Virginia Nonprofits in 2026 – What New Federal Scrutiny Means for Your Organization
The Landscape Has Changed
For Virginia’s nonprofit sector—home to approximately 53,000 registered organizations—the compliance environment in 2026 is fundamentally different from anything that came before. A convergence of new federal directives, expanded IRS enforcement authority, and heightened political attention to tax-exempt organizations has created an atmosphere of unprecedented scrutiny.
The signals are unmistakable. According to multiple published reports, the Trump administration has directed the IRS’s Criminal Investigation Division (IRS-CI) to focus on organizations it deems politically adversarial. The Wall Street Journal described how the IRS is being reorganized to enable easier pursuit of investigations into “left-leaning groups”. For nonprofit leaders across Virginia—from large associations in Arlington to community organizations in Richmond and faith-based networks in Hampton Roads—the message is clear: governance, compliance, and documentation now matter more than ever.
This guide provides a comprehensive overview of the new scrutiny landscape, the specific compliance obligations facing Virginia nonprofits, and practical steps organizations can take to protect their tax-exempt status and continue serving their missions.
The New Federal Enforcement Framework
National Security Presidential Memorandum 7 (NSPM-7)
The most significant development shaping the current environment is National Security Presidential Memorandum 7, issued in September 2025. This directive, which addresses “Countering Domestic Terrorism and Organized Political Violence,” has profound implications for tax-exempt organizations.
On December 4, 2025, U.S. Attorney General Pam Bondi issued an internal directive implementing NSPM-7, substantially expanding the federal government’s approach to identifying, investigating, and prosecuting alleged domestic terrorism. This directive:
Mandates new investigative procedures across federal agencies
Broadens key definitions to include a wider range of activities
Introduces enhanced enforcement mechanisms that can be applied to nonprofit organizations
The implications for nonprofits are serious. As one legal analysis notes, “Together, these changes significantly elevate the risk landscape for nonprofits, donors, advocacy organizations, and other taxpayers”. Organizations must now treat their compliance, records, governance, and operations as though they could be subject to criminal exposure, reputational harm, and loss of exempt status.
IRS Criminal Investigation Focus
Historically, IRS-CI operated under Internal Revenue Manual 9.1.1.4(3), which explicitly prohibited opening investigations based on political affiliation. Investigations were initiated based on leads from other IRS divisions, other agencies, informants, or whistleblowers.
According to reports, this is changing. The IRS is being reorganized to enable easier pursuit of investigations into organizations deemed politically adversarial. This represents “a full-scale shift in how the Internal Revenue Service handles tax-exempt organizations”.
For Virginia nonprofits, the implications are particularly acute. The Eastern District of Virginia has been identified as a favored venue for federal enforcement actions, making organizations with offices in the Commonwealth potentially more vulnerable to investigation.
Congressional Pressure on the IRS
Congress has also intensified its oversight of the nonprofit sector. In January 2026, House Ways and Means Committee Chairman Jason Smith and all Republican members of the Committee called on the IRS to overhaul its oversight of the nonprofit sector, citing concerns about fraud and abuse. The Committee’s ongoing investigation has already resulted in the referral of multiple nonprofit organizations to the IRS for revocation of tax-exempt status.
New IRS Guidance: Three Technical Guides for Exempt Organizations
In June 2025, the IRS published three new Technical Guides (TGs) that replace corresponding Audit Technique Guides (ATGs). These guides provide comprehensive, issue-specific guidance for IRS examiners and offer valuable insight for nonprofits seeking to understand what the IRS looks for during examinations.
TG 3-8: Inurement and Private Benefit
This guide addresses the concepts of inurement and private benefit for Section 501(c)(3) organizations. Organizations exempt under Section 501(c)(3) must avoid engaging in impermissible conduct, including that which results in private benefit and inurement.
An otherwise qualifying organization will be disqualified for exemption if it benefits private interests, either through inurement of its net earnings to certain “insiders,” or by primarily benefiting the interests of persons who, though not “insiders,” do not comprise a charitable class. Nonprofit leaders should review this guide to ensure their compensation practices and transactions with insiders are defensible.
