Nonprofit organizations in Virginia and Washington DC are entering a new era of regulatory scrutiny in 2026. From the IRS’s planned overhaul of Form 990 to expanded federal enforcement directives and heightened state-level compliance demands, the landscape for tax-exempt organizations has shifted significantly. For mission-driven organizations across the DMV region, understanding these changes is essential to maintaining tax-exempt status, protecting donor trust, and avoiding costly penalties. The Federal Enforcement Shift: Heightened Scrutiny of Nonprofits in Virginia Recent federal directives signal a significant shift in how the government approaches nonprofit oversight, with Virginia organizations particularly at risk . In her article for the Virginia State Bar Tax Section’s Taxation Reporter, tax attorney Karen Kelly outlines how recent federal directives, including National Security Presidential Memorandum 8 (NSPM-7) and U.S. Department of Justice guidance, signal heightened scrutiny of certain tax-exempt organizations, with the U.S. District Court, Eastern District of Virginia as a focal point . NSPM-7 and Expanded Federal Oversight On September 25, 2025, NSPM-7 was issued on “Countering Domestic Terrorism and Organized Political Violence.” This directive has significant implications for nonprofit organizations : It directs the DOJ, the Treasury, and the Department of Homeland Security (DHS) to identify and investigate potential “domestic terrorist organizations” The broad definition of “domestic terrorist organization” can include “extreme” views on race, gender, immigrants, and “hostility towards those who hold traditional American views on family, religion, and morality” The National Joint Terrorism Task Force and its local offices are directed to investigate such groups The IRS is directed to investigate tax-exempt entities suspected of “directly or indirectly financing political violence or domestic terrorism” IRS employees and officers of these organizations—and the exempt organizations themselves—can be referred to DOJ for further investigation and potential prosecution DOJ Enforcement Priorities Investigations of targeted tax-exempt organizations and associated individuals are now a major priority for the DOJ, following a December 4, 2025, directive from then-Attorney General Pam Bondi . This directive laid out a whole-of-government approach to the “grave threats” posed by “Antifa-aligned extremists.” Under this directive, federal law enforcement and the DOJ must also consider applicable tax crimes in which such entities or affiliated individuals are suspected of defrauding the IRS . Why Virginia Nonprofits Face Particular Risk Virginia nonprofit organizations could be particularly at risk because the Eastern District of Virginia is a favored judicial venue for federal enforcement actions . Organizations with offices in Virginia may, therefore, be at heightened risk for federal investigation. This makes proactive compliance essential for any organization operating in the Commonwealth. The incredibly broad scope of NSPM-7 and subsequent directives puts politically sensitive organizations at risk, particularly those advocating for immigrant rights and gay rights. The organizations themselves could face significant scrutiny from the federal government, but so may their individual donors, grantors and funders, executives, and employees . Practical Guidance for Nonprofit Leaders Kelly’s message is clear: nonprofits and their leaders should proactively review compliance programs, tax filings, donor lists, and governance practices to prepare for potential civil or criminal investigations. As she states, “An ounce of prevention is worth a pound of cure” . She urges nonprofit executives, key employees, and advisors to audit their compliance programs, review annual tax filings, donor lists, funding sources, and other crucial information, and to communicate the current legal reality with their donors and stakeholders. Nonprofit organizations in Virginia should operate with the assumption that civil audits and criminal investigations may be forthcoming and prepare accordingly . Form 990 Overhaul: New Transparency Requirements on the Horizon The IRS is planning the first major overhaul of Form 990 in nearly two decades, with significant new reporting requirements for tax-exempt organizations . The Treasury’s April 2026 Announcement On April 23, 2026, the U.S. Department of the Treasury announced that the IRS plans to revise Form 990 to improve transparency, strengthen tax administration, and provide clearer reporting on certain activities of tax-exempt organizations described in section 501(c)(3) . The proposed changes focus on three areas: Government contracts Government grants Fiscal sponsorship arrangements Treasury Secretary Scott Bessent stated: “Public money and tax-exempt status demand public accountability. We are ending the days of hiding fraud, abuse, and extremist activity behind complicated nonprofit arrangements” . What the Changes Mean for Government Funding Disclosures Currently, government grants are reported on Form 990, but there is no requirement to show how specific governmental funds are spent . The proposed changes would require organizations to report not only the receipt of government grants and contracts, but also how those funds are specifically used, adding a new layer of accountability and public transparency around governmental funding . Organizations that receive substantial funding from federal, state, or local government sources may need to provide clearer, more detailed reporting on the sources and uses of government funding . While this information is not included publicly on Form 990, organizations are typically required to provide detailed information to government grantees or contractors periodically. Organizations should ensure they are keeping detailed records