Part I. Rulings — Internal Revenue Bulletin 2000-44

one of which is being required to report under FECA as a political committee. An organization that finances election activity (within the meaning of FECA) for both federal and non-federal elections may establish a political committee to receive contributions and make expenditures for both federal and non-federal election activity. In that case, the organization must register as a political committee and comply with the FECA contribution limitations and reporting requirements. 11 C.F.R. 102.5(a)(1)(ii). Such an organization is, therefore, not required to file Form 8871.

If, however, the organization sets up separate accounts to conduct its federal election activity and its non-federal election activity, the federal account is treated as a separate political committee that is required to register and report under FECA. 11 C.F.R. 102.5(a)(1)(i). The treatment of the federal account as a separate committee is consistent with the organizational requirements for political organizations under § 527, as discussed below in Q&A-12. Accordingly, the separate federal account is not required to file Form 8871. However, a separate nonfederal account is not required to register and report under FECA as a political committee. Therefore, a separate non-federal account that is described in § 527(e)(1) is required to file Form 8871. 7. Q. Are political organizations that are required to report to state or local election agencies excepted from the notice requirement?

A. Section 527(i) does not except political organizations that file reports with state or local election agencies from the notice of status requirement. Therefore, unless the political organization meets one of the exceptions discussed above in Q&A-3, it must file Form 8871 with the Service. 8. Q. When must the organization file Form 8871? A. Form 8871 must be filed within 24 hours after the date on which the organization was established. See Notice 2000–36, 2000–33 I.R.B. 173 for information about filing requirements for organizations in existence before July 30, 2000. 9. Q. What are the methods of filing Form 8871?

Section 527.—Political Organizations

26 CFR 1.527–2: Definitions. (Also §§ 6012, 6033, 6104, and 6652.)

Reporting requirements for section 527 organizations. This ruling provides questions and answers regarding the notice and reporting requirements for section 527.

Rev. Rul. 2000–49

ISSUES

On July 1, 2000, Pub. L. 106–230 was enacted, amending § 527 of the Code. The new law imposes three reporting and disclosure requirements on political organizations described in § 527: (1) an initial notice of status, (2) periodic reports of contributions and expenditures, and (3) annual returns. This revenue ruling provides questions and answers relating to the reporting and disclosure requirements for political organizations described in § 527.

QUESTIONS AND ANSWERS

I. Notice of Status

Q. What is the notice of status requirement for an organization described in § 527? A. Under § 527(i)(1)(A), a political organization is required to give notice both electronically and in writing to the Service that it is a political organization described in § 527. 2.Q. What is the required notice form? A. The required notice form is Form 8871, Political Organization Notice of Section 527 Status .
Q. Are all political organizations required to file the Form 8871 notice? A. No. Under § 527(i)(5) and § 527(i)(6), three types of organizations are not required to file the Form 8871 notice:

(a) Persons required to report under the Federal Election Campaign Act of 1971 (FECA) as a political committee (see 2 U.S.C. § 431(4));

(b) Organizations that reasonably anticipate that their annual gross receipts will always be less than $25,000; and

(c) Organizations described in § 501(c) that are subject to § 527(f)(1) because they have made an “exempt function” expenditure.

All other political organizations, including state and local candidate committees, are required to file the notice. 4. Q. Is a political organization required to file Form 8871 if it does not know whether it will have annual gross receipts of $25,000 or more for any taxable year? A. A newly established political organization is not required to file Form 8871 if it reasonably anticipates that its annual gross receipts will be less than $25,000 for its first six taxable years. However, if an organization, in fact, does have annual gross receipts of $25,000 or more for any taxable year, it is required to file Form 8871 within 30 days of receiving $25,000. 5.Q. Is the separate segregated fund established under § 527(f)(3) by a § 501(c) organization required to file Form 8871?

