The term proxy tax refers to a tax paid by certain tax-exempt organizations for expenses associated with lobbying and other political activities. Proxy taxes are collected at the highest corporate federal income tax rate for that tax year.
Proxy taxes are imposed by the Internal Revenue Service (IRS) when certain tax exempt organizations have political lobbying expenses in excess of threshold values, and members of that organization take deductions on their federal income tax return equal to their membership dues.
Organizations subject to a proxy tax include tax-exempt groups described in sections 501(c)(4), 501(c)(5), and 501(c)(6) of the Internal Revenue Code (IRC). Example of these tax exempt businesses include: agricultural and horticultural organizations, chambers of commerce, civic groups, labor unions, and social welfare organizations. These businesses can avoid the proxy tax if they notify members their dues are used to pay for political lobbying efforts, and the dues cannot be deducted on their individual federal income tax returns.
The proxy tax owed by these groups for such expenditures is equal to the highest corporate federal income tax rate. In addition to this tax, the organization may be subject to additional charges and penalties levied by the IRS.