Buried in the USA PATRIOT Act of 2001 is a provision most nonprofits have never heard of: Internal Revenue Code § 501(p). It doesn’t deal with private inurement, lobbying limits, or excess benefit transactions. Instead, it gives the IRS a blunt enforcement tool: if another federal authority designates a nonprofit as supporting terrorism, the IRS must automatically suspend its tax-exempt status.
Until now, most charities have largely been able to safely ignore §501(p). But recent Executive Orders and agency directives from the Trump administration have put nonprofits—particularly those engaged in advocacy or politically sensitive work—on notice. In this environment, every board should understand what §501(p) does and how the government might use it.
How §501(p) Works
- Triggering event – Suspension is automatic if an organization is designated under the Immigration and Nationality Act or by Executive Order (most commonly EO 13224).
- Immediate suspension – The IRS has no discretion under § 501(p). Once designated, the exemption is suspended without advance notice or hearing.
- Consequences – The organization loses recognition under § 501(a), contributions made after suspension are not deductible, and private foundations cannot make qualifying distributions.
- Notice – The IRS publishes suspensions in the Internal Revenue Bulletin and can notify state officials.
- Restoration – If the government lifts the designation, the IRS can reinstate the exemption retroactively.
Why It Matters Now
A September 2025 presidential memorandum on “political violence” explicitly directed the DOJ, FBI, Treasury, and IRS to investigate nonprofits, foundations, and funders it claims might “sponsor or otherwise aid and abet” unlawful activity. New executive orders targeting DEI initiatives and “gender ideology” have already created uncertainty for civil rights, housing, and health nonprofits.
While Congress wrote § 501(p) for terrorism designations, its mechanics, automatic suspension with no due process—could be triggered in a politically charged environment. Even if the ultimate designation never sticks, the damage to reputation, donor confidence, and operations would be immediate.
Risks for Nonprofits
- No appeal before suspension – Under § 501(p) An organization cannot fight the IRS suspension itself. Relief only comes if the terrorism designation is lifted.
- Chilling effect – Boards and donors may scale back programs that intersect with advocacy or sensitive issues.
- Collateral exposure – Under § 501(p), even inadvertent transactions with designated entities can raise problems.
- Heightened enforcement climate – With multiple agencies ordered to investigate, the likelihood of scrutiny increases.
Board Action Checklist
Practical steps boards should consider now:
- Screen partners and grantees – Run due diligence against the OFAC lists and document the results.
- Incorporate compliance into policies – Add screening and monitoring procedures to your governance manual.
- Prepare donor communication templates – If deductibility ever comes into question, have clear messaging ready.
- Engage legal counsel early – Be prepared to respond promptly to inquiries from the IRS or DOJ.
- Track policy developments – Stay alert for new executive orders or memoranda that expand the scope of designations.
Section 501(p) was drafted as a national security tool, not a nonprofit compliance standard. But the statute is mandatory and leaves no room for the IRS to exercise discretion once a designation is made. Coupled with the current wave of executive orders and agency directives targeting politically sensitive nonprofit work, §501(p) represents a real risk—even if most organizations will never come close to a terrorism designation.
Boards do not need to panic, but they do need to prepare. Simple steps such as screening partners, tightening compliance procedures, and planning for donor communications can reduce the risk of disruption and build resilience. In today’s enforcement climate, ignoring §501(p) is not an option.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C., licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form