What Is a 527 Organization? Rules and Requirements
Understand the operational framework of a 527 organization, a tax-exempt entity designed for political activity, from its legal structure to its public reporting.
A 527 organization is a type of tax-exempt entity in the United States, named after the section of the Internal Revenue Code that provides for its existence. These groups are created with the primary purpose of influencing the selection, nomination, election, or appointment of individuals to federal, state, or local public office. Their activities are centered on political campaigns and public advocacy.
Permissible Activities and Contribution Rules
The tax-exempt status of a 527 organization is contingent upon its engagement in “exempt function activities.” Such activities can include a wide range of efforts, such as voter registration drives, get-out-the-vote initiatives, and the creation and distribution of political advertising. The scope of these activities is broad, covering actions intended to influence political outcomes at any level of government.
An aspect of a 527’s operations involves the distinction between different types of advocacy. Issue advocacy focuses on broader political topics and policy debates without explicitly endorsing or opposing a particular candidate. In contrast, express advocacy directly calls for the election or defeat of a specific candidate. While 527s can engage in issue advocacy, their ability to expressly advocate may subject them to different regulatory frameworks.
One of the defining features of a 527 organization is its fundraising capability. These groups can accept unlimited contributions from individuals, corporations, and labor unions. There are no upper limits on the amount an individual or entity can contribute, nor are there restrictions on the total amount a 527 can spend on its political activities.
Formation and Initial IRS Notification
To formally establish itself, a prospective 527 organization must first obtain an employer identification number (EIN) from the IRS, which is required even if the group has no employees. This can be done by filing Form SS-4, Application for Employer Identification Number.
A primary step in formation is filing IRS Form 8871, Notice of 527 Status. This document must be filed electronically with the IRS and serves as the official declaration of the organization’s intent to operate under this specific tax code section. The form requires the disclosure of key information, including the organization’s legal name, mailing address, and its stated purpose.
Completing Form 8871 also necessitates providing the names and addresses of the organization’s officers, directors, and any highly compensated employees. This information ensures transparency regarding the individuals managing and directing the group’s activities.
Ongoing Reporting and Disclosure Requirements
After its formation, a 527 organization has recurring obligations to maintain transparency regarding its financial activities. The primary instrument for this is IRS Form 8872, Political Organization Report of Contributions and Expenditures. This form mandates the public disclosure of the group’s financial inflows and outflows.
The reporting schedule for Form 8872 depends on the calendar year. In an election year, organizations may be required to file on a monthly or quarterly basis, while in non-election years, the filing might be semi-annual. The form requires an itemized list of all contributions received, including the name, address, and amount for each donor. Similarly, all expenditures must be itemized, detailing the recipient and purpose of each payment.
Submission of Form 8872 must be done electronically through the IRS website. This ensures that the information is promptly made available to the public, allowing for timely oversight of the organization’s financial dealings.
Tax Treatment of a 527 Organization
The tax obligations of a 527 organization are directly tied to the nature of its income. Funds that are used for the organization’s exempt function activities, such as influencing elections, are not subject to federal income tax.
However, not all income received by a 527 organization is tax-free. The organization is subject to tax on its net investment income. This includes revenue generated from sources like interest, dividends, and capital gains from the sale of assets. This income is considered taxable and must be reported to the IRS.
If a 527 organization has taxable income of $100 or more for the year, it is required to file Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. The tax on this net investment income is calculated at a flat 21% rate.