Section 4955 Excise Tax on Political Expenditures

Section 4955 of the Internal Revenue Code imposes an excise tax on any Section 501(c)(3) organization that makes a political expenditure. The purpose of this tax is to enforce the prohibition against charitable, religious, and educational organizations participating in political campaigns. While revocation of tax-exempt status is a possible sanction, Section 4955 provides the Internal Revenue Service (IRS) with a more immediate penalty to address violations.

Defining a Political Expenditure

A “political expenditure” is any amount paid by a Section 501(c)(3) organization for participation or intervention in a political campaign for or against a candidate for public office. This includes direct financial contributions to a campaign and indirect support, such as publishing or distributing statements. An organization cannot use its funds to produce materials that endorse or oppose a candidate. For example, voter guides that rate candidates with a clear bias are considered a political expenditure.

A public statement by an organization’s leader at an official event telling an audience not to vote for a specific candidate is also a prohibited activity. Expenses that have the primary effect of promoting public recognition for a candidate can fall under this definition as well. These rules apply to all local, state, and federal campaigns. The defining factor is the intent to influence an election outcome.

This prohibition contrasts with permissible, non-partisan activities, such as conducting a public forum where all candidates are given an equal opportunity to speak. Publishing educational materials that examine issues without favoring any candidate is also allowed. The distinction is whether the organization’s activity shows a preference for or against a particular candidate.

The Two-Tier Tax Structure

Section 4955 uses a two-tier tax structure to penalize the organization and the individuals responsible for the spending. This system includes an immediate initial tax and a more severe secondary tax if the expenditure is not corrected promptly.

The first-tier tax applies when a political expenditure is made. The organization is liable for an initial tax of 10 percent of the expenditure amount. A separate initial tax of 2.5 percent is imposed on any “organization manager” who knowingly and willfully agreed to the expenditure, capped at $5,000 per expenditure. An organization manager is an officer, director, trustee, or employee with authority over the spending. This tax is not applied if the manager’s agreement was not willful and was due to reasonable cause.

A second tier of taxes is triggered if the political expenditure is not “corrected” within a specific timeframe. The organization faces an additional tax of 100 percent of the expenditure amount. Any organization manager who refused to agree to the correction faces a second-tier tax of 50 percent of the expenditure, with a maximum penalty of $10,000. If more than one manager is liable, they are held jointly and severally liable.

Correction of the Expenditure

To avoid the second-tier taxes, an organization must “correct” the political expenditure. Correction involves recovering the funds and establishing safeguards to prevent future violations. The organization must make a genuine effort to get the money back from the recipient. The IRS does not require pursuing legal action if it is unlikely to be successful.

The second part of correction is establishing safeguards to prevent future political expenditures. This requires implementing or improving internal controls. Examples include adopting a formal policy against political intervention, training board members and staff on the rules, or creating a review process for expenditures. The IRS determines the adequacy of these safeguards.

Reporting and Paying the Tax

The organization and any liable managers must use Form 4720, “Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code,” to report the expenditure and calculate the tax. The organization files a Form 4720 for its tax liability, and any liable manager must file a separate Form 4720.

For an organization, the form is due by the 15th day of the fifth month after its accounting period ends. For an individual manager, the deadline is the 15th day of the fifth month after the end of their tax year. Payment of the tax is due when the form is filed, and Form 4720 must be filed electronically.