A. A § 501(c) organization that is not prohibited from participating in political campaign activity has the option of conducting the activity itself or setting up a separate segregated fund. If the § 501(c) organization conducts the activity itself, it is subject to tax under § 527(f)(1) on the lesser of its investment income or the amount of its political expenditures, but it is not required to file Form 8871 pursuant to § 527(i)(5)(A). If the § 501(c) organization establishes a separate segregated fund, the fund is treated as a separate political organization under § 527(f)(3) and does not qualify for the exception under § 527(i)(5)(A). Therefore, unless it meets one of the other exceptions, the separate segregated fund is required to file Form 8871. 6. Q. Is an organization that finances both federal and non-federal election activity required to file the Form 8871 notice? A. As a general rule, any political organization (whether or not separately incorporated) that is organized and operated primarily for an exempt function under § 527(e)(2) (see Q&A-17) must file Form 8871 unless it meets one of the exceptions discussed above (see Q&A-3),

October 30, 2000 430 2000–44 I.R.B.

A. Section 527(i)(1)(A) requires that the organization file Form 8871 both electronically and in writing. Therefore, the methods for filing Form 8871 are as follows:

(a) Electronically via the Internal Revenue Service Internet Web Site (IRS Web Site) at www.irs.gov./polorgs, and

(b) In writing by sending a signed copy of Form 8871 to the Internal Revenue Service Center, Ogden, UT 84201. An organization can fill in and print out the form from the IRS Web Site. 10. Q. Must an organization take any additional steps before filing Form 8871? A. Before filing Form 8871, the political organization must have its own employer identification number (EIN) even if it has no employees. To obtain an EIN, an organization must file Form SS-4, Ap- plication for Employer Identification Number, with the Service (see Q&A-52). 11.Q. What information must be provided in the Form 8871 notice? A. Under § 527(i)(3), an organization must provide in its Form 8871 notice its name and address (including any business address, if different) and electronic mailing address; its purpose; the names and addresses of its officers, highly compensated employees, contact person, custodian of records, and members of its Board of Directors; and the name and address of, and relationship to, any related entities (within the meaning of § 168(h)(4)). 12. Q. Does § 527(i) change the organizational requirements for § 527 organizations? A. No. Section 527 does not require an organization to have formal organizational documents, such as articles of incorporation. Under § 1.527–2(a)(2) of the Income Tax Regulations, a political organization meets the organizational test if it is organized for the primary purpose of carrying on exempt function activities as defined in § 527. The regulation specifically states that the organization need not be formally chartered or established as a corporation, trust, or association. For example, a separate bank account can qualify as a political organization. See Rev. Rul. 79–11, 1979–1 C.B. 207.

The requirement that a § 527 organization include the names and addresses of its officers, highly compensated employees, and members of its Board of Direc

tors does not change the organizational test for § 527. Section 527(i) does not require political organizations to be organized with Boards of Directors, officers and highly compensated employees. It merely requires the organization to provide their names and addresses if it is so organized. 13. Q. What is a “related entity” for this purpose?

A. An entity is a “related entity” within the meaning of § 168(h)(4), which provides that an organization is related to another entity as follows:

(a) The two entities have (i) significant common purposes and substantial common membership or (ii) directly or indirectly substantial common direction or control; or

(b) Either entity owns (directly or through one or more entities) a 50 percent or greater interest in the capital or profits of the other. For this purpose, entities treated as related entities under (a) above shall be treated as one entity. 14. Q. What are “highly compensated employees” for this purpose? A.Highly compensated employees for this purpose are the five employees (other than officers and directors) who are reasonably expected to have the highest annual compensation over $50,000. Compensation includes both cash and noncash amounts, whether paid currently or deferred, for the 12-month period that began with the date the organization was formed (if the organization was formed after June 30, 2000). If the organization was already in existence on June 30, 2000, it must use the accounting period that includes July 1, 2000. 15. Q. What if an organization described in § 527(e)(1) does not file the Form 8871 notice? A. An organization described in § 527(e)(1) must file Form 8871 unless it is an organization described in § 527(i)(5) or § 527(i)(6) (see Q&A-3). If the organization fails to file Form 8871 on a timely basis, § 527(i)(4) provides that until the organization satisfies the notice requirement, the taxable income of the organization includes its exempt function income (including contributions received, membership dues, and political fundraising receipts), minus any deductions directly connected with the production of that income. For purposes of computing its tax

able income, the organization may not deduct its exempt function expenditures because § 162(e) denies a deduction for political campaign expenditures.

