period if the recipient has received at least
$500 during the year, along with the recipient’s name, address and, if appropriate, occupation and
employer. Contracts to spend or contribute are treated as contributions or expenditures. The
organization may file on a (1) quarterly basis in a year with a regularly scheduled election and
semi-annually in any other year or (2) monthly basis. There are additional requirements for pre-
general election, post-general election, and year-end reports. Form 8872 may be filed
electronically, and organizations with annual contributions or expenditures exceeding $50,000
must do so.

²²^I^R^C^§⁶⁰³³⁽^g⁾^.
²³^I^R^C^§⁶⁰¹²⁽^a⁾⁽⁶⁾^.
²⁴^I^R^C^§⁵²⁷⁽^j)^.

The penalty imposed on an exempt organization for failing to timely or accurately file the annual
information return (Form 990) is $20 per day for each day the return is not filed, up to the lesser ²⁵
of $10,000 or 5% of the organization’s gross receipts for the year. For organizations with gross
receipts over $1,000,000, the daily penalty is $100, with a maximum penalty of $50,000.
Exempt organizations are subject to the same penalties as other taxpayers for failing to file a tax
return or pay their taxes. An organization that fails to file a timely tax return is subject to a
penalty that equals 5% of the tax due for each month the return is late, limited to 25% of the tax ²⁶
due. If the organization does not pay its taxes, it is subject to a penalty that equals 0.5% of the ²⁷
unpaid tax for each month the tax is not paid, limited to 25% of the unpaid tax. Neither penalty
will be imposed if the organization shows that the failure was due to reasonable cause. On the ²⁸
other hand, the penalty may be increased if the failure was due to negligence or fraud. ²⁹
Organizations are also subject to penalty for failing to make estimated tax payments and for
failing to properly handle and deposit employment taxes—for more information, see IRS
Publication 15, Circular E, Employer’s Tax Guide, available at http://www.irs.gov/pub/irs-pdf/
p15.pdf.
If a 527 organization fails to file a timely or accurate Form 8872 (disclosure of contributions and
expenditures), it is subject to a penalty that equals the highest corporate tax rate multiplied by the ³⁰
amount of contributions and/or expenditures to which the failure relates.
Under IRC § 6104, all the 501(c) organizations discussed in this report are required to make
available for public inspection a copy of their three most recent information returns [Form 990]
and any materials relating to their applications for exempt status. In addition, the Pension
Protection Act of 2006 (P.L. 109-280) added a requirement that 501(c)(3) organizations also
disclose their unrelated business tax returns (Form 990-T). 527 organizations must meet the same
requirement for their Forms 990, notification of 527 status (Form 8871), and returns for
disclosing contributions and expenditures (Forms 8872). With respect to Form 990’s Schedule B,
although 501(c)(3) organizations disclose the names and addresses of their substantial
contributors to the IRS, they are not required to disclose any identifying information to the ³¹
general public unless the organization is a private foundation. 527 organizations must disclose
the names and address of their substantial contributors to the IRS and the public. The other 501(c)
organizations do not have to disclose the information about substantial contributors to the public.
There are two parts to the public disclosure requirements. First, the organization must make the
forms and application available for public inspection during regular business hours at its

²⁵^I^R^C^§⁶⁶⁵²⁽^c⁾⁽¹⁾⁽^A⁾^.
²⁶^I^R^C^§⁶⁶^51.
²⁷^I^R^C^§⁶⁶^51.
²⁸^I^R^C^§⁶⁶^{62 a}^nd⁶⁶⁶³^.
²⁹^I^R^C^§⁶⁶^55.
³⁰^I^R^C^§⁵²⁷⁽^j)⁽¹⁾^.
³¹^I^R^C^§⁶¹⁰⁴⁽^d)⁽³⁾^.

principal, regional, and district offices. If an individual makes a request to inspect the returns or
application, an inspection copy must generally be provided immediately. Second, the organization
must provide copies of the forms and application upon request, whether the request is made in
person or in writing. The copies must be free, but the organization is permitted to charge for
copying and mailing. If the request is made in person, the organization must generally provide the
copies on the same day; if the request is made in writing, the organization must generally respond
withing 30 days. If the organization has made its documents widely available (e.g., published
them on a website), it is not required to respond to written requests for copies. It must, however,
still keep the information available for inspection during business hours. An organization that
fails to comply with the public inspection requirements is subject to a penalty that equals $20 per
day for each day the failure continues, which is limited to $10,000 for failures relating to Forms ³²

990 and 8872.

