Amidst a political climate of “saber-rattling” regarding tax-exempt organizations, leaders of nonprofits in Washington DC, Ashburn, and across Virginia are increasingly concerned about an IRS crackdown. However, a nuanced analysis of the facts reveals a more complex picture than simple headlines suggest. According to Jeffrey S. Tenenbaum, managing partner at Tenenbaum Law Group and an expert in nonprofit law, while there has been significant rhetoric, there has been no meaningful, widespread IRS crackdown threatening the tax-exempt status of most organizations . In fact, the administration has cut the number of IRS auditors, leaving very few to engage in aggressive, large-scale audits . Nevertheless, this does not mean nonprofits are off the hook. The IRS is shifting its enforcement strategy. There is a notable trend toward moving enforcement duties from the IRS to the Department of Justice, which is a significant change. “I know exactly what’s involved in litigation, and I know exactly what’s involved in an IRS audit and appeal,” Tenenbaum noted. “The two share virtually no similarity” . Litigation is far more resource-intensive and public. Furthermore, the primary administrative threats to an organization’s tax-exempt status remain threefold: (1) automatic revocation for failing to file Form 990 for three consecutive years; (2) a standard IRS audit, which has due process rights and appeals; and (3) suspension for being designated as supporting or engaging in terrorism under IRC Section 501(p) . For the vast majority of well-governed nonprofits, the most immediate and actionable threat is not a politically motivated audit, but an administrative lapse in filing. However, the IRS has also reopened and overhauled its group exemption program under Revenue Procedure 2026-8, effective January 20, 2026 . This is a major development for central organizations (like national associations or religious denominations) that oversee local chapters. The new rules impose stricter governance standards, requiring central organizations to demonstrate “general supervision or control” over subordinates, potentially through written agreements, and to file annual Supplemental Group Ruling Information (SGRI) . The compliance deadline for updating existing group exemptions is January 22, 2027 . Failure to comply could result in termination of the entire group’s exemption. For the average independent nonprofit, the path to staying audit-ready involves mastering the basics of public charity compliance. The IRS continues to prioritize governance, transparency, and accurate reporting. The introduction of the universal charitable deduction and the new 0.5% AGI floor for itemizers under the OBBBA will change donor behavior, but they do not change the organization’s filing obligation . Nonprofits must ensure their Form 990 accurately reflects executive compensation, conflict of interest policies, and program service accomplishments. The IRS uses this form as a primary screening tool for audit selection. At Nova Tax & Accounting Services, we specialize in Form 990 preparation and Assurance and Compliance for Nonprofits . We help organizations implement the internal controls and documentation practices that minimize audit risk and demonstrate the highest level of financial transparency, ensuring you are prepared for any level of scrutiny, regardless of the political climate.
One of the most overlooked but financially impactful changes in Virginia’s 2026 decoupling legislation involves the treatment of business interest expense. Under the federal Tax Cuts and Jobs Act (TCJA), IRC Section 163(j) generally limits a business’s deduction for net interest expense to 30% of its adjusted taxable income (ATI). Any interest expense that is “disallowed” under this limit can be carried forward indefinitely. For state tax purposes, many states, including Virginia, historically allowed a similar add-back and deduction for disallowed interest. However, under HB 29, Virginia has significantly tightened its rules. For tax years beginning on or after January 1, 2025, Virginia has decreased its deduction for disallowed business interest expenses from 50% to just 20% of the interest disallowed on the federal return . This means that if a Virginia business has $100,000 of interest expense disallowed federally under Section 163(j), it can only deduct $20,000 of that amount on its Virginia return, with the remaining $80,000 representing a permanent, not temporary, difference. This change dramatically increases the state tax liability for leveraged businesses, including real estate investment entities, private equity-owned portfolio companies, and capital-intensive manufacturers. The decoupling from federal interest deduction rules creates a permanent “Virginia-only” add-back, directly impacting cash flow and effective tax rates. Businesses need to model the impact of this change immediately. At Nova Tax & Accounting Services, our Accounting & Bookkeeping and tax strategy teams can help you calculate the precise impact of the Section 163(j) decoupling and explore restructuring options to mitigate its effects.
For decades, Virginia has prided itself on a relatively flat income tax structure, taxing most income above a modest threshold at a single rate of 5.75%. However, the 2026 legislative session has introduced two major proposals that could shatter this tradition and reshape the Commonwealth’s tax competitiveness. The first is a suite of bills (including HB 188 and HB 979) proposing to create new top marginal rates for high earners, with some versions suggesting an 8% bracket for income over $600,000 and a 10% “millionaire’s tax” on income over $1 million . The second, equally transformative proposal is HB 378, which would layer a state-level Net Investment Income Tax (NIIT) of 3.8% on dividends, interest, capital gains, and rental income for individuals and estates with modified adjusted gross incomes exceeding $500,000 . Together, these proposals could push Virginia’s effective top rate on investment income close to 9.6%, significantly raising the burden on affluent households with substantial passive income . Supporters argue these measures are necessary to fund public schools, child care subsidies, and affordable housing, promoting tax fairness by aligning the treatment of investment income with wages . Critics, however, warn of significant risks, including making Virginia less competitive with neighboring states, discouraging business investment, and accelerating “tax flight” among high-income residents who have the flexibility to relocate . While these bills remain under legislative review, proactive planning is essential. For individuals and business owners potentially affected by these changes, our team at Nova Tax & Accounting Services can provide strategic Tax Planning to model different scenarios and explore income-shifting or realization strategies to mitigate potential exposure before any new brackets take effect.