Under § 527(b), the tax is computed by multiplying the organization’s taxable income (including its net investment income) by the highest corporate tax rate, currently 35 percent. The organization must file a Form 1120-POL to report the income and pay the tax. 16. Q. When is an organization described in § 527(e)(1)?

A. An organization is described in § 527(e)(1) if it meets both the organizational and operational tests, that is, it must be organized and operated primarily for the purpose of accepting contributions or making expenditures for an exempt function under § 527(e)(2). See § 1.527–2(a). 17. Q. What is an “exempt function” under § 527(e)(2)?

A. “Exempt function” means, under § 527(e)(2), influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. 18. Q. Are transfers to political organizations that fail to file Form 8871 subject to the gift tax?

A. Section 2501(a)(5) provides that the gift tax does not apply to transfers of money or other property to political organizations within the meaning of § 527(e)(1). Therefore, transfers to an organization described in § 527(e)(1) (see Q&A-16) are not subject to the gift tax, regardless of whether the organization has filed Form 8871. 19. Q. Is the Form 8871 notice publicly available? A. Yes. Under § 6104(a), Form 8871 (including any supporting papers), and any letter or other document the Service issues with regard to Form 8871, will be open to public inspection. Copies of Form 8871 that have been filed are currently available at the IRS Web Site at www.irs.gov/polorgs and are considered widely available under § 301.6104(d)–3 of the Procedure and Administration Regulations, as long as the organization provides the IRS Web Site address to the per

2000–44 I.R.B. 431 October 30, 2000

son making the request. In addition, the organization is required to make a copy of these materials available for public inspection during regular business hours at the organization’s principal office (and at each of its regional or district offices having at least three paid employees) in the same manner as applications for exemption of § 501(c) organizations are made available. § 6104(d). 20. Q. What is the penalty on the organization for failure to comply with the public inspection requirement? A. Under § 6652(c)(1)(D), a penalty of $20 per day may be imposed on any person with a duty to comply with the public inspection requirement for each day a failure to comply continues. II. Periodic Reporting Requirements 21. Q. What are the periodic reporting requirements imposed upon political organizations? A. Under § 527(j), a political organization is required to periodically report certain contributions it receives and expenditures it makes. 22. Q. What is the required periodic reporting form?

A. The required periodic reporting form is Form 8872, Political Organization Report of Contributions and Expenditures . 23. Q. When are political organizations required to file periodic reports on Form 8872? A. Under § 527(j)(2), political organizations that accept contributions or make expenditures for an exempt function under § 527 (see Q&A-17) during a calendar year are required to file periodic reports on Form 8872, beginning with the first month or quarter in which they accept contributions or make expenditures. In addition, organizations that make contributions or expenditures with respect to an election for federal office (as defined in § 527(j)(6)) may be required to file pre-election reports for that election. 24. Q. Are all political organizations required to file periodic reports on Form 8872?

A. No, § 527(j)(5) provides that some organizations are not subject to this requirement. The organizations excepted from the filing requirements are as follows:

a) Organizations excepted from the requirement to file a Form 8871 (see Q&A-3);

b) Political committees of a state or local candidate, including political committees of state or local officeholders; and

c) State and local committees of political parties.

All other political organizations, including state and local political action committees, are subject to the reporting requirements of § 527(j), even if they file reports with state or local election agencies. 25. Q. Must a state or local candidate or officeholder organize a formal committee to be excepted from the Form 8872 filing requirements?

A. No. As discussed in Q&A-12, § 527 does not require organizations to have formal organizational documents. Therefore, a candidate or officeholder does not need to organize a formal committee to qualify for the exception under § 527(j)(5) for committees of state or local candidates. 26. Q. Are political organizations that engage in exempt function activities (as defined in § 527(e)(2)) solely with respect to elections for state or local offices excepted from the Form 8872 filing requirements? A. No. Although the timing of the reports is based upon federal elections (see Q&A-34), the requirement to file the reports is based on accepting contributions or making expenditures for an exempt function under § 527(e)(2) (see Q&A-17). Therefore, unless a political organization meets one of the exceptions discussed above in Q&A-24, it must file Form 8872 with the Service. 27. Q. Is an organization that reasonably anticipated it would not have annual gross receipts of $25,000 or more required to file Form 8872 if it, in fact, receives $25,000 or more in any taxable year?

