With tax-exempt organizations facing harsher scrutiny and a higher threat of investigation this year, practitioners offered suggestions for managing risk.
Elinor Ramey, a partner at Lowenstein Sandler and a former Treasury Department attorney, suggests that organizations consider three different “buckets” of risk: optics and reputational risk, litigation and investigation risk, and liability risk.
Nancy McGlamery, a principal at Adler & Colvin, said she views risk as an equation: risk = probability x consequences. Both attorneys shared their thoughts on managing risk in today’s environment during a June 24 virtual TEGE Exempt Organizations Council meeting.
Exempt organizations were previously focused on the IRS when assessing risk, but the agency is no longer the “main focus,” said Ramey.
Beyond agency actions and “garden variety” risks like employment and office slip-and-falls claims, exempt organizations may face challenges brought by private plaintiffs, such as constitutional challenges, McGlamery explained. And organizations should also be aware of risks like “showing up” in the news and being presented in a bad light or being subpoenaed for a congressional hearing, she added.
Ultimately, if an organization’s assessment of its risk exceeds its tolerance, it will need to consider adjustments, said McGlamery. But she added that not all organizations — or even people within an organization — have the same risk tolerance.
McGlamery noted that after a 2023 U.S. Supreme Court decision on higher educational institutions’ use of race in the admissions process, Students for Fair Admissions v. Harvard, “we were already… on this path to thinking about… certain kinds of risk more pointedly.” Since January, the focus has expanded to organizations informed by diversity, equity, and inclusion and other “missions” and “activities” targeted by the Trump administration through executive orders or otherwise.
But Ramey said to keep in mind that, thus far, “nothing’s changed” in terms of the IRS’ procedures for taking away an organization’s tax-exempt status.
“To lose your tax-exempt status, it’s not a tweet by the president, and it’s not a statement by the Treasury secretary,” Ramey said. The procedure is still that “the IRS audits your organization” and “they propose a revocation based on the facts that they have found in the audit.”
After a proposed revocation, Ramey explained, organizations get a “30-day letter” and a chance to challenge the decision before the IRS Independent Office of Appeals. And if Appeals agrees with the revocation, an organization gets a “90-day letter” and can further challenge the decision in the Tax Court, U.S. Court of Federal Claims, or U.S. District Court for the District of Columbia.
“That process still exists, and that process is the process organizations are going through,” Ramey emphasized. “All of the additional sort of guidance and talk around all of that doesn’t change those things.”
Form 990.
In terms of exempt organizations’ “exposure,” an important part of the picture is the Form 990, said McGlamery.
Organizations that are exempt from tax under Code Sec. 501(a) are required to file Form 990 annually (or Form 990-EZ, for smaller organizations). Organizations must include in this annual information return their gross income, gross receipts, disbursements, and other information.
Frank Giardini, a principal at CliftonLarsonAllen, explained that Form 990 was aimed at gaining “transparency and clarity as to what an exempt organization is doing.” It’s accessible not just by the IRS but also by state and local governments and the public.
But now some organizations use Form 990 not only for compliance purposes, but also as a “live public relations document,” Giardini added.
McGlamery said she hasn’t really gotten many questions from clients on their Form 990s since President Trump took office. Organizations are more worried about their websites and other exposures, in her experience. But she noted that it’s “a bigger enterprise to go through every nonprofit organization’s website versus literally just having the data-crunching machine that is the IRS renew a 990.”
Giardini, too, said that a lot of his clients “were not even viewing the 990 as an issue” and “didn’t see the potential that the 990 actually is saying a lot of the things that they’re doing” — including those of interest to the Trump administration.
While some of the “more sophisticated organizations” are “on top of it,” said Giardini, “it is incumbent on us as practitioners” to guide clients.
“There’s a lot of things that are outside of organizations’ control right now,” added McGlamery. But there are ways of “getting your organization’s house in order” to avoid being “an easy target.”
On that, Megan Okun, a partner at Taft Stettinius & Hollister, noted that while the Form 990, itself, isn’t subject to attorney-client privilege, the “discussions that you have around the 990 may be, if you structure them properly.” She urges practitioners and exempt organizations to exercise “special caution in today’s environment in thinking about that.”
For more on exempt organization information return requirements, see Checkpoint’s Federal Tax Coordinator ¶ S-2801.
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