TG 3-27: Public Charity Foundation Classifications
This guide addresses public charity foundation classifications under Sections 509(a)(1) and 509(a)(4). It covers organizations for the benefit of certain state and municipal colleges and universities, governmental units, agricultural research organizations, and organizations testing for public safety.
For Virginia nonprofits that operate in partnership with public universities or government entities, this guide provides essential guidance on maintaining proper classification and avoiding unintended private foundation status.
TG 70: Non-Exempt Charitable Trusts and Split-Interest Trusts
This guide addresses technical information and examination techniques regarding non-exempt charitable trusts (NECTs) and split-interest trusts. These trusts are subject to certain excise taxes under Chapters 41 and 42 pursuant to Section 4947.
Organizations that operate charitable trusts or split-interest arrangements should familiarize themselves with this guidance to ensure compliance with applicable excise tax provisions.
Virginia-Specific Compliance Requirements
Charitable Solicitation Registration
Virginia law requires that every charitable organization intending to solicit contributions within the Commonwealth, or have funds solicited on its behalf, must register with the Office of Charitable and Regulatory Programs (OCRP) prior to any solicitation. The OCRP is part of the Virginia Department of Agriculture and Consumer Services (VDACS).
Recent news illustrates the consequences of non-compliance. In Virginia Beach, a local nonprofit contracted by the city to solicit donations for a public park was found to be “not authorized to solicit in Virginia” because it had failed to renew its registration, which expired in November 2023. The organization was unable to legally raise funds for the project until it resolved its registration status.
Virginia nonprofits should verify their registration status annually and ensure renewals are filed on time. The registration must be renewed annually within 5.5 months after the end of the organization’s fiscal year.
Virginia Sales and Use Tax Exemption
To qualify for Virginia’s sales and use tax exemption, a nonprofit organization must meet several requirements:
The organization must be exempt from federal income taxation under §§ 501(c)(3), 501(c)(4), or 501(c)(19)
Proof of compliance with Virginia’s law relating to organizations that solicit contributions
Annual administrative costs (including salaries and fundraising) must not exceed 40% of annual gross revenue
Organizations with gross annual revenue of at least $750,000 in the previous year must provide a financial review performed by an independent CPA
Virginia Tax may require an organization with gross annual revenue of at least $1.5 million to provide a financial audit
Nonprofits can apply for and manage their exemption through Virginia Tax’s Nonprofit Online portal . The portal allows organizations to register, renew exemptions, update contact information, and upload required documentation.
Local Property Tax Exemptions
Virginia localities may grant property tax exemptions to qualifying nonprofits. Under Virginia Code, property owned by organizations classified for religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purposes may be exempt if used exclusively for those purposes.
Organizations must apply for property tax exemptions with their local Commissioner of the Revenue. Requirements vary by locality, and some jurisdictions require a public hearing before approval.
The Expanded Excise Tax on Executive Compensation
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, significantly expanded the application of the excise tax on excess compensation paid by tax-exempt organizations under IRC Section 4960.
What Changed
Previously, the excise tax applied only to the five highest-compensated employees of an applicable tax-exempt organization (ATEO). Under the OBBBA, for taxable years beginning after December 31, 2025, any current or former employee of an ATEO (going back to 2017) is now a covered employee—dramatically broadening the scope of the tax.
The tax applies to employees with compensation exceeding $1 million in a tax year or receiving an excess parachute payment. The excise tax rate is 21%.
IRS Guidance
On June 5, 2026, the Treasury Department and IRS issued Notice 2026-36, announcing intent to issue proposed regulations addressing these changes. The notice clarifies that the expanded definition applies only to taxable years beginning after December 31, 2025. The old “top five” definition still governs prior years (2017–2025).
The notice also provides important exceptions for individuals who provide volunteer services, allowing ATEOs to rely on limited hours and nonexempt funds exceptions until further guidance is issued.