A. An organization that receives $25,000 in any taxable year no longer qualifies for the exception in § 527(j)(5)(C) and, therefore, must begin filing Form 8872 unless it meets one of the other exceptions discussed in Q&A-24. The organization must file, within 30 days of receiving $25,000, any Form 8872 that would otherwise have been due during the calendar year prior to that date. 28. Q. How often must the Form 8872 be filed?

A. A political organization subject to the periodic reporting requirement may choose to file Form 8872 on a monthly

basis or on a quarterly/semi-annual basis, but it must file on the same basis for the entire calendar year. 29. Q. What is an election year and nonelection year for purposes of determining the due dates for filing Form 8872?

A. An election year is any year in which a regularly scheduled general election for federal office is held, i.e., any even-numbered year. A non-election year is therefore any odd-numbered year. 30. Q. If an organization chooses to file on a monthly basis, when is Form 8872 due in a non-election year? A. Pursuant to § 527(j)(2)(B), a political organization that chooses to file monthly must file Form 8872 reports not later than the 20th day after the end of the month, which must be complete as of the last day of the month. December activity is included in the year-end report which is due not later than January 31 of the following year. 31. Q. If an organization chooses to file on a monthly basis, when is Form 8872 due during an election year? A. Pursuant to § 527(j)(2)(B), in any election year (i.e., even-numbered years), monthly reports are due not later than the 20th day after the end of the month (see Q&A-30), except the organization shall not file the reports regularly due in November and December (i.e., the monthly reports for activity in October and November). Instead, the organization must file a Form 8872 report not later than 12 days before the general election (or 15 days before the general election if posted by registered or certified mail) that contains information through the 20th day before the general election. The organization must also file a report no more than 30 days after the general election which shall contain information through the 20th day after the election. The December activity is included in the yearend report due not later than January 31 of the following year. 32. Q. If an organization chooses not to file on a monthly basis, when is Form 8872 due in a non-election year? A. Pursuant to § 527(j)(2)(A), a political organization that chooses not to file monthly must file semi-annual reports in non-election years (i.e., odd-numbered years). These reports are due not later

October 30, 2000 432 2000–44 I.R.B.

than July 31 for the first half of the year and, for the second half of the year, not later than January 31 of the following year. 33. Q. If an organization chooses not to file on a monthly basis, when is Form 8872 due during an election year?

A. Pursuant to § 527(j)(2)(A), in an election year (even-numbered years), an organization that chooses not to file monthly reports must file quarterly reports not later than the 15th day after the last day of the quarter, except that the return for the final quarter shall be due not later than January 31 of the following year. The organization must also file a post-general election report not later than 30 days after the general election that contains information through the 20th day after the election. In addition, the organization must file a pre-election report for any election for federal office with respect to which the organization makes a contribution or expenditure. These reports shall be filed not later than 12 days before the election (15 days before if posted by registered or certified mail) and must contain information through the 20th day before the election. 34. Q. What is an election for purposes of the reporting deadlines under § 527(j)? A. For purposes of determining what is an election year and what elections trigger the pre-election and post-general election reports, § 527(j)(6) provides that an “election” is a general, special, primary, or runoff election for a federal office; a convention or caucus of a political party with authority to nominate a candidate for federal office; a primary election to select delegates to a national nominating convention of a political party; or a primary election to express a preference for the nomination of individuals for election to the office of President. Thus, an election for purpose of these reporting deadlines does not include a purely state or local election. When an election involves both candidates for federal office and candidates for state or local offices, it is an election for purposes of the reporting deadlines, but only those organizations that make contributions or expenditures with respect to the candidates for federal office are required to file the pre-election reports for those elections under

