ICNL: Evolving Threats to the Tax-Exempt Status of 501(c)(3) Nonprofits

There is significant fear in nonprofit circles that the Executive Branch will seek to target the 501(c)(3) status of many nonprofits this week based on ideological differences with their views on the state of the world. Fortunately, the International Center for Nonprofit Law (ICNL) is out today with a briefer on “Evolving Threats to the Tax-Exempt Status of 501(c)(3) Nonprofits.” The brief discusses potential attacks on three fronts:

(1) Illegal purpose or activities;
(2) Activity contrary to fundamental public policy; and
(3) Support for terrorism.

ICNL offers a good explanation of the state of the law — and why disagreement on issues of public policy don’t cut it — before offering a few tips to nonprofits:

• Monitoring. Monitor developments in IRS enforcement of requirements for tax-exempt status as well as potential legislative or regulatory changes affecting tax-exempt requirements or the ability to carry out charitable purposes.
• Internal compliance. Ensure internal regulatory compliance. Amongst other requirements, a 501(c)(3) organization must be organized and operated for an exempt purpose. Organizations should also ensure they do not engage in unlawful activity, have an unlawful purpose, or provide material support to organizations or individuals designated as Specially Designated Nationals or improperly engage with other sanctioned nationals or blocked persons (maintained by OFAC).
• Preparing for a potential government investigation. Prepare for a potential IRS or other government investigation or audit. Steps might include assessing risk for an enforcement action and taking steps to mitigate this risk, having a plan on how to respond to an enforcement action (including how to communicate with staff, funders, and the public), putting into place an appropriate document retention policy, and identifying legal counsel in advance.
• Understanding the process. The IRS determines if an organization has violated the illegality doctrine, conducts activities contrary to public purpose, or fails other requirements for tax exemption. The IRS maintains general information about audits and the appeals process for an adverse determination. Even if 501(c)(3) tax-exempt status is revoked an organization remains a nonprofit corporation, although a taxable one. The IRS does not have authority to shut down the organization or take control of its assets.

Whether IRS scrutiny is legal or justified or not, ICNL sounds the alarm about the current threats to nonprofits. It suggests this basic principle with which everyone should agree:

A vibrant and independent nonprofit sector is central to U.S. democracy. Tax-exemption should be enforced in a consistent and non-politicized manner that protects Americans’ First Amendment and other constitutional rights. No administration should be able to weaponize the IRS to attack organizations that it disagrees with. As a DC district court judge found, “discrimination on the basis of political viewpoint in administering the United States tax code violates fundamental First Amendment rights.”

-Joseph Mead