A new Senate bill would strip tax advantages from donor-advised funds that route money to organizations the federal government has linked to terrorism or extremist activity, taking direct aim at a charitable giving structure that critics say left-wing donors have exploited to bankroll anti-Israel groups with ties to Hamas.
Sen. Tim Scott (R., S.C.) plans to introduce the legislation, which would require donor-advised funds, known as DAFs, to comply with enhanced disclosure and due-diligence rules or lose their tax-exempt status. The bill represents the most aggressive congressional effort yet to close what Scott's office describes as a loophole in the charitable tax code that allows anonymous donors to funnel money through intermediary nonprofits to organizations that would otherwise face public scrutiny.
Donor-advised funds function as charitable middlemen. A donor contributes money to a DAF sponsor, takes an immediate tax deduction, and then recommends grants to specific nonprofits over time. The donor's identity is shielded from the recipient organization and from the public. DAFs have exploded in popularity in recent years, holding more than $234 billion in assets as of 2023, the Washington Free Beacon first reported.
The problem, Scott's office argues, is that this anonymity has made DAFs attractive vehicles for donors who want to support controversial or extremist-linked organizations without attaching their names to the contributions. Under current law, DAF sponsors have limited obligations to vet where recommended grants ultimately land.
Scott's bill would change that by imposing new screening requirements on DAF sponsors. Sponsors would need to verify that grant recipients do not appear on federal terrorism watch lists or sanctions designations. The legislation would also mandate annual public reporting of aggregate grant data broken down by recipient category, giving regulators and the public a clearer picture of money flows.
The bill's sponsors point to several specific cases in which DAF-channeled money reached organizations that have expressed support for Hamas or whose leaders have made statements backing the October 7 attack on Israel. The Free Beacon's reporting identified grants flowing through major DAF sponsors to groups including American Muslims for Palestine, which has faced allegations of ties to a Hamas-support network, and the U.S. Campaign for Palestinian Rights.
Neither organization has been formally designated as a terrorist entity by the U.S. government. But Scott's office cited court filings, public statements by group leaders, and research from pro-Israel watchdog organizations to argue that DAF money has reached groups operating in what his staff called "the Hamas support ecosystem."
The timing is deliberate. Since the October 7 attack, congressional scrutiny of anti-Israel organizations operating in the United States has intensified sharply. Terror survivors have urged Congress to prioritize victims in debates over frozen assets linked to state sponsors of terrorism, and lawmakers on both sides have pressed for greater transparency in how charitable dollars intersect with groups accused of extremist sympathies.
Scott, the ranking Republican on the Senate Banking Committee, cast the bill as a matter of basic accountability in the tax code. His office provided a statement to the Free Beacon framing the issue in stark terms.
"American taxpayers should not be subsidizing donations to groups that celebrate the murder of innocent people, including Americans, at the hands of Hamas."
The senator's staff emphasized that the bill does not seek to ban DAFs or restrict legitimate charitable giving. Instead, it targets what Scott described as the "dark money" pipeline that allows donors to claim tax benefits while supporting organizations that undermine U.S. national security interests.
Scott's framing taps into a broader conservative push to examine how nonprofit structures interact with left-wing activism. The White House budget office recently opened a spending probe into dozens of nonprofit groups over alleged activist ties, signaling that the executive branch shares the appetite for tighter oversight of tax-exempt organizations aligned with progressive causes.
The donor-advised fund industry has historically resisted new disclosure mandates. DAF sponsors, which include major financial institutions like Fidelity Charitable, Schwab Charitable, and the National Philanthropic Trust, argue that donor anonymity encourages giving and that existing IRS rules provide adequate safeguards against misuse.
Industry representatives have warned that layering new compliance burdens onto DAF sponsors could chill charitable contributions across the board, not just those directed at controversial recipients. Some have also raised First Amendment concerns, arguing that mandatory disclosure of donor intent could expose contributors to harassment or retaliation.
Those arguments carry weight in some conservative circles, where donor privacy has long been treated as a constitutional value. The Supreme Court's 2021 decision in Americans for Prosperity Foundation v. Bonta struck down a California donor-disclosure requirement on First Amendment grounds, and DAF defenders have signaled they would invoke similar principles against Scott's bill.
Scott's office anticipated the objection. Staff members told the Free Beacon that the bill's screening requirements focus on recipient organizations, not individual donors, and that the disclosure provisions involve aggregate data rather than donor-level identification. The distinction matters legally: courts have generally been more permissive of transparency requirements that target institutional recipients rather than individual contributors.