of all government-funded income and related expenditures . Fiscal Sponsorship Under the Microscope Fiscal sponsorship is a structure where an established tax-exempt organization extends its nonprofit status to a project or initiative that isn’t independently registered as a nonprofit. These are sometimes referred to as incubator organizations, allowing smaller nonprofits to focus on their mission while the sponsor handles the administrative fiscal responsibilities . Currently, there is no required reporting for fiscal sponsorship arrangements on Form 990 . This creates a significant transparency gap: Fiscal sponsors are not required to disclose details about these arrangements on Form 990 Sponsored projects don’t file their own returns Many projects may not even have their own employee identification numbers (EIN), making them almost invisible to the IRS The proposed changes would require sponsors to identify their sponsored projects, disclose who controls those funds, and provide details on how they’re being used . For some fiscal sponsors this could be a formidable task, as there is no current federal limit to the number of projects they can hold, with some housing hundreds of projects at a time . The Broader Context: Whistleblower Alerts and Increased Enforcement This announcement didn’t happen
The One Big Beautiful Bill Act (OBBBA) made a significant and permanent change to the federal estate and gift tax exemption. As of January 1, 2026, the federal lifetime exemption has been permanently reset to $15 million per individual (with portability allowing married couples to pass up to $30 million free of federal estate tax) . This is a huge increase from the previous, scheduled sunset, and for the vast majority of Americans, it effectively removes federal estate tax from the equation . However, for families in Maryland, Washington D.C., and Virginia, the story doesn’t end there. A “no federal tax” situation does not mean “no tax at all” due to state-level estate and inheritance taxes that are decoupled from the federal threshold . Understanding the rules in your specific jurisdiction is critical for effective estate planning. The Federal Framework: $15 Million Is Now Permanent The OBBBA has permanently set the federal exemption to $15 million, adjusted annually for inflation starting in 2027 . The federal tax rate on any portion of an estate exceeding the exemption remains 40% . For many, this means federal estate tax planning is no longer a primary concern. However, the changes are still significant for existing plans, as “trust documents use a formula tied to ‘the federal estate tax exemption amount,’ which has now changed dramatically and could redirect assets in ways you didn’t intend” . Maryland: The State-Level Tax Gap Maryland presents the most significant state-level estate tax burden in the region. Unlike the new $15 million federal threshold, Maryland’s estate tax exemption remains much lower, at approximately $5 million . This creates a considerable “gap” for Maryland families with estates between the state and federal exemption levels. This means many estates will have no federal estate tax liability but will still owe tax to the state of Maryland. Proactive trust planning is essential for Maryland residents with significant assets. Washington D.C.: No Portability, Need for Planning The District of Columbia also imposes its own estate tax, separate from the federal system, with an exemption set well below the $15 million federal level . A crucial distinction for D.C. residents is that the District does not allow portability between spouses. Portability is a federal rule that allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. Since D.C. does not allow this, “each spouse’s exemption must be used on its own estate, not transferred to the survivor” . This makes proactive trust planning—rather than relying on the surviving spouse’s exemption alone—especially important for D.C. residents. Virginia: No State Estate Tax Virginia offers a simpler landscape for its residents. The Commonwealth does not impose a separate state estate tax . Therefore, Virginia families benefit directly from the higher $15 million federal threshold without a state-level gap to plan around. That said, “even ‘no state tax’ families shouldn’t assume no paperwork is needed.” For couples who want to utilize federal portability, an estate tax return must still be filed in a timely manner to claim a deceased spouse’s unused exemption . Planning Considerations for the DMV Region For families across Maryland, D.C., and Virginia, the 2026 tax changes mean that estate plans drafted under the old exemption numbers need a second look. This is particularly true for: Maryland and D.C. residents with a combined estate (including life insurance and retirement accounts) approaching $5 million . Those who made large lifetime gifts under the prior exemption and need to know how much exemption capacity they have left under the new $15 million figure . Plans that rely on a credit shelter or A/B trust structure built around exemption levels that no longer reflect current law . Additionally, the federal annual gift tax exclusion rose to $19,000 per recipient in 2026 ($38,000 for a married couple giving jointly) . This is a simple and often underused way to move wealth to the next generation each year without touching your lifetime exemption at all. Conclusion The federal estate tax changes have removed a major financial concern for many, but they have not eliminated the need for careful estate planning, especially for those living in Maryland and D.C. where state-level taxes remain a factor. The removal of portability in D.C. and the disparity between state and federal exemptions in Maryland are critical factors that require careful consideration and professional advice to ensure your legacy is protected and your wishes are honored.
