DOJ Tax Attorneys Focus on Immigration, Nonprofits After Shakeup

Tax enforcement has entered a new age.

The decades-old Justice Department Tax Division is now split between the broader civil and criminal divisions. Critics say the reorganization sends a signal that tax enforcement won’t be a priority.

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While the reorganization may mean tax attorneys are pulled into different DOJ priorities, it also could mean more investigations will include tax charges, said Karen Kelly, who was the top official at the DOJ Tax Division before she joined Kostelanetz as a partner in August.

DOJ tax attorneys are prioritizing immigration, fraud, and investigations into tax-exempt organizations that may have ties to “Antifa,” Kelly said. The latter refers to an informal collection of people with left-leaning views that was a focus of a recent directive from Attorney General Pam Bondi.

On this episode of Talking Tax, Kelly sits down with Bloomberg Tax reporter Erin Schilling to discuss DOJ’s tax enforcement priorities, changing strategies, and how taxpayers should prepare.

Do you have feedback on this episode of Talking Tax? Give us a call and leave a voicemail at 703-341-3690.

This transcript was produced by Bloomberg Law Automation.

David Schultz:

From Washington, I’m David Schultz, and this is Talking Tax.

The Department of Justice’s tax division is no more. A Trump administration reorganization last year ended the nearly 80-year-old division and split its functions into the civil and criminal divisions of the department. Today on the podcast, we’re going to hear from someone who has firsthand knowledge of how and why this went down, Karen Kelly, who was the top official at the tax division before she ended her 28-year career at DOJ in August. Now Kelly is a partner at the law firm Kostelanetz, and she spoke with Bloomberg Tax reporter Erin Schilling about the breakup of her former division. She also talked about a December memo from Attorney General Pam Bondi that instructs DOJ lawyers to investigate tax-exempt organizations linked to far-left political causes and what those organizations should be doing about this right now.

First, they started off by talking about how DOJ handles tax issues after the reorganization.

Erin Schilling:

Let’s start with the Department of Justice tax division, which I know no longer exists. Tell me a little bit about how the tax division is now organized.

Karen Kelly:

Okay. Do we have a moment of silence for the tax division or do I just jump right into it?

Erin Schilling:

Whatever you prefer.

Karen Kelly:

Okay. Tax division, rest in peace. So in November of 2025, the tax division no longer existed. The civil side of the tax division was moved into the civil division and the criminal side of the tax division was moved into the criminal division.

Erin Schilling:

And before this change, can you talk a little bit about what the tax division typically did and how it typically worked with the IRS?

Karen Kelly:

Yeah. Sure. So the tax division, which existed for almost 80 years before it was dissolved in 2025, was really the exclusive enclave of all things tax for the Department of Justice. And their mission was to ensure the uniform enforcement of the tax laws throughout the United States so that a taxpayer in Portland, Maine is treated the same as a taxpayer in Portland, Oregon.

Erin Schilling:

So now that we no longer have a tax division, and I know you helped with that transition into changing tax enforcement to the civil division and the criminal division, how in the new reorganization are we keeping the sort of uniformity of tax enforcement that was a big pillar of the division to begin with?

Karen Kelly:

Right. So I just want to say we use the word help with air quotes, right? I helped eliminate the tax division. Actually just to give a little bit of background, the Department of Justice under the new administration wanted to completely eliminate the tax division by moving all of the trial attorneys and supervisors into the US attorney’s offices throughout the United States. So there’s 93 US attorney’s offices and they’re all responsible in those districts for the enforcement of the federal laws, civil and criminal, in those districts. And so the idea was to move all of the trial attorneys from Washington, DC where they’re based out into the US attorney’s offices where they would be assigned to tax cases and other matters as they arose.

So in response to that proposal, I proposed that they keep the tax division in Washington, DC. They decouple the civil and criminal sections and move civil into the civil division and move criminal into the criminal division so that we could have a concentration of tax experts in Washington, DC. Because if we moved all the trial attorneys out into the field, their knowledge would be diluted and they’d be focused on lots of other things, other administration priorities and maybe not tax matters.

So yes, I did, quote, help eliminate the tax division, so to speak. I think that the mission of uniformity is still the focus of what these two units are doing, although separately in the civil and criminal divisions. It’s much more challenging now because they’re in two separate chains of command. So they don’t share full exchange of data with regards to tax referrals. You know, on the civil side and criminal side, there’s parallel enforcement. The IRS has lots of tools in their toolbox with regards to civil tax enforcement and criminal tax enforcement, and sometimes that’s done in parallel time. Those types of overlapping partnerships are much more challenging. But I think that in the civil division, in the civil unit and in the criminal unit, the trial attorneys that remain are still highly focused on trying to enforce the tax laws and ensure the tax laws are enforced uniformly. They’re much more streamlined. There’s fewer of them. I think on the civil side, their plates are fuller with other things as well. But I think their mission is the same at this point.