§ 527(j)(2)(A)(i)(II). However, all reports filed under § 527(j) must contain information about the contributions and expenditures within the reporting period, regardless of whether they were accepted or made with respect to candidates for federal, state or local office. 35. Q. What is a general election? A. A general election is either one of the following:

a) an election for federal office held in even numbered years on the Tuesday following the first Monday in November or

b) an election held to fill a vacancy in a federal office (i.e., a special election) that is intended to result in the final selection of a single individual to the office at stake. See 11 C.F.R. 100.2(b). 36. Q. How will “election” under § 527(j)(6) be interpreted? A. The definition of “election” under § 527(j)(6) is virtually identical to the definition of “election” under FECA (2 U.S.C. § 431(1)). Organizations may rely on FEC interpretations of the FECA definition in the absence of further guidance from the Service. The FEC publishes information concerning the filing requirements under FECA and the dates for filing those reports, including information on the dates of elections, on its Web Site at http://www.fec.gov/pages/report.htm. 37. Q. What must a Form 8872 report contain? A. The report must include the name, address, and (if an individual) the occupation and employer, of any person to whom expenditures are made that aggregate $500 or more in a calendar year and the amount of such expenditure. The report must also include the name, address, and (if an individual) the occupation and employer, of any person that contributes in the aggregate $200 or more in a calendar year and the amount of such contribution. However, an organization is not required to report independent expenditures, as defined in § 301 of FECA. Only expenditures made or contributions received after July 1, 2000, that are not made or received pursuant to binding contracts entered into before July 2, 2000, must be reported. 38. Q. What is an independent expenditure under § 301 of FECA?

A. An independent expenditure is an expenditure by a person expressly advo

cating the election or defeat of a clearly identified candidate for federal office which is made without cooperation or consultation with any candidate for federal office, or any authorized committee or agent of such candidate, and which is not made in concert with, or at the request or suggestion of, any candidate for federal office, or authorized committee or agent of such candidate. See 2 U.S.C. § 431(17). 39. Q. Where is the Form 8872 filed? A. The report is filed by sending a signed copy of Form 8872 to the Internal Revenue Service Center, Ogden, UT 84201. The form must be signed by an official authorized by the organization to sign the report. 40. Q. What if a political organization that has filed Form 8871 does not file the required Form 8872? A. Under § 527(j)(1), a political organization that does not file the required Form 8872 or which fails to include the information required on the Form 8872 is subject to a penalty equal to the amount of contributions and expenditures that are not disclosed multiplied by the highest corporate tax rate, currently 35 percent. 41. Q. Is the Form 8872 filed by political organizations publicly available?

A. Yes. Under § 6104(b) and § 6104(d)(6), Form 8872 will be made available for public inspection by the Service. Copies of Form 8872 that have been filed are currently available at the IRS Web Site at www.irs.gov/polorgs and are considered widely available under § 301.6104(d)–3, as long as the organization provides the IRS Web Site address to the person making the request. In addition, under § 6104(d)(1)(A), the organization is required to make a copy of these reports available for public inspection during regular business hours at the organization’s principal office (and at each of its regional or district offices having at least three paid employees) in the same manner as applications for exemption of § 501(c) organizations are made available. Pursuant to § 6104(b) and § 6104(d)(3)(A), contributor information must be disclosed to the public. 42. Q. What if the political organization does not make its Form 8872 publicly available?

A. Under § 6652(c)(1)(C), a penalty of $20 per day may be imposed on any

2000–44 I.R.B. 433 October 30, 2000

person with a duty to comply with the public inspection requirement for each day a failure to comply continues. The maximum penalty that may be incurred for any failure to disclose any one report is $10,000.

III. Annual Return Requirements

Q. Which political organizations are required to file annual income tax returns?

A. A political organization that has taxable income in excess of the $100 specific deduction allowed under § 527 is required to file an annual income tax return on Form 1120-POL, U.S. Income Tax Re- turn for Certain Political Organizations . In addition, for taxable years beginning after June 30, 2000, a political organization that has $25,000 or more in gross receipts for the taxable year is also required to file Form 1120-POL, without regard to whether it has taxable income. § 6012(a)(6). 44. Q. When is the Form 1120-POL due? A. The Form 1120-POL is due on or before the 15th day of the third month after the close of the organization’s taxable year. § 6072(b). Thus, for a calendar-year taxpayer, Form 1120-POL is due on March 15 of the following year. 45. Q. Which political organizations are required to file an annual information return?