What Nonprofits Should Do
Virginia nonprofits should review their compensation practices and identify any employees who may be affected by the expanded definition. Organizations with substantial deferred-compensation programs—including universities, hospital systems, and large charities—should pay particular attention.
Comments on the notice are due by August 4, 2026, and can be submitted via regulations.gov (docket IRS-2026-0233).
New Group Exemption Rules
On January 20, 2026, the IRS reopened its group exemption program with the release of Revenue Procedure 2026-8, ending a multi-year suspension on new group exemption applications. The new guidance replaces rules dating back to 1980 and materially changes how group exemptions are obtained, maintained, and monitored.
Key Changes
Minimum Size Requirements: A central organization must have at least five subordinate organizations to obtain a new group exemption, though the exemption may continue so long as at least one subordinate remains.
Single Group Exemption Letter: Each central organization may maintain only one group exemption letter, requiring organizations with multiple historical group rulings to evaluate consolidation during the transition period.
Uniform Purpose Statement: Subordinate organizations sharing the same purpose must adopt a uniform purpose statement, even though complete uniformity of governing documents is not required.
Supervision and Control: Central organizations must demonstrate general supervision or control over subordinates, which may be established through written agreements. The IRS will apply a facts-and-circumstances analysis and will not permit reliance on intermediate tiers to establish supervision.
Annual Reporting: Central organizations must file Supplemental Group Ruling Information (SGRI) annually to report changes in subordinate organizations and to add or remove subordinates.
Compliance Deadlines
The IRS resumed accepting new group exemption applications on January 20, 2026. Organizations holding group exemption letters in effect as of that date must complete required updates and filings by January 22, 2027.
Failure to file SGRI or failure to exercise adequate supervision or control may result in termination of the group exemption. If more than half of a group’s subordinates are automatically revoked, the IRS may terminate the group exemption entirely.
Practical Steps for Virginia Nonprofits
Organizations with existing group exemptions should:
Inventory all subordinate organizations
Confirm consistent Section 501(c) classification
Document supervision and control arrangements
Evaluate consolidation of multiple group exemption letters
Prepare for enhanced annual reporting well in advance of the January 2027 deadline
Virginia’s many large nonprofit networks and associations—including faith-based denominations and statewide advocacy organizations—should begin this process immediately.
Common Audit Triggers for Nonprofits
According to recent guidance for nonprofits, IRS scrutiny is increasing, driven by data analytics and targeted campaigns. Common triggers for audits include:
Discrepancies in Form 990 filings: Inconsistent reporting of revenues or expenses between different sections of the form
High fundraising expenses: Lack of correlation between fundraising costs and income generated
Unrelated business income: UBI that lacks proper allocation support or accounts for too much of overall revenue
Complex transactions: Related-party transactions and unusual financial arrangements
Political activities: Any activity that could be construed as political campaign intervention
Form 990 Red Flags
The IRS can initiate an audit for many reasons, but one of the most common is a red flag sent up by the annual Form 990 filing. Key areas of scrutiny include:
Incomplete or Inconsistent Information: Missing schedules, blank boxes, or unsigned forms can draw IRS attention. The agency considers incomplete returns to be unfiled returns, which could result in penalties.
Unreasonable Compensation: Excessive compensation paid to officers, directors, and high-ranking employees will be noticed. Compensation should be in line with benchmarks for similar positions at comparable organizations.
Excess Benefit Transactions: Transactions that provide economic benefit to disqualified persons—those in a position to exercise substantial influence over the organization—can lead to audits and costly intermediate sanctions.
Foreign Grant Activity: The IRS keeps a close eye on nonprofits operating overseas due to concerns about foreign control and funds being used for noncharitable purposes.
Diverted Assets: Organizations must disclose embezzlement or fraud if the gross value of illegally diverted assets exceeds 5% of gross receipts, 5% of total assets, or $250,000.
Preparing for an Audit: Proactive Compliance Measures
Nonprofit organizations should prioritize the following actions to reduce audit risk and ensure audit readiness:
1. Regular Reviews of Form 990
Ensure accuracy and consistency in filings. Review the form for completeness, proper schedule attachment, and alignment with your organization’s actual activities and finances. Our Form 990 preparation services can help ensure your filing is accurate and compliant.