Erin Schilling:

One of the criticisms of this reorganization was that it might be easier if you have a criminal tax attorney inside of the broader criminal division to pull them off of tax matters onto other criminal priorities or have less budgeting for criminal tax. How did you guys during the transition deal with those concerns?

Karen Kelly:

So those are legitimate concerns, and I think there’s been some of that. But you know, in every administration, there’s some of that. There’s some mission creep. Right out of the gate, a number of our attorneys were reassigned to immigration enforcement and to U.S. attorney’s offices that needed more prosecutors. So immediately out of the gate, tax division attorneys on the civil and criminal sides went out to U.S. attorney’s offices and were assigned to prosecute immigration matters in those offices.

Now I know that some of the tax division attorneys were assigned, while they were in the criminal division, some redactions in a giant project that was recently rolled out by the Department of Justice. So they were not focused on tax. They were focused on redacting volumes of information in the Epstein case. You know, obviously the priorities of the administration are going to dictate what transpires in the sections.

I believe, from what I understand, that there is collaboration in the criminal division, as opposed to trying to pull people off of tax matters, they’re trying to collaborate a little bit more cross-culturally with the other components and their investigations and try to bring tax in as an additional supplemental charge, as another way to investigate, another way to skin a cat and get things done.

Being a component within the criminal division brings some benefits, I think, because I think the criminal division carries a lot of clout. They have a big budget. You know, they’re taken seriously, not that tax wasn’t, but certainly it’s a bigger stick being in the criminal division as a criminal prosecutor, I think. So it does have upsides as well as downsides.

Erin Schilling:

Have you noticed, now that you’re in private practice, a change in how DOJ tax attorneys, a change in maybe their strategy or in what they seem to be focused on?

Karen Kelly:

So I think they continue to be focused on tax matters. There’s a bigger focus on waste, fraud, and abuse. There’s a broader lens. If there is immigration fraud, they’re going to bring that. If they can charge wire and mail fraud for some of the misconduct, they’re going to do that and try to bring a forfeiture count. They’re very busy. Based on what I’ve heard, they have a lot on their plate. They have, they’re leaner. They’ve lost, they’ve had a substantial amount of attrition, so they’re leaner, which means more work for everyone.

Erin Schilling:

I know a big issue that has come up is the administration targeting tax-exempt organizations for criminal tax prosecution. Have you seen an increase in that or sort of, again, sort of changing of strategies in those types of cases?

Karen Kelly:

So yeah, I’ve seen what you’ve seen, which is the administration particularly speaking out and saying, this is what we’re going to do. We’re going to criminalize organizations that are affiliated with a very broad definition of what they describe as Antifa organizations and activities. My understanding is that there are investigations that are open with regards to that. I haven’t seen an indictment yet come out from a grand jury in these investigations, but we are watching that very closely because that is a pretty significant change with regards to what we’ve seen in the past.

Erin Schilling:

How have tax-exempt organizations been reacting to that?

Karen Kelly:

As you would expect, right? I think generally speaking, tax-exempt organizations who think that they could fall within the bullseye of this administration are a little bit panicked, and they want to get their affairs in order and make sure that they don’t find themselves on the wrong side of a V. It feels like dangerous, precarious, chaotic times for them because it’s not clear what conduct would step into criminal conduct under this administration. Pam Bondi’s memo to the Department of Justice and the law enforcement agencies was broad and not highly specific, so obviously we would want to keep an eye on that and see what comes out of these investigations, what indictments are returned by grand juries.

Once you’re targeted as an organization by the Department of Justice for misconduct in a grand jury, well, sure, they’re looking at the organization, they’re going to issue subpoenas to the organization, they’re going to issue subpoenas to perhaps whomever the organization pays or whomever the organization receives money from, but they’re also going to look at all of the individuals who are affiliated with that organization, whether it’s the president, the executive director, perhaps members of the board, and they’re looking for compliance and sort of the weak link who they can flip against whatever’s going on in that organization. And so that feels precarious and dangerous if you’re affiliated with something you believe in and something you support and suddenly you think, oh my gosh, I could be the target of the United States government. That’s scary.

Erin Schilling:

Can you talk a little bit about what Pam Bondi’s memo said?

Karen Kelly:

Basically, it was setting up a mandate for the Department of Justice and law enforcement to implement the president’s executive order where, in essence, they said, we want to investigate and prosecute organizations and entities and individuals who are involved in far-left radical conduct, sometimes defined as Antifa, and we’re going to do that through all of the lawful means of the Department of Justice and law enforcement agencies. And then Pam Bondi’s memo to law enforcement said, we’re going to implement President Trump’s executive order and we’re going to use the JTTF, the Joint Terrorist Task Force, to investigate and prosecute any individuals and entities and tax exempt entities that are involved in anti-government conduct, anti-immigration. I think they described it as anti-American conduct. And she mandated a 30-day turnaround of law enforcement to provide to her a list and list of individuals and entities that fall within her broad description, her broad classification. And then they were going to use those lists to open investigations and pursue these individuals and entities.

