Strong Policies Shield Tax-Exempts From ‘Domestic Terror’ Probes

A new national security memorandum from President Donald Trump means that for tax‑exempt organizations, the practical question is no longer whether political scrutiny may intensify—it’s how to prepare for such scrutiny.

The Sept. 25 memorandum mandates a federal government-wide strategy to investigate, disrupt and dismantle networks engaged in what Trump calls “organized political violence” and domestic terrorism.

It expands the administration’s efforts to enforce its priorities by directing the IRS to “take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism.”

Specifically, it requires:

• The FBI’s Joint Terrorism Task Forces to investigate entities and individuals involved in political violence and intimidation, including “institutional and individual funders” and officers and employees who “aid and abet” principal actors.
• The Department of Justice to prosecute all federal crimes related to the memorandum’s targets and issue guidance elevating acts such as doxing, swatting, riot‑related offenses, and property crimes as domestic terrorism priorities.
• The Treasury Department identify and disrupt financial networks and guide financial institutions on suspicious activity reporting tied to domestic terrorism and political violence.
• The IRS commissioner (currently Treasury Secretary Scott Bessent) to ensure no tax‑exempt entities directly or indirectly finance political violence or domestic terrorism and refer violators—and their officers and employees—to the DOJ.

Given that the IRS’s workforce shrank by 25% earlier this year, it’s unclear whether it can effectively implement its new directives. However, if Bessent shifts historic and current priorities to the back burner or hires new employees, tax-exempt organizations can expect greater audit activity, potential referrals from the IRS to the DOJ, and bank account scrutiny under new or revised suspicious activity reporting guidelines.

Tax-exempt organizations may or may not be familiar with Section 501(p), which automatically suspends tax-exempt status of entities designated as a terrorist organization or as supporting terrorist activity. But that Internal Revenue Code section from 2003 was designed to combat foreign terrorism in response to the Sept. 11, 2001, attacks, such that it may not apply to the “domestic terrorism” in the Sept. 25 memorandum.

Further, the federal tax code doesn’t define “domestic terrorism” or “organized political violence,” so it’s unclear which tax-exempt organizations could be subject to greater scrutiny, and what activities the IRS would investigate. Domestic terrorism is defined elsewhere in federal law, specifically 18 USC Section 2331(5), but it lacks an enforcement mechanism.

Nevertheless, the memorandum provides that the US attorney general may designate entities whose members are engaged in domestic terrorism (as defined in 18 USC Section 2331(5)) as domestic terrorism organizations. But the memorandum doesn’t explain how the IRS could rely on that designation to revoke an entity’s exempt status.

With so much still uncertain, tax-exempt organizations can prepare for heightened enforcement by:

Tightening governance and documentation. Confirm organizational and operational compliance with exempt purposes. Revise and update bylaws, policies and delegation of authority. Refresh conflict‑of‑interest, whistleblower, document retention and grant‑making policies. Retrain staff and boards on prohibitions against political campaign intervention and limits on lobbying.

Prioritizing due diligence for grants, subgrants, and vendors. Review policies for screening grantees, fiscal sponsors and key vendors for sanctions, law enforcement red flags and criminal indicators. Consider certification clauses prohibiting violence, intimidation or unlawful conduct.

Preparing for investigations. Review historical transactions for compliance with relevant Treasury and IRS reporting requirements. Assemble an “audit-ready” file—organizing documents, exemption letters, Forms 990, bank and financial statements, board minutes, policies, grant files and substantiation of exempt purpose.

Also, ensure the ability to trace restricted and unrestricted funds to program outcomes; maintain clear ledgers supporting grants and payments. And designate an investigation response team (legal, finance, communications) and outside counsel experienced in exempt‑org audits and DOJ inquiries.

The Sept. 25 memorandum doesn’t give the president power to summarily revoke tax exemption, nor does the tax code define domestic terrorism or political violence. But it does align multiple agencies—especially the IRS, Treasury and the DOJ—around investigations tied to the Trump administration’s domestic terrorism priorities.

Nonprofits that strengthen governance, financial tracing and grant oversight now will be best positioned to withstand heightened scrutiny, safeguard their exemptions and continue their missions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Adam R. Young is a partner at Fox Rothschild and a member of the firm’s taxation and wealth planning department.

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