Purpose: This manual focuses on procedures an agent follows when auditing an organization that receives a terrorist designation, Internal Revenue Code IRC Section 501(p). Topics addressed include:

The procedures in this manual apply to Exempt Organizations Examination agents and reviewers in the following series:

Policy Owner: Director, Exempt Organizations

Program Owner: Exempt Organizations

These procedures provide information for agents on closing cases involving organizations that received a designation as a terrorist organization as described in Internal Revenue Code Section (IRC) 501(p), enacted as part of the Military Family Tax Relief Act of 2003 (P.L.108-121). The IRS announces the designations in the Internal Revenue Bulletin and they apply to organizations designated as supporting or engaging in terrorist activity or supporting terrorism under the Immigration and Nationality Act, the International Emergency Economic Powers Act, or the United Nations Participation Act of 1945. For more background information on IRC Section 501(p) suspensions, see IRM 7.25.45, Suspension of Exempt Status Under IRC Section 501(p).

IRC 501(p)(1) suspends the exemption from tax under IRC Section 501(a) with respect to any organization described in IRC 501(p)(2).

Under IRC 501(p)(3), suspension of an organization's tax exemption begins on the date of the first publication of a designation or identification with respect to the organization, as described above, or the date on which IRC 501(p) was enacted, whichever is later. This suspension continues until all designations and identifications receive a subsequent recision under the law or Executive Order, under which such designation or identification was made.

Under IRC 501(p)(4), the IRS doesn’t allow any deduction for a contribution to an organization during the entire period the organization's tax exemption receives a suspension under IRC Section 501(p).

An organization with a suspended exempt status under IRC Section 501(p) doesn’t file Form 990, Return of Organization Exempt From Income Tax, but is required to file the appropriate federal income tax returns for the taxable periods beginning on the date of the suspension. The organization must continue to file all other appropriate federal tax returns, including employment tax returns, and may also have to file federal unemployment tax returns.

If an organization is included on the Treasury Department's Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list at https://www.treasury.gov/resource-center/sanctions/Pages/default.aspx, and is "suspended" under IRC 501(p), there are several implications, including:

When a case is assigned to an agent involving an organization whose tax-exempt status has been suspended under IRC Section 501(p) (Status Code 98 in the EO Business Master File (BMF)), or is suspended under IRC Section 501(p) during the audit, the agent will cease all audit actions and notify his/her manager. After consulting with the manager, the agent will:

Mandatory Review staff will mail Letter 5324, IRC Section 501(p) Closing Letter, to the taxpayer.

The EO R&A Anti-Terrorism Coordinator is responsible for:

The EO Examinations Fraud Suspense Coordinator (FSC) will:

An outstanding balance due on the suspended organization’s tax module will preclude the EO R&A designated employee from updating the organization to BMF status 98. The EO R&A designated employee will coordinate with the FSC to determine whether the outstanding balance can be abated. The FSC will:

The FSL/ET Area Manager will:

If the EO Examinations Director concurs with the abatement, the FSL/ET Area Manager will:

Once the tax liability’s abated, the organization’s BMF entity record can then be updated to Status 98, allowing the EO R&A designated employee to change the filing requirements and remove the entity as an exempt organization.