Terrorism, in many forms, has tragically continued to plague our global society, and we are tremendously saddened by the horrific events in Sri Lanka this past weekend. Nonprofits, including religious institutions, are often among those victimized and those that take leadership in recovery. But in extremely rare circumstances, nonprofits may be utilized to support terrorist activities. The laws and government agencies have sought to mitigate the risks, including at the point when startup nonprofits are applying for tax-exempt status.

Potential OFAC SDN Name Matches

The Office of Foreign Assets Control (OFAC) maintains a Specially Designated Nationals (SDN) List, which is a compilation of entities and individuals that have been targeted under one or more of Treasury’s sanctions programs. Those on the list have their assets blocked, and U.S. persons are generally prohibited from dealing with them.

The Internal Revenue Manual (IRM) is an official instruction manual for personnel of the Internal Revenue Service (IRS). Part 7, Chapter 20, Section 6 (7.20.6) of the IRM provides for Anti-Terrorism and Other Emerging Issues. It currently provides:

1. Employees must review every case for potential indicators of involvement in terrorism and heightened risk of diversion of funds to terrorism. This includes all exemption applications (including Form 1023-EZ), foundation reclassification requests, and other miscellaneous determination requests.
2. Indicators of potential involvement in terrorism or heightened risk of diversion of funds to terrorism may include:
   • Name or address matches against the Comprehensive List of Terrorists and Groups
   • Foreign grants or activities in a foreign country
   • Other facts and circumstances
3. Employees complete Form 14503, Potential Terrorism Connection Checksheet, if they identify indicators of potential involvement in terrorism or heightened risk of diversion of funds to terrorism in a case (see IRM 7.20.6.2.2).

The Comprehensive List of Terrorists and Groups (CLTG) referenced above is maintained by EO Determinations and includes terrorist designations from the SDN List. It may also include other individuals or groups identified as terrorists by other agencies. IRS employees are required to check all exemption applications (including the Form 1023-EZ) against the CLTG for any matching information.

In a Memorandum for Exempt Organizations Rulings and Agreements and Other TE/GE Employees dated February 22, 2019 regarding Interim Guidance for EO Determination Letter Request Processing – OFAC SDN Name Match Requirements and Development of Foreign Grants or Activities (the “R&A Memo“), the following procedural changes are detailed:

1. Employees processing EO determination letter requests will use OFAC’s online Sanctions List Search (https://sanctionssearch.ofac.treas.gov/) to identify potential name and address matches. Employees will limit searches to terrorist programs.

2. A “match” of two or more names (e.g., given name and surname) requires further review, completion of Form 14503 and coordination with the EO Rulings and Agreements (R&A) Anti-Terrorism Coordinator ATC. A single name match (e.g., given name or surname) does not require further review unless other facts and circumstances indicate a higher risk of terrorism or diversion of funds.

3. Employees will document search actions and results in case chronology records (CCRs) and request additional information as necessary to help in correctly identifying a match.

4. R&A will continue to maintain and distribute the OFAC SDN list to designated employees who perform anti-terrorism name match reviews on Form 990-series returns but who do not have access to the online OFAC search tool.

Foreign Grants or Activities

IRM 7.20.6 also provides provisions regarding foreign grants or activities. It currently provides:

1. Cases involving grants or activities in foreign countries present a higher risk of terrorism, especially in countries where there is war and civil unrest. Also, in some foreign countries an organization’s assets are at higher risk for diversion to support terrorism regardless of the organization’s intent. For information on state sponsors of terrorism and safe havens for terrorists, see the US Department of State’s Country Reports on Terrorism, available at www.state.gov/j/ct/rls/crt/.
2. See Rev. Rul. 63-252, Rev. Rul. 66-79, Rev. Rul. 68-489, and Rev. Rul. 75-65 for guidance on foreign grants and activities. See also Rev. Rul. 68-117, Rev. Rul. 71-460, and Rev. Rul. 74-229.
3. The following facts may be helpful in ensuring the organization’s funds or goods are used for the intended purposes:
   1. Requiring written grant agreements that specify how grant funds may be used
   2. Requiring feedback reports from foreign grantees or agents
   3. Employing report verification procedures such as on-site visits (by U.S. personnel or independent persons) or documentation (such as photos or receipts)
4. In cases where an organization will make foreign grants or conduct activities in foreign countries, request sufficient information (if not included in the taxpayer’s initial submission) to determine:
   1. In which countries the organization will operate or make grants
   2. Whether the organization will check the OFAC SDN List for names of individuals and entities with whom it is dealing to determine if they are included on the list
   3. Whether the organization has any other practices to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities Exception: Tax examiners processing Form 1023-EZ will not complete this step if foreign activities or grants are indicated on Form 1023-EZ (see IRM 7.20.9, Processing Form 1023-EZ).
5. In cases where an organization will make foreign grants, also request sufficient information (if not included in the taxpayer’s initial submission) to determine:
   1. What funds or goods have been or will be distributed and for what purposes
   2. How the organization processes grant requests, including its application, review, and approval process
   3. How the organization ensures the funds or goods are used for the intended purposes Exception: Tax examiners processing Form 1023-EZ will not complete this step (see IRM 7.20.9, Processing Form 1023-EZ).
6. Complete Form 14503 following the procedures listed in IRM 7.20.6.2.2 for all foreign activities or grant making (except if indicated on Form 1023-EZ, see IRM 7.20.9).Note:Document the CCR noting “Prepared Form 14503 per IRM 7.20.6.2.1.2 and sent to Anti-Terrorism Coordinator.”

The R&A Memo also details the following procedural changes (note that items 1 and 2 below are substantively the same as what is currently in the IRM):

1. In a case (other than a non-predetermination Form 1023-EZ) where an organization will make foreign grants or conduct activities in foreign countries, the EO Determinations specialist will continue to request sufficient information (if not included in the taxpayer’s initial submission) to determine:

a. In which countries the organization will operate or make grants
b. Whether the organization will check the OFAC SDN List for names of individuals and entities with whom it’s dealing to determine if they’re included on the list
c. Whether the organization has any other practices to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities

2. In a case (other than a non-predetermination Form 1023-EZ) where an organization will make foreign grants, the EO Determinations specialist will also continue to request sufficient information (if not included in the taxpayer’s initial submission) to determine:

a. What funds or goods have been or will be distributed and for what purposes
b. How the organization processes grant requests, including its application, review, and approval process
c. How the organization ensures the funds or goods are used for the intended purposes

3. The specialist’s manager will review this information as part of the case review process to ensure the facts and circumstances of the case do not suggest a potential for diversion of funds to support terrorism.

4. If the specialist and manager agree that the facts and circumstances of a case suggest a potential for diversion of funds to support terrorism, the specialist will complete Form 14503 and submit it to the R&A ATC for review and coordination.

5. The specialist will document all actions in the CCR.