New IRS Rule Targets Terror Funding: Tax-Exempt Status Immediately Suspended for Designated Organizations

This legislation aims to amend the Internal Revenue Code to immediately suspend the tax-exempt status of any organization designated by the Secretary of the Treasury as a "terrorist supporting organization." Essentially, if you’re a non-profit, charity, or foundation, and the government finds you’ve provided more than a minimal amount of material support to a terrorist group in the last three years, the IRS will treat you like a for-profit entity overnight.

The New Definition of 'Material Support'

What counts as a "terrorist supporting organization"? The bill defines it as any group the Treasury Secretary designates as having given some level of "material support or resources" to a terrorist organization within the last 36 months. This "material support" definition is pulled from existing federal criminal law, which is broad—it can mean anything from money and training to expert advice or personnel. However, the bill carves out two key exceptions: support approved by the State Department and Attorney General, or humanitarian aid approved by the Office of Foreign Assets Control (OFAC). This means if a non-profit is doing legitimate, government-sanctioned work in a risky area, they should be protected. If designated, the suspension of tax-exempt status starts immediately and lasts until the Secretary officially rescinds the designation.

The 90-Day Warning Shot

Before the Treasury can drop the hammer, they have to send a written notice to the organization. This is a crucial 90-day window, essentially a "cure period." The notice must explain that designation is coming and name the terrorist group that received support. The organization can avoid the designation by doing one of three things: proving the support never happened, making a reasonable effort to get the support back and certifying they won't do it again, or challenging the Secretary in court if the evidence description was withheld for national security reasons. This notice requirement provides a critical chance for legitimate organizations caught in a mistake or error to clear their name before facing financial ruin.

The Fine Print: When the Cure Doesn't Work

While the 90-day cure period sounds fair, there’s a catch that could trip up organizations facing repeated scrutiny. If an organization has already used the "certify they won't do it again" option within the previous five years, they can’t use it this time. For groups operating in complex international environments where they might repeatedly face inadvertent exposure to bad actors, this five-year limitation means they only get one "free pass" to certify future compliance. If they mess up again within that window, they must prove the support didn't happen or get the funds back—a much harder task.

Accountability and Secrecy Concerns

This bill sets up a clear path for organizations to fight a designation, which is important for due process. Disputes can go through the IRS Independent Office of Appeals, and organizations can take the final designation to a U.S. district court. However, the bill allows the Secretary to withhold the description of the material support—the very evidence the organization needs to defend itself—if disclosing it would harm national security or law enforcement. This means an organization could be fighting a designation without knowing the full details of the accusation, which is a significant hurdle. If the court review involves classified information, the Secretary can submit that evidence to the court privately, which means the organization’s lawyers might not even see all the evidence used against them. This is a necessary reality when dealing with national security but raises serious questions about procedural fairness when an organization’s entire financial structure is on the line.