A. A political organization that is required under § 6012(a)(6) to file an income tax return is also required to file Form 990, Return of Organization Ex- empt from Income Tax, for taxable years beginning after June 30, 2000. § 6033(g). Organizations with gross receipts less than $100,000 and assets less than $250,000 may file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax . Organizations with gross receipts of less than $25,000 are not required to file Form 990 or Form 990EZ. 46. Q. When is the Form 990 due? A. The Form 990 (or Form 990-EZ) is due on or before the 15th day of the fifth month after the close of the organization’s taxable year. Thus, for a calendar-year taxpayer, Form 990 is due on May 15 of the following year. 47. Q. What if the political organization fails to file Form 1120-POL or Form 990?

A. A political organization that fails to file a required Form 1120-POL or Form 900 or fails to include required information on those returns is subject to a penalty of $20 per day for every day such failure continues. The maximum penalty imposed regarding any one return is the lesser of $10,000 or 5 percent of the gross receipts of the organization for the year. In the case of an organization having gross receipts exceeding $1,000,000 for any year, the penalty is increased to $100 per day with a maximum penalty of $50,000. § 6652(c)(1)(A). 48. Q. Are the Forms 1120-POL and Forms 990 filed by political organizations publicly available? A. Yes, the Forms 1120-POL and the Forms 990 filed for taxable years beginning after June 30, 2000 will be made available for public inspection by the Service. § 6104(b). In addition, each political organization must make a copy of its returns available for public inspection during regular business hours at its principal office (and any regional or district offices having at least three paid employees) in the same manner as annual information returns of § 501(c) organizations are made available. It must also provide a copy of the returns to any person requesting a copy in person or in writing without charge other than a reasonable charge for reproduction and postage in the same manner that § 501(c) organizations provide copies of their annual returns. § 6104(d)(1). If an organization’s returns are widely available under § 301.6104(d)–3 (such as on the Internet), the organization need not respond to requests for copies so long as it provides the web site address where the returns are available to the person making the request. Returns only need to be made available for three years after filing. § 6104(d)(2). Contributor information must be disclosed to the public. § 6104(d)(3)(A). 49. Q. What if the political organization does not make its Forms 1120-POL and Forms 990 publicly available? A. A penalty of $20 per day may be imposed on any person with a duty to comply with the public inspection requirement for each day a failure to comply continues. The maximum penalty that may be incurred for any failure to

disclose any one return is $10,000. § 6652(c) (1)(C).

IV. General

Q. What if the filing date for any of these forms falls on Saturday, Sunday or a holiday?

A. If any due date falls on a Saturday, Sunday or legal holiday, the organization may file the report on the next business day. 51. Q. Where can organizations get copies of the various forms?

A. The various forms (Form SS-4, Form 8871, Form 8872, Form 1120POL, and Form 990) and their instructions are available by calling 1-800TAX-FORM (1-800-829-3676) or via the Internet at the IRS Web Site at www.irs.gov in the “Forms and Publications” section. 52. Q. What if an organization has questions regarding the notice and reporting requirements or has any problem obtaining an EIN? A. For more information or if an organization has any problem obtaining an EIN, organizations may call the TE/GE Customer Service Center at 1-877-8295500.

DRAFTING INFORMATION

The principal author of this announcement is Judith E. Kindell of Exempt Organizations. For further information regarding this announcement contact Judith E. Kindell at (202) 622-6494 (not a toll-free call).

Section 6012.—Persons Required to Make Returns of Income

Questions and answers relating to the reporting and disclosure requirements for political organizations described in § 527. See Rev. Rul. 2000–49, page 430.

Section 6033.—Returns by Exempt Organizations

Questions and answers relating to the reporting and disclosure requirements for political organizations described in § 527. See Rev. Rul. 2000–49, page 430.

October 30, 2000 434 2000–44 I.R.B.

Background

Section 6695(g) was added by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Public Law 105–34 (11 Stat. 788, 955 (1997)) (the Act), effective for taxable years beginning after December 31, 1996. Section 6695(g) imposes a $100 penalty for each failure by an income tax return preparer to meet the due diligence requirements set forth in regulations prescribed by the Secretary.

