4.75.34 Procedures for Disposition of IRC 501(p) Cases

Manual Transmittal

May 29, 2019


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

Material Changes

(1) Revised IRM to incorporate service-wide memorandum "Heightened Awareness, Sensitivity and Understanding of Internal Controls" , September 14, 2016.

(2) All references to "EO Manager, Examination Programs and Review (EPR)" becomes "FSL/ET Area Manager"

(3) All references to Examination Special Support (ESS) are now"EO Closing Unit" , EGC 7997.

(4) All References to "EO Classification-Referrals" are now "EO Referrals Group" .

(5) Exhibit 4.75.34-1: Deleted exhibit, now new Letter 5324.

(6) IRM Added the responsibilities of the EO R&A Anti-Terrorism Coordinator.

Effect on Other Documents

The February 6, 2017 revision of this manual is superseded.


Tax Exempt and Government Entities
Exempt Organizations

Effective Date


Margaret Von Lienen
Exempt Organizations Director
Tax Exempt and Government Entities

Program Scope and Objectives

  1. 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:

    1. How designations are announced.

    2. Suspension procedures and ramifications of the designation.

    3. Audit procedures for closing the case.

    4. Notification of the group manager and transferring the case.

    5. How to update the Business Master File (BMF).

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

    • GS-512

    • GS-526

    • GS-987

    • GS-501

  3. Policy Owner: Director, Exempt Organizations

  4. Program Owner: Exempt Organizations


  1. This section contains procedures for EO Revenue Agents to take for cases involving an organization whose tax-exempt status is suspended under IRC 501(p) during the audit.


  1. IRC Section 7602 gives agents the authority to:

    1. Examine any books, papers, records or any data necessary to complete an audit.

    2. Issue a summons for information necessary to complete an audit.

    3. Take testimony under oath to secure additional information needed.

    4. Inquire into any offense connected with the administration or enforcement of the Internal Revenue laws.


  1. During an audit, agents determine if an organization :

    1. Received an IRC Section 501(p) suspension.

    2. Must cease being audited.

    3. Requires its file closed upon notification.

    4. Must have its case file transferred to Mandatory Review for issuance of a special letter.

Program Controls

  1. Agents will consult the K-NET Knowledge Management Network to ensure proper issue development and consistent application of the law.


  1. The table lists commonly used acronyms and definitions.

    Acronym Definition
    EO Exempt Organizations
    AIMS Audit Information Management System
    K-NET Knowledge Management Network
    RAR Revenue Agent Report
    TAM Technical Advice Memorandum
    TEGE Tax Exempt/Government Entities
    IRC Internal Revenue Code
    OCEP Office Correspondence Examination Program


  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), 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).

Suspension of Exemption for IRC Section 501(p) Organizations

  1. 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).

  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 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).


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

  4. 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.

  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 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 Section 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 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:

    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 IRC Section 501(p) closure.

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

Procedures for Updating the Business Master File

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

    1. Serving as the EO liaison with IRS-CI.

    2. Maintaining an archive of all Potential Terrorism Connection Checksheets (PTCC). (i.e., Form 14503)

    3. Extracting the OFAC SDN list from its website into a spreadsheet and distributing the spreadsheet to internal stakeholders.

    4. Reviewing and evaluating the completed (PTCC) checksheets

    5. Forwarding these checksheets to:

      • Manager for review

      • Originator for further clarification

      • IRS-CI for cases identified with a risk of terrorism

  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 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. The FSC will:

    1. Determine whether the IRS is 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 EO Exam 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 FSL/ET Area Manager with a copy to the Mandatory Review (MR) Examination Manager for review and approval.

  4. The FSL/ET Area Manager will:

    1. Review and approve the abatement package.

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

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

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

    2. Alert the FSC.

  6. 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.