IRS gives tax-exempt groups closer scrutiny

Internal Revenue Service officials discussed their efforts to increase compliance of tax-exempt groups as well as for-profit businesses with the help of whistleblowers during a tax conference Thursday in New York.

"If it's fraud in the tax-exempt sector, that's something that's very important to us as an organization, as an institution," said Edward Killen, commissioner of the Tax Exempt and Government Entities division at the IRS, at the annual Tax Controversy Forum at New York University. "It's a privilege to be tax exempt. There are rules, both in statute and regulation, so if entities are not abiding by those rules, and there's abuse, we want to make sure that we are positioning ourselves to identify those issues and to pursue them appropriately and timely and completely."

The IRS and the Treasury have been cracking down on organizations such as charities and nonprofits, while threatening their tax-exempt status if their policies don't align with the administration, adding new questions to the Form 990 filed by them and asking whistleblowers to report signs of possible fraud.

In April, the IRS issued its first Whistleblower Alert asking for tips on possible fraud by nonprofits. "We've never done this before," said Erick Martinez, acting director of the IRS Whistleblower Office. "We've gone out to the public for information on the misuse of federal funds by tax-exempt entities. It's the first time we did it. We get information, and then we look at the best information and forward it on to our partners across compliance to look at. This is a whole-of-government endeavor."

He plans to report on the findings. The IRS has been pursuing a number of cases recently against tax-exempt groups, including a high-profile one against the Southern Poverty Law Center,  a tax-exempt organization that tracks hate groups and focuses on civil rights litigation, accusing it of funneling more than $3 million in donated funds to associates and informants who had infiltrated groups like the Ku Klux Klan, United Klans of America and Unite the Right. This week, the Los Angeles Homeless Services Authority announced it was terminating its contracts with one nonprofit after one of its founders came under investigation by the IRS and had his cash seized.

Earlier this month, the IRS and the Treasury announced that they intend to issue proposed regulations on a section of the One Big Beautiful Bill Act limiting the ability of tax-exempt organizations to pay high compensation and parachute payments to their top executives. 

The IRS is taking a coordinated approach to enforcement across the agency. "What that requires is that we take a whole of compliance approach to that," said Killen. "We are in the process of doing that and that's what we intend to continue to do. I think that's healthy for tax administration. I think it's healthy for us to show up with a singular voice, even though the activities may be executed in different parts of the organization."

The IRS established a Chief Tax Compliance Office, naming Jared Koopman, who was later also named chief of the Criminal Investigation division. He is overseeing IRS compliance operations in several divisions and offices: Large Business and International, Small Business/Self Employed, Tax Exempt and Government Entities, IRS Criminal Investigation, the Office of Professional Responsibility, the Return Preparer Office, and the Whistleblower Office. 

The IRS has been trying to pay out whistleblower claims more efficiently. "One way that we've had some success to improve the processing time is through the expanded use of our program to disaggregate the claims," said Martinez. "If you have a large whistleblower claim, parts of that whistleblower claim have finality sooner than other parts, and in many circumstances we're able to pay those claims before the bigger claim is resolved. That's a major change over the last couple of years. I'll just give you an idea: 80% of our award payments in the past two years have been through this disaggregated process. Roughly, that means we paid $200 million in awards related to about $800 million of tax collected."

In fiscal 2025 the Whistleblower Office issued payments within 30 days of the finality requirement, a 21% improvement over 2024 and a 43% improvement over 2023. "If we pay those claims faster, you'll incentivize folks to present more information to us," said Martinez.

The IRS has managed to cope with a smaller workforce this past year, having shed about 27% of its workforce, but nevertheless managed to navigate tax season successfully.

"The organization is faring quite well," said Lia Colbert, commissioner of the IRS's Small Business/Self-Employed division. "The amazing workforce at the IRS that chooses to be public servants, serving the mission of the IRS, steadies us, even in times in leadership we might not be sure it's steady, but the workforce reminds us. They are amazingly driven, they are amazingly committed to serving the taxpayers. There is a unified focus across compliance to really strengthen our compliance efforts."

The tax compliance function is leveraging technology such as artificial intelligence to help make up for the staffing cuts.

"I think you can hear a common theme around the technology that we're embracing at the IRS, certainly within compliance," said Mabeline Baldwin, acting commissioner of the Large Business and International division at the IRS. "It's s not something that's new, but we now have some new tools that we're able to take advantage of, and also for our employees to really embrace and to lean in. As you can imagine, with us trying to be a digital service organization. We're looking at reducing our paper footprint."

She noted that the IRS is making sure its employees are properly trained in the responsible use of AI. "While the technology is great, we want to make sure we're being responsible, and we have the guardrails in place to make sure that we not only have risk mitigation, but making sure we have the guardrails." She noted that some employees want to go "full throttle" on the use of AI, but she pointed to the need to protect the privacy of the information.