Washington D.C. has been at the center of a significant tax policy battle in 2026, centered on its decision to decouple from certain provisions of the federal One Big Beautiful Bill Act (OBBBA). The District’s efforts to align its local tax code with its own fiscal priorities led to a clash with Congress, creating uncertainty for taxpayers. The final outcome has resulted in a narrower decoupling, but one that still presents unique challenges for residents and businesses in the District. The Initial Decoupling and Congressional Intervention The OBBBA, signed into law in July 2025, introduced a wide range of federal tax changes, including an increased standard deduction, new deductions for tips and overtime, and significant business expensing provisions . In late 2025, the D.C. Council voted to decouple from nearly all of these key OBBBA provisions . This was a significant move that would have meant D.C. taxpayers would not benefit from these new federal tax cuts on their local returns. However, Congress stepped in. The House and Senate voted to disapprove of D.C.’s decoupling law, effectively blocking it . This congressional action caused significant disruption and confusion. Senator Angela Alsobrooks noted the problem of changing rules after taxpayers had already started filing returns, stating, “This resolution would literally change the rules in the middle of the game… it would require revising tax forms and systems and could force taxpayers to refile” . The congressional disapproval also created a $600 million budget hole for the District . A Revised Decoupling: The Budget Bill In response to the congressional block, the D.C. Council passed a fresh, narrower decoupling as part of its budget bill . The new law represents a compromise and a more targeted approach. What D.C. Still Decouples From:The revised law maintains a decoupling from several business-related OBBBA provisions, including : Business Full Expensing: D.C. will not conform to the OBBBA’s more generous rules for expensing business assets. Changes to Interest Expense: The District is not adopting federal modifications to business interest deduction limitations. Research and Experimentation (R&E) Expensing: Like Virginia, D.C. is decoupling from the federal provision that allows for immediate expensing of R&E costs. Above-the-Line Charitable Deduction: D.C. will not allow the OBBBA’s new deduction for charitable contributions for non-itemizing taxpayers . What D.C. Now Conforms To:Crucially, the revised law allows D.C. taxpayers to take advantage of several individual tax benefits that were in the original decoupling bill. For the tax years 2026, 2027, and 2028, D.C. taxpayers can claim deductions for : Tips Overtime pay Car loan interest The enhanced senior deduction This means that for these specific provisions, D.C. taxpayers will see the same benefits on their local returns as they do on their federal returns. Under federal law, these provisions are set to expire at the end of 2028 . Fixing the Qualified Small Business Stock (QSBS) Issue The budget bill also resolved a potentially disastrous issue regarding the tax treatment of Qualified Small Business Stock (QSBS) . The initial decoupling bill was written in a way that appeared to eliminate the QSBS exclusion entirely for D.C. taxpayers, and it was made retroactive to January 1, 2025. This would have been a crushing tax increase for founders of small businesses who had counted on the one-time exclusion from capital gains tax when selling their stock. The National Taxpayers Union Foundation and affected taxpayers worked to alert policymakers to this likely unintended consequence. The revised budget law fixed this mistake, preventing a retroactive tax hike on small business owners . The Federal Prohibition on Taxing Nonresident Workers Adding another layer of complexity, Washington D.C. is subject to a unique federal prohibition. Federal law prohibits the District from taxing the income of nonresidents who work in D.C. . This creates a distinct dynamic where workers who live in Virginia or Maryland can commute into the District for employment and pay no D.C. income tax on that income. This structural limitation significantly shapes D.C.’s revenue base and tax policy. Conclusion The tax landscape in Washington D.C. for 2026 is the result of a legislative tug-of-war. The final outcome sees D.C. conforming to most individual tax benefits from the OBBBA, but deliberately decoupling from several major business provisions to protect its own revenue stream. This complexity is compounded by the region’s multi-state nature, where residents may have income sourced in D.C., Maryland, and Virginia. For taxpayers, especially business owners and high-net-worth individuals, this means carefully tracking where their income is earned and understanding the specific rules of each jurisdiction.