On December 22, 1997, the IRS published Notice 97–65 (1997–2 C.B. 326), in which the IRS set forth the preparer due diligence requirements for 1997 returns and claims for refund involving the EIC. To avoid the imposition of the penalty under section 6695(g) for 1997 returns and claims for refund, Notice 97–65 required preparers to meet four requirements: (1) complete the Earned Income Credit Eligibility Checklist attached to Notice 97–65 (Eligibility Checklist), or otherwise record the information necessary to complete the Eligibility Checklist; (2) complete the Earned Income Credit Worksheet (Computation Worksheet), as contained in the 1997 Form 1040 instructions, or otherwise record the computation and information necessary to complete the Computation Worksheet; (3) not know or have reason to know that any information used by the preparer in determining eligibility for, and the amount of, the EIC is incorrect; and (4) retain for three years the Eligibility Checklist and Computation Worksheet (or alternative records), and a record of how and when the information used to determine eligibility for, and the amount of, the EIC was obtained by the preparer. This information may be retained as a paper record, in magnetic media format, or in an electronic storage media system, consistent with applicable IRS revenue procedures.

On December 21, 1998, temporary regulations (TD 8798, 1999–1 C.B. 804) under section 6695(g) were published in the Federal Register (63 F.R. 70339). A notice of proposed rulemaking (REG– 120168–97, 1999–1 C.B. 809) cross-referencing the temporary regulations was published in the Federal Register (63 F.R. 70357) on that same date. The text of the temporary regulations served as the text of the proposed regulations. The requirements set forth in the temporary regulations were substantially similar to those in Notice 97–65.

Section 6104.—Publicity of Information Required From Certain Exempt Organizations and Certain Trusts

Questions and answers relating to the reporting and disclosure requirements for political organizations described in § 527. See Rev. Rul. 2000–49, page 430.

Section 6652.—Failure to File Certain Information Returns, Registration Statements, Etc.

Questions and answers relating to the reporting and disclosure requirements for political organizations described in § 527. See Rev. Rul. 2000–49, page 430.

Section 6695.— Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons

26 CFR 1.6695–2: Preparer due diligence requirements for determining earned income credit eligibility.

T.D. 8905

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Preparer Due Diligence Requirements for Determining Earned Income Credit Eligibility

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations relating to the due diligence requirements under section 6695(g) of the Internal Revenue Code for paid preparers of Federal income tax returns or claims for refund involving the earned income credit (EIC). These regulations reflect changes to the law made by the Taxpayer Relief Act of 1997. The regulations provide guidance to paid preparers who prepare Federal income tax returns or claims for refund claiming the earned income credit.

DATES: Effective Date . These regulations are effective October 17, 2000.

Applicability Date . For dates of applicability, see §1.6695–2(d) of these regulations.

FOR FURTHER INFORMATION CONTACT: Andrea Tucker, (202) 622-4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1570. This information is required by the IRS to determine preparer due diligence compliance for purposes of the penalty imposed under section 6695(g). Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.

The estimated annual burden per recordkeeper varies depending on individual circumstances. The estimated total annual recordkeeping burden: 507,136 hours with the estimated average annual burden hours per recordkeeper: 5 hours 4 minutes (40 minutes per return or claim for refund, 7.6 returns per preparer). The estimated number of recordkeepers: 100,000.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

2000–44 I.R.B. 435 October 30, 2000

6695(g) on a person who is an income tax return preparer solely by reason of—

(1) Section 301.7701–15(a)(2) and (b) of this chapter, on account of having given advice on specific issues of law; or

(2) Section 301.7701–15(b)(3) of this chapter, on account of having prepared the return solely because of having prepared another return that affects amounts reported on the return.

(b) Due diligence requirements . A preparer must satisfy the following due diligence requirements:

(1) Completion of eligibility checklist . (i) The preparer must either—

(A) Complete Form 8867, “Paid Preparer’s Earned Income Credit Checklist,” or such other form and such other information as may be prescribed by the Internal Revenue Service (IRS)(Eligibility Checklist); or

(B) Otherwise record in the preparer’s paper or electronic files the information necessary to complete the Eligibility Checklist (Alternative Eligibility Record). The Alternative Eligibility Record may consist of one or more documents containing the required information.

(ii) The preparer’s completion of the Eligibility Checklist or Alternative Eligibility Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer.

