Nonprofits have long navigated a complex landscape of tax laws, compliance regulations, and financial oversight. However, the Stop Terror-Financing and Tax Penalties on American Hostages Act (H.R. 9495)—has raised serious concerns within the nonprofit sector.
In this article, we’ll do a brief and objective breakdown of the bill’s provisions, an analysis of how past legislation has affected nonprofits, and, most importantly, offer recommendations on how your nonprofit can proactively adapt and prepare in case similar measures are reintroduced. Please note that this article is only intended to provide education and should not replace the advice of an attorney. We also do not intend to endorse or denounce a particular political party. Our only goal is to keep you aware of tax legislation so you’re ahead and never behind in your tax strategy.
What Are The Provisions In H.R. 9495?
H.R. 9495 was designed to serve two main purposes, including providing tax relief for American hostages and wrongfully detained individuals by delaying tax filing deadlines and refunding penalties while they are in captivity, and strengthening the government’s ability to revoke the tax-exempt status of nonprofits found to be providing material support to terrorist organizations.
Tax Relief For American Hostages and Detainees
Regarding the first goal stated above about U.S. citizens wrongfully detained abroad, H.R. 9495 would extend tax filing deadlines and eliminate penalties for late payments until their return. This provision is uncontroversial and aims to ease financial burdens on hostages and their families.
Expanded Authority to Revoke Nonprofit Tax Exemptions For Terrorist Supporters
While this first provision has widespread bipartisan support, the second provision has been the topic of many debates since it expands the Treasury Department’s power to strip tax-exempt status from any nonprofit found to be providing “material support or resources” to designated terrorist organizations. Below is an outline of the process
- Notice & Evidence: The nonprofit receives a written notice of intent to revoke its tax-exempt status, outlining alleged support to a terrorist group.
- 90-Day Cure Period: The organization has 90 days to either prove it did not provide support or take corrective action.
- Final Designation: If the Treasury Department is unsatisfied, it formally revokes the tax-exempt status, making donations non-deductible.
- Appeals Process: Unlike existing law (IRC §501(p)), nonprofits can appeal the decision to the IRS Independent Office of Appeals and, if necessary, to federal court.
The above process is a shift from the current legal provisions, in which a nonprofit designated as a terrorist entity has no right to challenge its tax-exempt suspension in tax court. For more information, see the official legal text, specifically Section 501(p), and also refer to the IRS list of suspensions under Code Section 501(p).
Why Nonprofits Are Concerned About H.R. 9495
As a nonprofit leader, you play a critical role in humanitarian aid, international development, and advocacy work. But H.R. 9495 introduces potential risks that could directly impact your ability to operate. While the bill is intended to prevent terrorist financing, its broad authority and limited safeguards could create unintended consequences for your organization. Below are some of the key concerns that many nonprofit organizations have about H.R. 9495.
1. Broad and Unilateral Executive Power
Critics argue the bill gives the Treasury Secretary unilateral authority to target nonprofits, without requiring a prior conviction or public trial. This raises concerns about politically motivated misuse of the law and the potential for overreach that could affect legitimate organizations like yours.
2. Lack of Transparency
The government is not required to fully disclose evidence to your nonprofit before revoking its tax status, especially if classified intelligence is involved. This could make it difficult for you to defend your organization and challenge an unfair designation.
3. Reputational and Financial Risk
Even if you successfully appeal a revocation, the damage may already be done. Loss of donor trust, bank account closures, and grant funding withdrawal could put your nonprofit at serious financial risk before you have a chance to clear your name.
4. Humanitarian Aid Concerns
If your nonprofit delivers aid in conflict zones, you may unintentionally interact with groups linked to terrorism. Critics of H.R. 9495 argue that even lawful humanitarian efforts could be misinterpreted, leading to punitive actions against your organization.
Learning from the impact of past terrorism laws on nonprofits
As you’re likely already thinking, this is not the first time anti-terrorism laws have impacted nonprofits. After 9/11, many American Muslim charities faced shutdowns even before formal charges were filed, leading to significant financial and reputational damage. Additionally, nonprofits have experienced increasing compliance costs due to heightened due diligence requirements, requiring organizations to invest more resources into financial oversight and risk management. The biggest takeaway? You must be proactive in compliance, transparency, and advocacy to protect your nonprofit’s operations.
How Your Nonprofits Can Prepare For Laws Similar To H.R. 9495
Being aware of regulatory changes and proposed legislation is a critical aspect of protecting your nonprofit’s mission and financial stability. Taking action now to strengthen compliance measures and documentation safeguards will ensure you’re prepared to defend your nonprofit’s tax exemption status from allegations of terrorist-supporting activities.
Strengthen Compliance Measures
Your nonprofit should actively screen donors and partners against federal terrorist watchlists to avoid any inadvertent violations. Conducting internal risk assessments will help you identify vulnerabilities and implement mitigation strategies. Educating staff on what constitutes “material support” will help your team understand legal boundaries and risks. Finally, keeping meticulous financial records will allow you to prove responsible use of funds in the event of an audit or government inquiry regarding potential terrorist funding.
Take Legal and Financial Precautions
Consulting legal counsel to review international activities is critical, especially if your organization operates in regions with heightened security risks. Establishing a crisis response plan will prepare your team in case of a government investigation, minimizing disruption. Diversifying funding sources can help reduce reliance on tax-deductible donations, providing financial stability in the event of an unexpected compliance issue. Ensuring your Directors & Officers (D&O) insurance covers legal defense costs is also a necessary step in risk mitigation. Additionally, nonprofit accountants should ensure that grant agreements include clear compliance clauses related to federal anti-terrorism laws and that your organization has a documented grant tracking system in place to verify how funds are used.
Make Necessary Operational Adjustments
Reducing reliance on cash transactions in high-risk regions can minimize exposure to potential financial scrutiny. Increasing monitoring of field programs ensures that funds are not being diverted to unintended recipients. Keeping copies of government-issued licenses for sanctioned regions provides proof of legitimacy and can serve as critical evidence in demonstrating compliance. Make sure your CFO or controller is helping you conduct regular internal grant audits to ensure compliance with donor restrictions and legal requirements, identifying any potential risks before they become major issues.
Invest Resources In Risk Management and Advocacy
Engaging in policy discussions allows your nonprofit to help shape fair implementation of legislation that affects the sector. Running internal scenario exercises can test your organization’s readiness for regulatory changes and identify gaps in your preparedness. Communicating transparency with donors fosters trust and reassures stakeholders that your nonprofit is committed to compliance and ethical operations. To strengthen financial resilience, make sure your nonprofit accountant helps you develop contingency financial plans to mitigate risks associated with sudden grant restrictions or lost funding due to regulatory scrutiny.
Stay Vigilant, Stay Prepared
While H.R. 9495 failed to pass in the Senate, similar legislation could be reintroduced. Regardless of its legal status, it’s advisable for all nonprofits to treat it as a wake-up call and take proactive steps now. By tightening compliance, consulting with an attorney and your CFO or controller, and preparing for similar anti-terrorism regulations, your nonprofit will be taking proactive measures to safeguard your financial stability and mission success.