You Could Easily Lose Your Tax-Exempt Status Under H.R. 9495

What do Nonprofits Need to Know?

The United States House of Representatives is now set to vote on H.R. 9495, a bill that could have devastating effects on nonprofits across the United States. Nonprofits must understand how to safeguard their tax-exempt status against potential designation as a “terrorist supporting organization.” While this designation seems facially absurd to almost all well-meaning nonprofits, leaders cannot assume they are safe. While the bill would appear to protect national security, its criteria, broad language, and reporting requirements raise significant concerns for nonprofit leaders. Without careful compliance, nonprofits face an increased risk of losing their tax-exempt status.

Understanding the Core of HR 9495

Under H.R. 9495, Section 501(p) of the Internal Revenue Code now includes language that enables the IRS to revoke the tax-exempt status of organizations deemed to provide “material support” to any group designated as terrorist-affiliated. The law allows for immediate suspension of tax-exempt status upon designation by the Secretary of the Treasury, with specific requirements for organizations to cure the violation. Here’s what nonprofit organizations need to know:

• Designation as a Terrorist Supporting Organization: The Secretary of the Treasury may designate any organization that has provided “material support” to a group defined as terrorist-affiliated within the past three years. Material support encompasses a range of aid beyond funding, including providing resources, personnel, and services.
• Notice and Cure Process: Before designation, the organization is notified by mail, and has a 90-day period to prove that it either did not provide the alleged support or has taken steps to recover any resources provided. Failure to resolve the issue leads to automatic designation.
• Rescission of Designation: An organization can have its designation removed if the Secretary determines the designation was an error, or if the organization did not receive the initial notice.

4 Tips for Nonprofit Compliance

To protect against potential loss of tax-exempt status, nonprofits should adopt strong compliance measures, including:

1. Establish Rigorous Due Diligence Protocols Implement a system for vetting partners, funders, and affiliates. Review the background of each organization or entity you work with to ensure no ties to activities defined as material support to terrorist organizations. Designate team members or use outside consultants to assess potential risks.
2. Monitor All In-Kind and Financial Contributions Carefully Keep accurate records of both the sources of funds your organization receives and the destinations of any donations, resources, or volunteer support you provide. This can be crucial evidence in case of a government audit or inquiry.
3. Develop a Crisis Response Plan Outline procedures in case of an accusation or designation notice. This may include preparing documentation to prove compliance and swiftly identifying actions to rectify any potential misinterpretations.
4. Training and Awareness for Staff and Volunteers Ensure that everyone involved understands the importance of not engaging with restricted organizations. Provide regular training sessions to keep them informed of current laws and any updates to H.R. 9495.

Risks and Potential for Government Abuse

The broad nature of H.R. 9495’s language, particularly regarding “material support,” poses risks for overreach, especially given that the definition of support includes indirect forms of assistance that may be difficult for organizations to control fully. Here are some critical concerns:

1. Vague Definitions and Interpretation The term “material support” is broadly defined, which could lead to accidental violations. Nonprofits working internationally, or with vulnerable communities, may inadvertently fall under scrutiny even when aiming to provide humanitarian aid.
2. Risk of Retaliatory Targeting The law does not explicitly outline limits on the Secretary’s designation power, which opens the door to potential misuse against specific organizations due to their missions or political activities.
3. Administrative Burden and Costs Responding to a designation notice within 90 days is both financially and administratively taxing. For smaller nonprofits, complying with such requirements may drain limited resources.
4. Lack of Safeguards for Erroneous Designations While H.R. 9495 includes a process for rescission, it may not be robust enough to protect nonprofits unfairly targeted. The review process includes the ability for the nonprofit to appeal to the IRS Independent Office of Appeals and/or United States District Courts. For many nonprofits, however, the resources necessary for federal appeals litigation are cost-prohibitive. This makes it even more important for organizations to do their compliance work early and proactively.

If your organization needs assistance developing a compliance plan, feel free to contact me so that we may explore your options.