Tax-Exempt Companies Ignoring Current Climate Do So at Own Peril

Whether you’re a small entity previously reliant on government grants or a large organization with policies drawing near the epicenter of current cultural debate, tax-exempt organizations should tend to their garden. And the ground is moving beneath our feet.

While numbers have been down for years, IRS audits of tax-exempt organizations reached a new low in 2024, with audit levels dropping 34% for the year.

Conventional wisdom might argue that this reduction should result in less concern with government oversight, but such a supposition comes with risk. One needs only to look at Truth Social or other media sites to see that the focus across government toward tax-exempt entities has grown exponentially.

Trump Administration’s Priorities

In the last several months, the Trump administration has signaled increased attention to tax-exempt organizations to ensure their alignment with its policy priorities and view of the new world order. While the administration threatens imminent IRS audits and revocation to enforce these priorities, the IRS isn’t the only agency in play.

The earthquake began with an unprecedented number of executive orders, many of which apply to tax-exempt entities. These orders, many of which have been challenged in court, include a requirement to eliminate specific diversity, equity, and inclusion protocols. One of these orders requires every federal contract, including grants, to be compliant with “anti-discrimination” laws.

Another order that came out in March hinted at the administration’s stance regarding the characterization of certain charitable activities as evidencing a “substantial illegal purpose.” These activities apparently may include advocacy work on DEI, environmental, or immigration matters.

A memorandum issued by the White House in February also directed “the heads of executive departments and agencies (agencies) to review all funding that agencies provide to NGOs” and “align future funding decisions with the interests of the United States and with the goals and priorities” of the Trump administration.

As part of the new focus of the executive orders—and more generally, the expanding war on undocumented immigrants and “wokeness” (for want of a better term)—there is increased activity from quarters other than the IRS.

For example, the Department of Education, despite its dwindling resources, has accused more than 50 universities of using racial preference and stereotypes in education programs and activities. Some states, including Alabama and Arkansas, have passed bills that restrict or ban DEI initiatives at public colleges. An investigation launched by Indiana’s attorney general, Todd Rokita, has led to letters being sent to University of Notre Dame, DePauw University, and Butler University, questioning the institutions’ DEI programs while threatening possible legal action.

The House Committee on Homeland Security also has launched a probe into more than 200 nongovernmental organizations that provided advocacy for immigration efforts. Each NGO is required to complete an extensive survey that includes questions on the government grants, contracts, and disbursements it has received in addition to other operational activities. Congress overall continues to tinker with what it means for an NGO to support activities and when that support constitutes the support of terrorism here or overseas.

Additionally, the Department of Justice released a memorandum in May highlighting the False Claims Act as the “primary weapon against government fraud, waste and abuse,” noting that certain DEI initiatives would be one of the government’s focus areas. According to the memorandum, the DOJ will encourage lawsuits brought under the False Claims Act through a new Civil Rights Fraud Initiative that will pursue actions against organizations that receive “federal funds that knowingly violates federal civil rights laws.”

Most recently, Attorney General Pam Bondi last month put out additional guidance prohibiting race, sex, color, national origin, or religion from being used for “employment, program participation, resource allocation, or other similar activities.”

How to Proceed

Organizations should review existing external and internal communications, governance frameworks, and existing compliance measures in place to comply with IRS requirements. The communications review is key to determining what may draw attention to the organization and how to mitigate that risk. The review of requirements includes a comparison of the organization’s activities against the above-referenced executive orders, as well as other agency guidance.

Such a review may also include compliance with federal tax obligations, including reporting obligations and scholarship and grant eligibility rules and documentation. Organizations should take special care to review the public-facing Form 990 to ensure compliance with federal tax obligations—and to to eliminate any concern areas that might raise alarms with relevant enforcement authorities.

Red flags to look out for include transactions with insiders that are either incompletely reported or vague in their description, excess benefit or self-dealing transactions, compensation shared with affiliated entities, and inconsistencies with W-2 or other reporting. It’s also crucial to offer careful explanations concerning grants, activities, and scholarships.

Although tax compliance and good governance practices won’t fully immunize organizations in the current climate, the lack of such practices or compliance creates the opportunity for criticism by those who wish an organization ill. Negative attention can lead to reputational damage or worse for organizations and, at a minimum, may put fundraising initiatives at risk.

Key Takeaways

Despite the IRS’s low audit levels, this is still a dangerous time for certain tax-exempt organizations, as compliance remains a focus across federal agencies and Congress. Tax-exempt organizations may very well still come face-to-face with an examination, inquiry or similar investigation. Acting now will help minimize the impact of such an event.

Priority areas both with the administration and the IRS can always change, however, so exempt organizations must consider this, as well as the risks beyond the White House’s and the IRS’s current priorities.

Organizations and their leadership can see there’s a plethora of government interest in tax-exempt entities. So what is a responsible leader to do? At the end of the day, an organization and its leadership may go boldly into this environment without change—but it shouldn’t do so without assessing all the risks and possible outcomes.

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

Steven Miller is a partner at Zerbe, Miller, Fingeret, Frank & Jadav and served as IRS acting commissioner.

Eric Hylton is the director of investigations at Zerbe, Miller, Fingeret, Frank & Jadav and is former IRS commissioner of the small business/self-employed division and former deputy chief of IRS Criminal Investigation.

Write for Us: Author Guidelines