Erin Schilling:

With something like that memo where it’s pretty broad and vague in scope, how do you as a tax controversy lawyer sort of prepare and talk to your clients about it?

Karen Kelly:

So we talk to the clients and say, hey, this is what’s going on. This is what’s unfolding. And you need to be aware of this and you need to inform your donors, like, hey, folks, this is the climate we’re in. This is what’s going on. This is the perspective that the Department of Justice has, and this is the memo they’ve issued. And you’re also going to want to take steps to make sure you’re in compliance, that your 990s are accurate. Those are the tax returns that charitable organizations, tax exempts, file with the IRS. You want to make sure that they’re accurate, that they’re truthful. And you want to make sure that the people who are affiliated with your entity, the leaders, the executives, that they also have their own tax filings and documents that they filed vis-a-vis the United States all in order and proper and accurate. So you kind of want to do your own informal audit, if you will, to make sure that everything is as it needs to be.

Erin Schilling:

Well, we’ve talked a lot about DOJ tax and all sort of the changes that have happened there. But the IRS has also undergone a lot of changes in the past year. About a quarter of its workers have left. It’s definitely affected the criminal investigations unit as well. About 10 percent of those employees have left, and some special agents were pulled onto other administration priorities. And I’m curious, how do changes at the IRS affect DOJ tax attorneys?

Karen Kelly:

So all of the tax criminal cases on the criminal side that are generated in the United States are generated and worked by IRS criminal investigation. You can’t have a criminal tax case without having an IRS special agent on that case. Having a decreased workforce in IRS-CI is going to result in fewer cases that are referred.

Erin Schilling:

When I think of criminal tax prosecution, I think of, I don’t know, maybe very classic tax scheme type cases or return preparers conducting fraud and filing fraudulent returns and stuff like that. For those more classic tax cases, do you expect those to be worked less now that there’s sort of so many other priorities that this administration is looking at?

Karen Kelly:

So I mean, I think that they’ll continue to work those cases. Those are the bread and butter of the tax section. It’s entirely possible that the U.S. Attorney’s Office throughout the country, their resources are very limited these days. A lot of them have suffered substantial attrition. So to get the attention of an AUSA, to get that case prosecuted, the tax section and IRS-CI are going to have to make sure that the facts of those cases are such that an AUSA is going to want to prosecute it. And by that I mean the tax loss has to be substantial, right? It has to be enough that the AUSA feels confident that when they bring that case, they’re going to be able to ask the court for a prison sentence for the defendant. And so the tax cases may sit in the inbox in a U.S. Attorney’s Office. They may linger. They may slide off the desk into the trash can. You know, it’s one of those things where they don’t necessarily appeal to an AUSA on their own. So if you’re going to be picking tax cases, in theory, you should be picking strong and compelling tax cases. I mean, you should be doing that 100 percent of the time, but now more than ever, if you want to get those cases prosecuted out in the U.S. Attorney’s Office, out in the field.

Erin Schilling:

If we do see more tax evasion cases just sort of sliding off the desk, what does that mean for taxpayers? Do we think that there’s going to be more fraud in the market?

Karen Kelly:

It just depends on what the taxpayers think, right? So I was looking online. I know that there were quite a few tax matters that happened in the last three weeks throughout the United States. So I was looking for the press releases for those, right? Because that’s how prosecutors and the tax section gets their message out to the United States taxpayers. Hey, we issue press releases saying, hey, Joe the chiropractor just got sent to jail for tax evasion in, you know, Charlotte, North Carolina. And we want everyone in Charlotte, North Carolina to read that press release and think, oh snap, I better amend my tax returns or make sure they’re accurate so I don’t go to jail like Joe the chiropractor. There were no press releases issued on these cases that I knew were happening throughout the country. If they don’t see those press releases, if they don’t hear about people going to jail, going to prison for tax misconduct, it’s not going to be foremost in their mind. They’re not going to think, oh, I shouldn’t cheat on my taxes because I could go to jail. They’re going to think like, well, look what happens when I put this number in my tax program on my computer. When I increase this number, the amount I owe goes down substantially. That’s exciting. You know, and as they work with that, they’re going to think this is just too easy. It’s not going to be foremost in their mind that, oh, it is too easy, but I could go to jail for this because it’s a crime.

David Schultz:

That was former DOJ official and current Kostelanetz partner, Karen Kelly, speaking with Bloomberg Tax’s Erin Schilling. And that’s it for today’s podcast. You can find up-to-the-minute news on the latest tax and accounting developments at our website, news.bloombergtax.com. That website, once again, is news.bloombergtax.com.

Today’s episode is produced by myself, David Schultz, and our editor was Martha Mueller Neff. From Washington, I’m David Schultz. Thanks for listening.