You’ve likely seen the Trump Administration’s continued attacks targeting nonprofits on ideological grounds. We are now hearing additional executive orders (EOs) targeting nonprofits may be released soon, and while nothing specific has been announced, a focus could include revoking the tax-exempt status of nonprofits working in certain areas.
Does a President have the authority to revoke an organization’s tax status?
The President does not have the authority to unilaterally revoke any organization’s tax-exempt status. By law, the President is prohibited from directly or indirectly influencing tax-related decisions of the Internal Revenue Service.
Federal law under 26 U.S. Code section 7217 makes it illegal for the President, Vice President, or any employee of the executive office of the President or Vice President, to “request, directly or indirectly, any officer or employee of the Internal Revenue service” to conduct an audit or other investigation of any particular taxpayer. In fact, the statute states that any person who willfully does so shall be convicted with a fine not exceeding $5,000 or imprisonment of not more than five years.
Any executive order asserting to revoke an organization’s tax-exempt status – whether specifically by name or by inference (such as “all climate groups are no longer tax exempt”) does not have legal validity.
How can an organization’s tax-exempt status be changed?
The IRS is required to follow an administrative procedure for revocation of an organization’s tax-exempt status, which includes multiple avenues to appeal.
In the absence of a change in the law or regulations, a 501(c)(3)’s tax-exempt status can be revoked on the ground that the organization no longer qualifies under section 501(c)(3).
Generally, that would require a finding by the IRS that the organization no longer has a charitable or educational purpose within the meaning of section 501(c)(3), has violated the prohibition on partisan activity, has too much unrelated business activity, or has been run for the private benefit of specific individuals.
How would a nonprofit be notified if their tax status is questioned and/or revoked?
The process that the IRS is supposed to follow under its own procedural rule is:
- The Exempt Organizations Rulings & Agreements office (EO Determinations) will issue a proposed notice of revocation to the organization, which is supposed to include a detailed discussion of the basis for the IRS’ proposed determination.
- The organization can then, within 30 days, file an appeal with the EO Determinations. EO Determinations will either reverse its position or maintain it. In that appeal, the organization can request a conference with the IRS Independent Office of Appeals.
- If EO Determinations maintains its position, it sends the case file to the IRS Independent Office of Appeals. A conference may be held if one was requested. That Office of Appeals will then either issue a favorable determination or a final adverse determination – that is a final determination revoking the tax-exempt status.
My nonprofit was referenced in an executive order, can we continue operations?
If your organization is referenced by name or inference in a potential executive order, operations can continue as normal until a revocation notice is received by the IRS.
If a proposed revocation notice is received by your specific organization, there is an appeal process. This process is best navigated through legal support to ensure compliance with the appeal process.
What are the consequences of having your tax-exempt status revoked?
Following the appeal process noted above, if the IRS issues a final adverse determination revoking the tax-exempt status of an organization, the organization will become liable for paying taxes on its contribution income (minus fundraising costs).
Contributions to the organization become non-deductible as of the effective date of the revocation. There is an exception for contributions of up to $1,000 from any individual which remain deductible until any challenge is resolved.
Can a President freeze an organization’s funds?
While the President could direct the Secretary of State to designate a specific organization a “foreign terrorist organization” – that could leave to funds being frozen immediately, that determination would need to be made for each specific organization.
The organization must be foreign – must have some presence in a foreign country (not just funding) and have engaged in unlawful activity involving violence.
An organization designated as a “foreign terrorist organization” can file a petition for revocation with the US Court of Appeals for the DC Circuit.
There is no equivalent legal designation for a “domestic terrorist group.”
Why do nonprofits have tax-exempt status?
Tax exemption is granted by the IRS to a number of different groups who meet the criteria defined in the Internal Revenue Code section 501c. Qualifying groups are charitable organizations, churches and religious organizations, private foundations, political organizations, and other nonprofits. We most often think of nonprofits in the first category – charitable organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specific purposes.
By exempting nonprofits from certain taxes, the government recognizes the value of their mission-driven work and ensures that more of their resources can go directly toward serving the public good rather than toward tax obligations. Nonprofits fill critical gaps by addressing needs in education, healthcare, housing, human services, arts and culture, and more—areas that would otherwise fall entirely to government or go unmet.
501(c)(3) charitable nonprofits are generally exempt from paying income taxes, and donations to their work may qualify for tax deductions on their donors’ federal or Minnesota income tax returns. In Minnesota, dependent on their missions and other factors, nonprofits may be exempt from paying property taxes and from paying or collecting sales tax.
However, nonprofits are not exempt from all taxes. Nonprofits pay payroll taxes, including Social Security and Medicare for employees, and may be subject to unrelated business income tax (UBIT) if they earn income from activities not directly related to their charitable purpose.
How can nonprofits prepare for the impact of potential executive orders targeting a nonprofit’s tax status?
Many organizations are rightfully concerned about how the Administration’s actions may affect their operations. Preparation and calm are paramount in this moment, so MCN has created a list of considerations to review.
- Know your rights: “Nonprofits should consult legal counsel to understand the limits of government authority over their data, operations, financial information, and more. Consult with legal counsel about how to recognize and respond to subpoenas, search warrants, or politically motivated inquiries. Ensure leadership, staff, and key volunteers are trained on what to do in the event of these types of government intrusion.” – Nonprofit Quarterly
- Protect people and data: “The safety and privacy of the people the nonprofit serves, and its staff, board, and volunteers must be a priority. Review your data security practices and avoid collecting and storing sensitive information unless absolutely necessary. Update the organization’s policies on data and get everyone trained.” – Nonprofit Quarterly.
Have a document retention policy, make necessary updates, and ensure the policy is implemented. An effective policy can significantly reduce potential legal costs associated with responding to discovery requests. - Engage your community: Consider messaging to donors and funders about changes to their tax deductibility contributions and your increased need for support, as well as messaging to partners and other stakeholders that can provide crucial support during times of crisis.
- Understand financial & legal implications: Review legal compliance and articles of incorporation documentation as it relates to your nonprofit’s tax status. Explore the financial implications of paying taxes on your contribution income.
- Board partnership: Ensure your board is aware and considers further governance actions needed.
- Scenario Planning: Have an incident response plan for responding to a revocation notice or other action, including but not limited to process for working with legal counsel, a crisis communications plan, and cybersecurity plan.
- Additional resources: Access MCN’s list of resources to navigate uncertainty.
This content is for informational purposes only and is neither intended to be nor should be construed as legal or tax advice.