With the exception of the new requirement that 501(c)(3) organizations disclose their unrelated
business income tax returns, an organization’s income and employment tax returns are not subject
to the public disclosure requirements.
Any return or application that must be disclosed to the public by the organization must also be
made publicly available by the IRS. All publically-available information may be obtained from
the IRS by using Form 4506-A, Request for Public Inspection or Copy of Exempt or Political
Organization. Additionally, some of the information for 527 organizations is available on the IRS
website at http://www.irs.gov. The IRS must post electronically submitted Forms 8871 and 8872
in an online database within 48 hours of their filing. The IRS also posts some 527 organizations’
Forms 8871, 8872 and 990 that were submitted on paper.
The information contained in this report is summarized in the following chart.

³²^{IRC §§}⁶⁶⁵²^(c^{)(1)(C) a}ⁿ^{d (D).}^T^h^e^pe^na^lty^m^a^y^be^inc^r^e^a^s^e^d^if^the^f^a^ilure^w^a^s^w^ill^f^u^{l or i}ⁿ^v^o^lv^e^d^w^ill^f^u^lly
^pr^ov^idiⁿ^g^f^a^ls^e^or^f^r^a^uduleⁿ^{t i}ⁿ^f^o^r^m^a^{tion. I}^R^C^§§⁶⁶⁸⁵^aⁿ^{d 7}²⁰⁷^.

Table 1. Characteristics of and Reporting Requirements for Selected Tax-Exempt Organizations
^IRC^section^501(c)(3)^501(c)(4)^{501(c)(5) 501(c)(6) 527}
^Short-hand^{charitable organization}^{social welfare organizati}^on^{labor union}^{trade association}^politica^{l organization}
^name
^Charitable^yes⁰^no^{no no no}
^contribution
^deduction
^Business^maybe⁰^{maybe (with red}^{uction for}^{usually (with reduction for}^{usually (with reduction for}^no
^{deduction f}^or^{lobbying ex}^pense^s)⁰^{lobbying ex}^pense^s)⁰^{lobbying ex}^pense^s)⁰
^dues
^{Taxed on}^{unrelated b}^usiness^income;^{unrelated b}^usiness^income;^{unrelated b}^usiness^income;^{unrelated b}^usiness^income;^{investment in}^{come and}
^politica^{l expenditur}^{es; exce}^ss^politica^{l expenditur}^{es; exce}^ss^politica^{l expenditur}^es;^politica^{l expenditur}^es;^{other non-}^political^income;
^{lobbying ex}^penditure^s;^{benefit tra}^nsactions;^proxy^{proxy ta}^{x on lobbyi}^ng^{proxy ta}^{x on lobbyi}^ng^{all expenditures}^{for non-}
^{excess bene}^fit^{transactions;}^{tax on lobbying}^ex^penditures;^expe^{nditures; with}^holding^expe^{nditures; with}^holding^politica^{l purposes;}
^{withholding taxes on}^{withholding taxes on}^{taxes on em}^ployees^{taxes on em}^ployees^{withholding taxes on}
ⁱ^{ki/CRS-RL30877}^employees^employees^employees
^g/w^Permitt^{ed to}^non-sub^{stantial amount}^yes^yes^yes^{to influence t}^{he selection of}
^s^.or^lobby^{a candidate}
^le^ak^Permitt^{ed to}^{no, but may}^educate^pu^blic^{yes, but F}^{ECA may}^prohibit^{yes, but F}^{ECA may}^{yes, but F}^{ECA may}^{yes, but ma}^{y be}^regulated
^://wiki^{engage in}^campaigⁿ^{about issues}^{certain activities}^{prohibit certain a}^ctivities^{prohibit certain a}^ctivities^{by FECA}
^h^ttp^activiti^es
^{Application f}^or^{Package 10}²³^{Package 10}²⁴^{Package 10}²⁴^{Package 10}²⁴^{Form 88}^{71, u}^{nless exe}^mpt
^{exempt sta}^tus^{or registered with FEC}

