Proxy Tax

Knock, knock. It’s Uncle Sam, coming to collect taxes.

You’re a tax-exempt organization...a 501(c)(4), 501(c)(5) or 501(c)(6), you say? Well here; have this proxy tax, then, since Uncle Sam thinks you’re a lobbying tax-liar.

A proxy tax is placed on tax exempt organizations, only if the government thinks the organization inaccurately estimated the amount of money spent on lobbying that year. The proxy tax would be equal to the highest marginal corporate tax rate for that year. So much for being tax-exempt.

Tax-exempt organizations that rub elbows in Washington D.C. live in constant fear of a proxy tax. Okay, well maybe just once a year. These orgs toe the line between tax-exempt and non-tax-exempt status. Tax-exempt orgs get to be tax-exempt only if they don’t “engage in a regular business of a kind ordinarily carried on for profit,” says the IRS. And if lobbying is to do something to improve an org’s business, well...that’s taxable. Proxy taxable.

To be clear: these orgs can be exempt from all taxes and lobby. They just have to not under-guess how much they’re spending on lobbying. If they under-guess and overshoot, lobbying more than they said, the IRS makes up the difference with the proxy tax.