4.75.34 Procedures for Disposition of IRC 501(p) Cases

Manual Transmittal

February 06, 2017

Purpose

(1) This transmits revised IRM 4.75.34, Exempt Organizations Examination Procedures, Procedures for Disposition of IRC 501(p) Cases.

Material Changes

(1) This IRM provides procedures for processing cases involving organizations that had their tax-exempt status suspended pursuant to IRC 501(p). For more background information on IRC 501(p) suspensions, see IRM 7.25.45, Suspension of Exempt Status Under IRC 501(p).

(2) Removed italics for titles to forms, publications, IRMs, and letters as required by current IRS Writing Style Guide. Document 12835, The IRM Style Guide, will be updated to reflect this change.

(3) Converted the manual to plain language to comply with the Plain Writing Act of 2010. Replaced each mention of "examination" (except for the title of the division) with "audit" , and "examiner" with "agent" . The term "agent" additionally includes revenue agents and tax compliance officers.

(4) IRM 4.75.34.3: Added reference to new EO Examinations Mandatory Review Letter 5324 (Rev. 4-2016), IRC 501(p) Closing Letter.

(5) IRM 4.75.34.4: Added a new subsection on the procedures for updating the Business Master File.

(6) Exhibit 4.75.34-1: Deleted exhibit, replaced by new Letter 5324.

Effect on Other Documents

None

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(02-06-2017)

Margaret Von Lienen
Acting Director, Exempt Organizations
Tax Exempt and Government Entities

Introduction

  1. 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), which was 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.

Suspension of Exemption for IRC 501(p) Organizations

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

  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.

  3. Under IRC 501(p)(4), the IRS does not allow any deduction for a contribution to an organization during the entire period in which the organization's tax exemption receives a suspension under IRC 501(p).

    Example:

    No charitable contribution is allowed under IRC 170 (relating to the income tax).

  4. An organization with a suspended exempt status under IRC 501(p) does not 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.

  5. 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:

    • Contributions to the organization become illegal.

    • Contributions to the organization lose their deductibility.

    • The organization's assets are frozen.

    • The Federal Bureau of Investigation (FBI) or other federal agency will seize and hold the organization’s records; and

    • No organization or person may challenge a suspension in any administrative or judicial proceeding relating to the federal tax liability of such organization.

Processing a IRC 501(p) Organization Identified During Audit

  1. When a case is assigned to an agent involving an organization whose tax-exempt status has been suspended under IRC 501(p) (Status Code 98 in the EO Business Master File (BMF)), or is suspended under 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:

    1. Close the case from the group using either Disposal Code (DC) 36, Surveyed After Initial Contact; DC 31, Survey Before Assignment, or DC 32, Survey After Assignment, depending on the status of the case within the group, and

    2. Place Form 3198-A, TE/GE Special Handling Notice, on the front of the case file and check the Mandatory Review section, identifying the case as a 501(p) closure.

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

Procedures for Updating the Business Master File

  1. The EO Guidance function in EO Rulings and Agreements (R&A) is responsible for:

    1. Monitoring terrorist designations and preparing announcements of IRC 501(p) suspensions.

    2. Assisting in the matching of the designation with the organization.

    3. Alerting and coordinating with the EO Examinations Fraud Suspense Coordinator over the designation, and the BMF update.

    4. For additional information on IRC 501(p) suspension announcements, refer to IRM 7.20.6.3, Anti-Terrorism and Other Emerging Issues - Announcement of Section 501(p) Suspension.

  2. The EO Examinations Fraud Suspense Coordinator (FSC) will:

    1. Determine whether the designated organization has an established AIMS Master File or Non-Master file audit record and notify the EO R&A designated employee if no audit records exist.

    2. Assist and coordinate with EO R&A to update the Business Master File (BMF) to Status 98, Terrorist Organizations, and to update the filing requirement and employment codes.

    3. Monitor and receive a Lexis Alert when an IRC 501(p) announcement is published in the Internal Revenue Bulletin.

    4. Alert all EO Exam managers of the announcement via secure e-mail.

  3. 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. Accordingly, the FSC will:

    1. Ascertain whether the IRS is involved in a collection action to satisfy existing balances, or in other investigative action.

    2. Coordinate with IRS Criminal Investigation Division to determine whether OFAC will release the organization’s assets to satisfy existing balances.

    3. Provide assistance to the FIU field managers in preparing an e-mail for the abatement of any tax liability.

    4. Prepare both a memo authorizing the Service Center to abate tax and interest due, and a Form 3198-A for the Ogden Service Center.

    5. Forward both the memo and Form 3198-A to the Area Manager, Examination Programs and Review (EPR), with a copy to the Examination Manager, Mandatory Review (MR) for review and approval.

  4. The EPR Area Manager will:

    1. Review and approve the abatement package.

    2. Discuss the abatement issues with the Director, EO Examinations.

  5. If the Director, EO Examinations concurs with the abatement, the EPR Area Manager will:

    1. E-mail the manager, Submission Processing Programs Division (SPP) of Business Systems Plan in Ogden, to advise him/her that the abatement package needed for abatement will be forthcoming.

    2. Alert the FSC.

  6. Once the tax liability is 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.