Section 4955: Political Expenditure Taxes, Correction, and Form 4720

Section 4955 of the Internal Revenue Code imposes excise taxes on political expenditures made by 501(c)(3) organizations, and it hits at two levels. The organization pays 10 percent of the expenditure as a first-tier tax the moment the spending occurs, and any organization manager who knowingly agreed to it pays a separate 2.5 percent tax capped at $5,000. If the organization fails to correct the expenditure within the taxable period, a 100 percent second-tier tax applies to the organization, and non-cooperating managers face a 50 percent tax capped at $10,000.¹

What Spending Triggers the Tax

A political expenditure is any amount a 501(c)(3) pays or incurs to participate or intervene in a political campaign for or against a candidate for public office.¹ Direct contributions to a campaign and distribution of campaign literature are the obvious cases. A public statement by the organization supporting or opposing a candidate also counts, whether delivered at an event or printed in a newsletter. Paying a candidate’s travel or speaking fees can qualify if the primary effect benefits the campaign.

When the organization was formed primarily to promote someone’s candidacy, or is effectively controlled by a candidate and used for that purpose, the definition expands. It then covers payments to the candidate for speeches or services, the candidate’s travel, polling and research prepared for the candidate’s use, advertising and fundraising benefiting the candidate, and any other expense whose primary effect is boosting the candidate’s public recognition.¹

The IRS weighs several factors when deciding whether a communication is campaign intervention: whether it identifies a candidate, expresses approval or disapproval of a candidate’s positions, is delivered close to an election, references voting, or addresses an issue that distinguishes candidates in a race.² No single factor decides the question; the overall context does.

The Tax on the Organization

The first-tier tax is a flat 10 percent of the political expenditure, and the organization owes it whether the spending was deliberate or the product of weak internal controls.¹ A $50,000 prohibited expenditure produces a $5,000 first-tier tax.

The second-tier tax is 100 percent of the expenditure and applies when the organization does not correct the violation within the taxable period.¹ On the same $50,000, that adds another $50,000, bringing the organization’s exposure to $55,000 before any manager taxes.

The taxable period is the correction window. It starts on the date of the political expenditure and ends on the earlier of two events: the date the IRS mails a notice of deficiency for the first-tier tax, or the date the IRS assesses that tax.¹ Once either event happens, the 100 percent tax becomes unavoidable.

The Tax on Managers

A manager who knowingly agreed to the political expenditure owes a first-tier tax of 2.5 percent of the amount, capped at $5,000 per expenditure.¹ The manager tax only applies if the organization is also subject to its own first-tier tax, so the two liabilities run together.

Two things must be true for the manager tax to attach. The manager must have known the expenditure was a political expenditure, and the agreement must have been willful and not the result of reasonable cause. Genuine confusion about an edge case can be a defense; claiming ignorance of the basic prohibition is harder.

“Organization manager” reaches further than officers and directors. It includes any officer, director, or trustee, anyone with similar authority, and any employee who had responsibility over the specific expenditure in question.¹ A communications director who greenlit a newsletter endorsement can be personally liable.

If the organization fails to correct and incurs the 100 percent second-tier tax, a manager who refused to agree to part or all of the correction faces a second-tier tax of 50 percent of the expenditure, capped at $10,000 per expenditure. When more than one manager is liable at either tier, liability is joint and several: the IRS can collect the full amount from any one of them.¹

How to Correct a Political Expenditure

Correction under the statute has two mandatory parts. The organization must recover part or all of the expenditure to the extent recovery is possible, and it must establish safeguards to prevent future political expenditures. When full recovery is not possible, the Secretary can prescribe additional corrective action by regulation.¹

Recovery usually means demanding the money back from the recipient or the manager who approved it. Filing suit is not required where a judgment could not be satisfied, but the organization must document good-faith efforts. A cursory demand letter will not do.

Safeguards are where organizations most often fall short. A board resolution alone is not enough. The IRS looks for concrete change: updated policies that specifically address campaign intervention, training for staff and board members, revised approval procedures for public communications, and internal processes for flagging borderline activity before it happens. Specificity is what makes safeguards adequate.

Correction must be complete before the IRS mails the deficiency notice or assesses the first-tier tax. Organizations that spend the taxable period debating internally can lose the window entirely and end up with the 100 percent tax on top of the 10 percent.

Getting the First-Tier Tax Abated

Section 4962(c) gives the IRS discretion to abate the 10 percent first-tier tax on the organization if the violation was corrected within the correction period and the expenditure was not “willful and flagrant.”³ This is more lenient than the standard applied to other Chapter 42 excise taxes, which require a showing of reasonable cause. For political expenditures the organization just needs to show the spending was not both voluntary and grossly improper.

An act is “willful and flagrant” if it was voluntary, conscious, and knowing in violation of the prohibition, and a reasonable person would view it as a gross violation.³ Evidence that the organization did not realize its activity fell within the political expenditure rules can support abatement. Deliberate endorsement of a candidate by an organization that plainly knew the rule leaves no credible claim.

Consequences Beyond the Excise Tax

The excise tax is not the ceiling. The IRS has stated that violating the political campaign prohibition can result in both excise taxes and revocation of tax-exempt status.⁴ These are cumulative. An organization can lose its exemption and still owe the taxes, and once exemption is gone the organization’s income becomes taxable and donors lose the deduction.

Under Section 7409, the IRS can ask a federal district court to enjoin further political expenditures and preserve the organization’s assets for charitable purposes. Two conditions apply: the IRS must first notify the organization that it will seek an injunction if the spending does not immediately stop, and the Commissioner must personally determine that the violation is flagrant and injunctive relief appropriate.⁵ The personal-determination requirement reserves the tool for the worst cases.

Section 6852 lets the IRS make an immediate assessment when political expenditures amount to a flagrant violation. The tax becomes due and payable right away without the normal deficiency procedures, and the IRS can assess both regular income tax and Section 4955 excise taxes for the current or preceding taxable year.⁶

Filing and Paying on Form 4720

Organizations and managers subject to Section 4955 report and pay the tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.⁷ Schedule F computes the initial taxes on political expenditures. Both the organization and any liable managers must file, and managers file individually rather than through the organization’s return. The same form covers the first-tier and second-tier taxes, so an organization that missed the correction window reports the 100 percent tax there as well.

The timing of the filing matters beyond the return itself. A late or missing Form 4720 signals that the organization is not taking the violation seriously, and that impression can influence both the abatement decision and whether the IRS moves toward revocation.

1
Office of the Law Revision Counsel. 26 USC 4955 – Taxes on Political Expenditures of Section 501(c)(3) Organizations
2
Internal Revenue Service. Know the Law: Avoid Political Campaign Intervention
3
Internal Revenue Service. Abatement and Waivers
4
Internal Revenue Service. Frequently Asked Questions About the Ban on Political Campaign Intervention by 501(c)(3) Organizations: Consequences of Prohibited Activity
5
Office of the Law Revision Counsel. 26 USC 7409 – Action to Enjoin Flagrant Political Expenditures of Section 501(c)(3) Organizations
6
Office of the Law Revision Counsel. 26 USC 6852 – Termination Assessments in Case of Flagrant Political Expenditures
7
Internal Revenue Service. Instructions for Form 4720