How Virginia and DC Nonprofits Can Navigate 2026’s Compliance Surge
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 in isolation. Just one week before the Form 990 initiative was unveiled, the IRS issued a whistleblower alert seeking information about misuse or fraudulent use of federal funds by tax-exempt organizations. Together, these developments signal a broader shift toward a more active enforcement environment for nonprofits, one where documentation, governance, and reporting clarity will matter more than ever .
No Immediate Changes, But Preparation is Essential
It’s important to note that no changes have been finalized yet. Treasury and the IRS are expected to publish formal regulations and open a public comment period before anything is finalized . No effective date has been announced, and no immediate changes to your current filing obligations apply. However, organizations that get ahead of this now will be better positioned when formal rules arrive .
How Nonprofits Can Prepare for 2026’s Compliance Surge
In light of these developments, nonprofit leaders should take proactive steps to strengthen their compliance posture. Here’s where to focus:
Review and Strengthen Compliance Programs
Audit your compliance programs, tax filings, donor lists, funding sources, and governance practices
Ensure your tax filings are accurate and up to date
Review how government grants and contracts are tracked, so your organization can clearly demonstrate the source, purpose, and use of public funds
Enhance internal reporting processes to support potential new disclosures on how specific government funds are spent and allocated across programs and activities
Evaluate Fiscal Sponsorship Arrangements
Evaluate fiscal sponsorship arrangements and maintain clear documentation identifying who operates sponsored projects, who controls project funds, and how those funds are used
Confirm that organizational activities, funding practices, and public disclosures are consistent with the organization’s exempt purpose and mission
Strengthen board oversight, internal controls, and fund stewardship procedures to address heightened scrutiny around transparency, accountability, and misuse of charitable assets
Assess Accounting and Compliance Systems
Assess whether current accounting and compliance systems can support more detailed reporting requirements
Build cash reserves where possible and strengthen internal controls
Prepare teams for more frequent federal inquiries
Ensure compliance is an organizational discipline, not just an accounting issue
Communicate with Stakeholders
Communicate the current legal reality with your donors and stakeholders
Operate with the assumption that civil audits and criminal investigations may be forthcoming and prepare accordingly
The Stakes of Noncompliance
The stakes for nonprofit compliance failures have never been higher. Nonprofits that fail to file Form 990 for three consecutive years face automatic revocation of tax-exempt status . Reinstatement requires a new application, more fees, and no guarantee of retroactive restoration. The IRS publishes a list of organizations that have lost their exemption, which damages donor confidence and disqualifies the organization from grants .
Revocation of 501(c)(3) status also affects state tax exemptions, which were granted based on that federal determination . For organizations in Virginia, this means losing not only federal tax-exempt status but also Virginia state tax exemptions and VDACS charitable solicitation registration benefits.
Virginia State Compliance Obligations
In addition to federal requirements, Virginia nonprofits have ongoing compliance obligations to four agencies: the Virginia SCC, the IRS, the Virginia Department of Taxation, and VDACS .
Virginia SCC Annual Report – Virginia nonprofits must file an annual report with the SCC by the last day of their incorporation anniversary month, along with a $25 registration fee . The late penalty is $10, but if the annual report is more than four months late, the SCC will automatically terminate the corporation’s existence by operation of law .
VDACS Charitable Solicitation Registration – Virginia nonprofits that solicit charitable contributions must register with the Virginia Department of Agriculture and Consumer Services (VDACS) . The registration must be renewed annually within 5.5 months after the end of the organization’s fiscal year . Initial registration fees run up to $100, with annual renewal fees ranging from $30 to $325 based on gross contributions .
Virginia Tax Exemption – Virginia nonprofits must apply for Virginia sales tax exemption separately from federal 501(c)(3) status .
DC Nonprofit Compliance Requirements
Washington DC has its own compliance requirements that can be even more complex:
DC tax exemption is valid for 5 years and must be renewed; OTR provides notices at 180 days and 30 days before expiration
Federal 501(c)(3) status does NOT automatically grant DC tax exemption; you must file Form FR-164 separately
Charitable solicitation registration or exemption is required based on thresholds: under $25,000 annually with no professional solicitors may qualify for exemption, over $25,000 or with professional solicitors requires registration with DLCP
Registration fee is $99 (2-year license) or $198 (4-year license)
Conclusion
Virginia and Washington DC nonprofits are entering a new era of heightened scrutiny in 2026. From expanded IRS enforcement under NSPM-7 to the planned overhaul of Form 990, and from increased state-level compliance requirements to the threat of automatic revocation, the stakes for nonprofit compliance have never been higher.
For organizations in the DMV region, proactive preparation is essential. Leaders should review their compliance programs, tax filings, donor lists, and governance practices. They should strengthen their tracking of government grants and contracts, evaluate their fiscal sponsorship arrangements, and ensure their accounting systems can support more detailed reporting requirements.
Those who treat compliance as an organizational discipline rather than just an accounting issue will be best positioned to weather the coming scrutiny and continue serving their missions.
