Trump Scrutiny of Tax-Exempt Status Leaves Democrats Skittish

The Trump administration wants to boost transparency as part of efforts to scrutinize tax-exempt organizations—an area that’s had bipartisan interest—but Democrats aren’t sure they can trust the oversight will be applied fairly.

They can’t ignore President Donald Trump’s track record of using the government to go after his perceived enemies—from Harvard University to the Southern Poverty Law Center.

“There is right now some political targeting going on right out in the open on the far right,” said Senate Finance Committee ranking member Ron Wyden (D-Ore.) at a Thursday virtual press event. “The exact kind of IRS weaponization Republicans have been upset about for years is now basically happening in front of their eyes, and I consider it an assault on free speech.”

The Treasury Department announced a plan to change nonprofit reporting requirements, while the IRS pledged to boost enforcement on misuse of federal funds. The Department of Justice also secured a grand jury indictment of GOP foe Southern Poverty Law Center on accusations it funneled millions in donations to extremist groups, a charge critics call politically motivated, and released a 200-page report last week detailing alleged Biden-era targeting of religious nonprofits.

The tax-exempt industry has been on high alert as it seeks to navigate the administration’s increased examination. But this isn’t the first time the IRS has increased its oversight of nonprofit groups.

The decade-old political firestorm sparked after watchdog reports revealed the IRS’s tax-exempt division flagged both conservative- and progressive-leaning groups for extra scrutiny is far from ancient history. Last year, after prodding from right-wing activists, IRS leadership moved to oust employees like Holly Paz, who once worked for Lois Lerner, a central figure in the 2013 tax-exempt fracas.

Democrats say Republicans are now encouraging the very behavior they long criticized the IRS for, and which they’ve used to justify deep funding and staffing cuts to the agency.

“Reforms are needed, but not so that Trump and his insider buddies can use the government to beat on anybody who disagrees with them,” said Sen. Elizabeth Warren (D-Mass.). “There is no evidence that they plan to do this in an even-handed non-political way.”

House Ways and Means Committee Reps. Lloyd Doggett (D-Texas) and Terri Sewell (D-Ala.) penned a letter in April to IRS CEO Frank Bisignano expressing concern over reports that Trump’s administration was encouraging IRS facilitate criminal probes targeting Democrat-leaning groups.

Form 990

The IRS recognized 1.5 million tax-exempt organizations in fiscal year 2024, which employed 12.8 million workers and contributed $1.4 trillion to the economy, according to the National Council of Nonprofits. Though a majority have budgets under $50,000, about 3% have annual budgets over $5 million.

In some cases, the stepped-up focus on the tax-exempt sector has grown out of lawmaker frustration over well-funded groups led by highly compensated executives enjoying federal tax breaks.

“These aren’t all soup kitchens,” said Sean Clerget, former chief tax counsel for Ways and Means Committee Republicans. “The tax-exempt sector is so large that it makes sense to allocate some resources in this space.”

Clerget said the committee’s transparency initiatives date back to 2020, and updates to the Form 990—an IRS document detailing a tax-exempt group’s fundraising and top salaries—are long overdue.

Ways and Means Chair Jason Smith (R-Mo.) sent letters demanding IRS probes into nonprofits he accused of funding domestic terrorism or political violence and has held several hearings since taking the gavel, some calling out left-leaning groups and others with links to the antifa movement in parts of the tax-exempt sector.

In April, he grilled some nonprofit hospital system CEOs last week on whether they operate differently from their for-profit counterparts.

The IRS, under bipartisan congressional pressure looked into the area previously, launching audits on more than three dozen tax-exempt hospitals in 2024. Lawmakers from both parties, including Warren, have expressed concern over the “community benefit” section of the 990 hospitals fill out to justify their tax status.

Treasury’s plan to revise the Form 990 is still in early stages. The department promised to seek comment on the feasibility and reporting burden of changing reporting requirements for an organization’s government contracts, grants, and fiscal sponsorship arrangements before enacting the changes.

More Details

Groups may soon have to disclose more details on how they are funded and who’s cutting checks. It’s a sector that’s previously gotten a light touch from the IRS, said Michael Ronickher, a partner at the Whistleblower Partners law firm.

He added that over the last decade, he hasn’t had much luck with the IRS pursuing whistleblower cases involving nonprofits.

“It felt from the outside there was either spoken or unspoken guidance—just don’t even go there,” Ronickher said.

Republicans called the Treasury announcement a step toward closing transparency gaps that “have allowed bad actors to exploit the system with little accountability,” said Rep. Aaron Bean (R-Fla).

Rep. David Schweikert (R-Ariz.), who’s pushed for a full rewrite of the Form 990, called the Treasury project a good start.

“I’m pleased I’ve gotten 990s into the discussion. Now I need a much wider vision,” he said, arguing that more thorough forms could help dispel accusations that the IRS is singling out groups based on ideology.

“The more general visibility there is,” he said, “the more you know that the tax-exempt status isn’t being used to exploit politics.”