Under existing IRS rules, DAF sponsors must ensure that grants go to qualified 501(c)(3) organizations. But the IRS does not require sponsors to screen recipients against terrorism-related designations maintained by the Treasury Department's Office of Foreign Assets Control, known as OFAC. That gap means a DAF sponsor can lawfully distribute funds to a tax-exempt organization even if that organization's leadership has publicly endorsed a designated terrorist group, so long as the organization itself retains its 501(c)(3) status.
Scott's bill would close that gap by requiring cross-referencing with OFAC lists and by creating a new interagency review process for organizations flagged by intelligence or law enforcement agencies. The bill would also authorize the Treasury Department to issue guidance on "material support" risks specific to the DAF context.
Legal experts quoted by the Free Beacon noted that the bill would effectively create a higher compliance standard for DAFs than for direct charitable contributions. A donor who writes a check directly to a controversial nonprofit faces no intermediary screening. But a donor who routes the same contribution through a DAF would trigger the sponsor's obligation to vet the recipient.
That asymmetry could face legal challenges, though supporters argue it reflects the unique tax advantages DAFs provide. Because donors receive an immediate deduction at the time of contribution, rather than when the money actually reaches a working charity, DAFs already enjoy a more favorable tax treatment than direct giving. Enhanced oversight, Scott's office contends, is the reasonable price for that benefit.
The bill faces an uncertain path. Republicans hold a narrow Senate majority, but financial regulation bills typically require bipartisan support to clear procedural hurdles. Democrats have shown some interest in DAF reform, though their proposals have generally focused on payout requirements, pushing DAFs to distribute accumulated assets more quickly, rather than on recipient screening.
Whether Democrats would sign onto a bill framed around anti-Israel extremism is another question. Progressive members have resisted efforts they view as conflating criticism of Israeli government policy with support for terrorism. That political fault line has deepened since October 7, with recent congressional battles over government funding reflecting the broader tension between security priorities and civil liberties concerns.
Scott's team appears to be betting that the current political environment favors action. Public polling since October 7 has shown increased support for cracking down on organizations perceived as sympathetic to Hamas, and the issue cuts across some traditional partisan lines. Several Senate Democrats have co-sponsored other post-October 7 legislation targeting Hamas financing networks, and Scott's office has signaled it will seek Democratic co-sponsors for the DAF bill.
The legislation's key provisions, as described by Scott's office to the Free Beacon, include mandatory OFAC screening of all DAF grant recipients before funds are distributed; annual public reporting by DAF sponsors of aggregate grant amounts sorted by recipient category; a new interagency review mechanism allowing Treasury, State Department, and intelligence community input on flagged organizations; and potential revocation of tax-exempt status for DAF sponsors that fail to implement required screening procedures.
The enforcement mechanism gives the bill real teeth. Losing tax-exempt status would be a death sentence for a DAF sponsor, since the entire business model depends on the donor's ability to claim an immediate deduction. That threat could push major sponsors to adopt stringent screening even before the bill passes, as a defensive measure.
Critics will argue the bill hands the executive branch too much power to effectively blacklist nonprofits through the interagency review process. Civil liberties organizations have long warned that terrorism-related designations can be overbroad and politically motivated. Those concerns are not frivolous, and the bill's drafters will need to address them if the legislation is to survive both committee markup and potential court challenges.
Scott's bill arrives at a moment when the entire nonprofit sector faces intensifying scrutiny from Washington. Federal investigators have expanded their focus on how tax-exempt organizations interact with political movements, and both parties have shown willingness to use oversight tools against nonprofits aligned with the other side.
The DAF question is distinct because it involves a structural feature of the tax code, not just individual organizational behavior. Donor-advised funds were designed to make charitable giving easier and more flexible. Whether that flexibility has been exploited to obscure the flow of money to extremist-linked groups is a factual question that Congress has not yet fully investigated.
Scott's bill forces that investigation into the open. Even if the legislation stalls, the hearings and debate it generates will put DAF sponsors on notice and create a public record of how charitable dollars move through intermediary structures to reach their final destinations.
When the tax code makes it easier to fund groups that cheer for terrorists than to track where the money goes, the code is broken. Scott's bill is a straightforward bet that taxpayers deserve to know what their deductions are buying.
