The landscape for tax-exempt organizations has shifted under the current administration, particularly after the White House directed a whole-of-government approach to countering domestic terrorism, with a specific focus on nonprofits and their funders. But there are strategies organizations can take to identify and mitigate risk, BakerHostetler legal experts explained in an October 9 webinar.
The Trump administration issued a presidential memo on September 25 setting forth a national strategy to investigate and disrupt networks engaged in political violence. The strategy, detailed in an accompanying fact sheet, calls for a national Joint Terrorism Task Force “to investigate, prosecute, and disrupt entities and individuals engaged in acts of political violence and intimidation.”
For tax-exempt organizations, a key provision is the directive that the IRS commissioner “ensure tax-exempt entities do not directly or indirectly finance political violence or domestic terrorism.” The IRS commissioner is charged with “referring violators to the Department of Justice.”
Expanded Risks for Tax-Exempt Organizations
Those in the tax-exempt organization space are digesting these executive actions and determining how to respond. “I, as a tax lawyer and a tax-exempt specialist, feel somewhat out of my depth,” said Alexander Reid, who heads up BakerHostetler’s tax-exempt organizations and charitable giving team.
Steven Dettelbach, co-leader of BakerHostetler’s white collar investigations team, noted that with the recent actions, “there is more, at least talk – and sometimes more than talk – about treating things that were not traditionally seen as criminal matters in a criminal way if they align with certain key policy areas or people.”
He pointed to the memo’s emphasis on broad statutes such as conspiracy against rights under 18 U.S.C. § 241 and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). However, the idea of “inchoate crimes” – which “don’t require the crime to actually be committed” and “don’t require the same level of personal involvement” – is not new, Dettelbach explained.
But Dettelbach stressed that the Department of Justice has, for many years, had “norms” where you don’t start with a target and look around to “see if they did something wrong.” Instead, he explained, “we have to have some sort of initial predication that something has happened – some very specific allegation that has some level of reliability that starts the investigation.”
Andrew Grossman, leader of BakerHostetler’s appellate and major motion team, agreed that while the risks for tax-exempt organizations may be greater, they are not entirely new. “The increase in enforcement risk at the federal level and the threats of targeting is, unfortunately, a continuation of the same trend that we’ve seen over the past decade or so at the state level,” he said.
Grossman also stressed that despite “rhetoric” from the White House, the memos and orders contain the key phrases “consistent with law” or “to the extent permitted by law.” While “it’s very easy to catastrophize” the recent actions, what it really breaks down to for Grossman is a change in enforcement priorities. “They’re picking different cases, and they’re focusing on different things.”
“Sometimes, to an extent, we’re seeing new legal theories, or slightly more aggressive legal theories,” Grossman allowed. However, “they are still working with, in general, the same tools that previous administrations have used.”
How Nonprofits Can Mitigate Risk
“The power to investigate,” said Dettelbach, “is, in fact, the power to destroy.” But the panelists stressed that fear is not a strategy. Instead, they recommended several practical steps for tax-exempt organizations to take to mitigate their risk in the current enforcement environment.
Conduct an Insurance Inventory. Dettelbach advised organizations to understand their insurance coverage for costly investigations. That includes not just the directors and officers (D&O) policy, but also the umbrella policy, and any other coverage. Look at “what they cover, what they don’t,” he said. “If something can be negotiated with your carrier to add to coverage, that’s something you should explore now.”
Strengthen Internal Compliance. Grossman emphasized the importance of strong internal controls to avoid providing a pretext for an investigation. “Are your finances in order? Do you have proper accounting controls? Do you have a strong audit function? Do you have clear lines of authority?” he asked. “All the things that you think of as best practice in nonprofit management, those are things that can actually substantially reduce your risk in the enforcement context as well.”
Grossman noted that at the state level, he’d seen groups targeted for political reasons, but “at the end of the day, the issue that drives the case is not their political advocacy.” Instead, it’s about whether they “put the money in the right bucket” or whether organization officials were “doing things that they ought not to have been doing.”
Know What Your Partners or Grantees Are Doing. Beyond internal compliance, Grossman suggests talking to partner groups and grantees and either “have them run a tighter ship” or “cut ties.”
“There is a special set of risks for foundations and other organizations that are in the grant-making business,” he added. Know whether groups you work with are overtly or tacitly “engaged in illegal activities,” “involved in street protests,” or doing work overseas with groups or governments “disfavored” by the U.S.
Establish Clear Lines of Authority. For activities that carry higher risk, approval should come from the highest levels of the organization. “The riskier the activity is, the higher the approval should be within your organization to engage in them,” Dettelbach said.
This prevents risky decisions from being made at lower levels without a full view of the potential consequences. Dettelbach reflected on past clients “where the head of the organization says, ‘You know, I had no idea this was going on until it was too late.'”
Create a ‘Culture of Caution.’ Dettelbach warned against careless internal communications that could be misinterpreted by investigators. “I can’t tell you how many cases I’ve investigated where clients are making a joke and that joke turns into an investigation,” he said.
He advised creating a “culture of caution” to ensure communications are not “loose and misleading.” This helps avoid “inadvertently doing actions that may be totally unrelated to the core mission,” but that “provide a hook for an investigation to start.”
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