2. Test Unrelated Business Income Positions
Verify proper allocation and documentation for any UBI. Ensure that UBI does not account for too much of your overall revenue, as this could jeopardize exempt status.
3. Update Compensation Policies
Use independent comparability data for compensation adjustments. Document the board’s review and approval of executive compensation.
4. Clear Gift Acceptance Policies
Maintain transparency and adherence to guidelines for accepting and valuing non-cash donations. For significant non-cash gifts, obtain qualified appraisals.
5. Document Lobbying Activities
Keep detailed records and ensure compliance with regulations. For 501(c)(3) organizations, lobbying must not constitute a substantial part of activities.
6. Conduct Mock Audits
Identify and address potential vulnerabilities before an actual audit. This can include internal reviews of financial records, governance documents, and compliance procedures. Our nonprofit audit and assurance services can help you prepare.
7. Maintain a Master Log of Records
Have a master log of all records: financial statements, bank statements, board minutes, governance policies, grant agreements, program evaluations, employee files, contractor arrangements, and related-party transactions. Follow a document retention policy specifying what you keep, where it is stored, how it is protected, and who the points of contact are.
8. Engage Outside Counsel or a Tax Specialist
Consider engaging outside counsel or a tax-specialist advisor with exempt-organization experience to conduct a risk assessment, looking for hazards such as prior governance lapses, questionable transactions, or insufficient board oversight. Create a plan to fix any weak spots. Our nonprofit consulting services can help strengthen your internal controls and governance practices.
During an Audit: What to Expect
If your organization is selected for an audit, the process typically begins with an Information Document Request (IDR) that outlines the scope and deadlines. This is followed by a scoping conference to identify issues and logistics. Fieldwork involves interviews and document reviews, leading to proposed adjustments if necessary.
Organizations have opportunities to respond to and resolve issues through closing agreements or appeals.
Key Steps During an Audit
Centralize Communications: Designate a single point of contact for efficiency. This ensures consistent messaging and prevents confusion.
Organize Responses to IDRs: Provide well-documented and clear responses to information requests. Organize documents in a logical manner that corresponds to the request.
Prepare Interview Witnesses: Ensure they are ready and informed. Employees and board members who may be interviewed should understand the scope of the audit and their role in responding.
Consider Strategic Resolution Pathways: Utilize options like Fast Track Settlement when beneficial. These programs can expedite resolution of issues.
Virginia Nonprofits: A Call to Action
The environment for Virginia nonprofits in 2026 demands proactive compliance. The combination of expanded federal enforcement authority, new IRS guidance, and heightened political attention means that governance, documentation, and transparency are no longer optional—they are essential for survival.
As one recent analysis notes, “We have seen how the scrutiny from the current administration has just sent shockwaves through the community, which makes this a moment where your formation decisions, your governance practices, your compliance posture, it’s gonna matter more than ever”.
Virginia nonprofits should take the following immediate steps:
Conduct a comprehensive compliance review of governing documents, board minutes, compensation practices, and political activity safeguards
Ensure all state registrations are current, including charitable solicitation registration with VDACS and sales tax exemption with Virginia Tax
Review Form 990 filings for accuracy and consistency
Document supervision and control arrangements if operating under a group exemption
Assess executive compensation practices in light of the expanded excise tax
Develop a rapid response plan in the event of an IRS or other government investigation
How Nova Tax & Accounting Can Help
At Nova Tax & Accounting Services , we understand the unique challenges facing Virginia nonprofits in this new environment. Our team provides independent financial statement audits, reviews, and compliance support that promote transparency and enhance financial reporting. We help organizations prepare for IRS scrutiny, maintain tax-exempt status, and strengthen internal controls.
Our services include:
Charitable solicitation registration support
Group exemption compliance
Schedule your free consultation today to discuss your organization’s compliance needs and ensure you are prepared for the scrutiny ahead.