^IRC^section^501(c)(3)^501(c)(4)^{501(c)(5) 501(c)(6) 527}
^{Reports to IRS}^{Form 99}^{0 or}^{Form 99}⁰^{Form 99}⁰^{Form 99}⁰^{Form 88}⁷²
^{(not including}^{Form 99}^0PF^contains:^contains:^contains:^{(unless filing with FEC or}
^employment^contains:^{- name,}^{- name,}^{- name,}^{otherwise exem}^pt);
^retur^{ns s}^{uch a}^s^{- name,}^{- address,}^{- address,}^{- address,}^contains:
^{Forms 94}^{0, 94}^1,^{- address,}^{- reven}^ue,^{- reven}^ue,^{- reven}^ue,^{- name,}
^{W-2, W-3, 109}^9,^{- reven}^ue,^{- expe}^nses,^{- expe}^nses,^{- expe}^nses,^{- address,}
^{and the}^busine^ss^{- expe}^nses,^{- total assets}^{- total assets,}^{- total assets,}^{- custodian of records,}
^{income retur}ⁿ^{- total assets,}^{- functional ex}^pens^es,^{- functional ex}^pens^es,^{- functional ex}^pens^es,^{- contributors’ nam}^es,
^990-T)^{- functional ex}^pens^es,^{- program accom}^plishments,^{- program}^{- program}^{addresses, amounts given,}
^{- program accom}^plishments.^{- list of officers, directors, key}^{accomplishments,}^{accomplishments,}^{- itemized expenditures}
^{- list of officers, directors,}^employees,^{- list of officers, directors,}^{- list of officers, directors,}^{Form 99}⁰
^{key employees,}^{- compensation of high}^est^{key employees,}^{key employees,}^contains:
^{- compensation of high}^est^{paid employees,}^{- compensation of high}^est^{- compensation of high}^est^{- name,}
^{paid employees,}^{- compensation of high}^est^{paid employees,}^{paid employees,}^{- address,}
^{- compensation of high}^est^{paid independent}^contractors^{- compensation of high}^est^{- compensation of high}^est^{- reven}^ue,
^{paid independent}^{Form 11}^20-POL^{paid independent}^{paid independent}^{- expe}^nses,
^contractors,^{(if made expe}^{nditure for a}ⁿ^contractors^contractors^{- total assets,}
ⁱ^{ki/CRS-RL30877}^{Form 11}^20-POL^{exempt function}⁾^{Form 11}^20-POL^{Form 11}^20-POL^{- list of officers, directors,}
^g/w^{(if made expe}^{nditure for a}ⁿ^contains:^{(if made expe}^{nditure for a}ⁿ^{(if made expe}^{nditure for a}ⁿ^{key employees,}
^s^.or^{exempt fu}^nction)^contains:^{- name,}^{- address}^{exempt function}⁾^contains:^{exempt function}⁾^contains:^{- functional ex}^pens^es,^{- program}
^le^ak^{- name,}^{- income}^{- name,}^{- name,}^{accomplishments,}
^://wiki^{- address}^{- income}^{- expe}^nses^{- tax}^{- address}^{- income}^{- address}^{- income}^{- compensation of high}^est^{paid employees,}
^h^ttp^{- expe}^nses^{- expe}^nses^{- expe}^nses^{- compensation of high}^est
^{- tax}^{- tax}^{- tax}^{paid independent}
^contractors
^{Form 11}^20-POL
^contains:
^{- name,}
^{- address}
^{- income}
^{- expe}^nses
^{- tax}

^IRC^section^501(c)(3)^501(c)(4)^{501(c)(5) 501(c)(6) 527}
^Public^yes;^yes;^yes;^yes;^yes;
^{disclosure o}^f^{but major cont}^{ributors a}^re^{but major cont}^{ributors a}^re^{but major cont}^{ributors a}^re^{but major cont}^{ributors a}^re^{and major contributors}^are
^{Form 990}^{not disclosed to the public}^{not disclosed to the public}^{not disclosed to the public}^{not disclosed to the public}^{disclosed to the public}
^{unless t}^{he organization is a}
^{private fou}^ndation;
^{also must disclose Form 990-}
^{T (unrelated b}^{usiness income}
^{tax ret}^urn)
^Note:^Al^{l forms are available on the IRS website at}^{http://www.irs.gov/}^formsp^ubs.
^a.^{While the contrib}^{utions or dues}^{may be deducti}^{ble, limitat}^{ions apply which ma}^{y redu}^{ce the}^amoun^{t the cont}^{ributor or}^{payor is ac}^tu^{ally able to deduct.}

ⁱ^{ki/CRS-RL30877}
^g/w
^s^.or
^le^ak
^://wiki
^h^ttp

^Erik^{a Lun}^d^er
^S^u^pervⁱ^s^or^y^L^e^gⁱ^s^l^atⁱ^v^{e A}^t^t^o^rⁿ^e^y
^el^uⁿ^d^er^@^c^rs^.l^oc.g^ov^{, 7-}⁴⁵³⁸