Suspension of Tax-Exempt Status of Designated 
Terrorist Organizations

On November 11, 2003, President Bush signed into law the Military Family Tax Relief Act (H.R. 3365), which contains a provision requiring the IRS to suspend the tax-exempt status of an organization that is exempt from tax under section 501(a) of the Internal Revenue Code for any period during which the organization is designated or identified as a terrorist organization.

Under existing law before enactment of the measure, the president and the secretary of state had authority to designate an organization as a terrorist organization or as supporting terrorist activity.  Under this designation, the organization's assets maybe be frozen and placed under the control of the federal government.

Under the new provision, any organization designated as a terrorist organization will not be eligible to receive tax-deductible contributions and is ineligible to apply for tax exemption under section 501(a) from the date the organization is first designated or identified to the date when all designations or identifications with respect to the organization have been rescinded pursuant to the law or executive order under which the designation or identification was made. The IRS is required to update the listings of tax-exempt organizations and to publish appropriate notice to taxpayers of the suspension of an organization’s tax-exempt status.

The new law does not allow an organization to challenge the suspension of its tax-exempt status, the denial of deductions, or its designation as a terrorist organization or as supporting terrorist activity in any administrative or judicial proceeding relating to federal tax liability.

The IRS can reinstate an organization's tax-exempt status if and when the designation as a terrorist organization or supporting terrorist activity is removed.  The law allows for a credit or a refund for overpayment of taxes if it is found that the designation was made in error.

The IRS is required to update the listings of tax-exempt organizations and to publish appropriate notice to taxpayers of the suspension of an organization’s tax-exempt status. 

Action in the 107th Congress
On October 16, 2002 the House passed legislation to suspend the tax-exempt status of organizations designated as terrorist organizations or as supporting terrorist activity. The bill (H.R. 5603), which was introduced by Representative John Thune (R-SD), was passed with other legislation in a unanimous consent request.  Identical legislation was introduced by Senators Tim Johnson (D-SD) and Charles Grassley (R-IA) (S. 3081 and S. 3082, respectively).  This legislation was included as an amendment to an omnibus bill passed by the Senate late on November 14, 2002, but due to conflicts between the House and Senate over other provisions in the bill, it was not enacted into law in 107th Congress.


Last updated May 24, 2004