(2) Computation of credit . (i) The preparer must either—

(A) Complete the Earned Income Credit Worksheet in the Form 1040 instructions or such other form and such other information as may be prescribed by the IRS (Computation Worksheet); or

(B) Otherwise record in the preparer’s paper or electronic files the preparer’s EIC computation, including the method and information used to make the computation (Alternative Computation Record). The Alternative Computation Record may consist of one or more documents containing the required information.

(ii) The preparer’s completion of the Computation Worksheet or Alternative Computation Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer.

(3) Knowledge . The preparer must not know, or have reason to know, that any in

The notice of proposed rulemaking solicited comments from the public. One comment was received, but no public hearing was requested or held. After consideration of the comment received, the proposed regulations under section 6695(g) are adopted by this Treasury decision, and the corresponding temporary regulations are removed.

Summary of Comments

The commentator expressed concern that requiring the completion of an eligibility checklist and a computation worksheet impose additional recordkeeping burdens on tax return preparers. The commentator did not suggest alternative due diligence requirements.

The additional recordkeeping required by the regulations is necessary to implement congressional intent with respect to section 6695(g). The legislative history accompanying the Act explains that Congress “believes that more thorough efforts by return preparers are important to improving EIC compliance.” H.R. Rep. No. 148, 105 ^th Cong., 1 ^st Sess. 512 (1997) and S. Rep. No. 29, 105 ^th Cong., 1 ^st Sess. 125 (1997). The additional information gathering and recordkeeping required by these regulations are intended to ensure that preparers are thorough when determining whether a taxpayer qualifies to claim the EIC credit. Further, the regulations allow preparers the flexibility to use either the prescribed forms or alternative records containing the same information as the prescribed forms to meet the due diligence requirements.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility Act, that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the amount of time necessary to record and retain the required information

will be nominal for those income tax return preparers that choose to use the Alternative Eligibility Record and Alternative Computation Record. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Andrea Tucker, Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division). However, other personnel from the IRS and Treasury Department participated in their development.

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entry for “Section 1.6695–2T” and adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.6695–2 also issued under 26 U.S.C. 6695(g). * * *

Par. 2. Section 1.6695–2 is added to read as follows:

§1.6695–2 Preparer due diligence requirements for determining earned income credit eligibility.

(a) Penalty for failure to meet due dili- gence requirements . A person who is an income tax return preparer (preparer) of an income tax return or claim for refund under subtitle A of the Internal Revenue Code with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $100 for each such failure. However, no penalty will be imposed under section

October 30, 2000 436 2000–44 I.R.B.

formation used by the preparer in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect. The preparer may not ignore the implications of information furnished to, or known by, the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete.

(4) Retention of records . (i) The preparer must retain—

(A) A copy of the completed Eligibility Checklist or Alternative Eligibility Record;

(B) A copy of the Computation Worksheet or Alternative Computation Record; and

(C) A record of how and when the information used to complete the Eligibility Checklist or Alternative Eligibility Record and the Computation Worksheet or Alternative Computation Record was obtained by the preparer, including the identity of any person furnishing the information.

(ii) The items in paragraph (b)(4) of this section must be retained for three years after the June 30th following the date the return or claim for refund was

presented to the taxpayer for signature, and may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance (see §601.601(d)(2) of this chapter).

(c) Exception to penalty . The section 6695(g) penalty will not be applied with respect to a particular income tax return or claim for refund if the preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circumstances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular return or claim for refund was isolated and inadvertent.

(d) Effective date . This section applies to income tax returns and claims for refund due on or after October 17, 2000.

§1.6695–2T [Removed]

Par. 3. Section 1.6695–2T is removed.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 5. In §602.101, paragraph (b) is amended by removing the entry for “1.6695–2T” and adding the following entry in numerical order to the table to read as follows:

§602.101 OMB Control numbers.

(b) * * *

CFR part or section where Current OMB identified and described control No.

1.6695–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545-1570

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved October 6, 2000.

Jonathan Talisman, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on October 16, 2000, 8:45 a.m., and published in the issue of the Federal Register for October 17, 2000, 65 F.R. 61268)

2000–44 I.R.B. 437 October 30, 2000