Not-for-profits face new threats to their tax-exempt status on two fronts. First, organizations may face scrutiny from the Internal Revenue Service (IRS) for adhering to the principles of diversity, equity, and inclusion (DEI). Second, organizations that provide services to historically underserved populations face threats from third parties that may file complaints with the IRS requesting their tax-exempt status be revoked.1
Diversity, Equity, and Inclusion
After Harvard University declined to take certain actions requested by the Trump administration relating to faculty hiring, student admissions, and its DEI programs, President Trump indicated that Harvard’s tax-exempt status would be revoked.
Do organizations that embrace DEI place their tax-exempt status in jeopardy, and if so, what should they do?
Most tax-exempt organizations do not share Havard’s public profile, making them less appealing anti-DEI targets. Also, several safeguards exist to protect organizations whose DEI programs comply with current law. Federal law prohibits the president, vice president, or any employee of the office of the president to direct or request the IRS to conduct an audit or investigation of any taxpayer (which includes tax-exempt organizations).2 Typically, the IRS seeks revocation of an organization’s tax-exempt status through an audit process, which includes appeal rights within the IRS.3 If appeals within the IRS prove unsuccessful, an organization may further appeal the revocation of its tax-exempt status to certain federal courts4 and, ultimately, to the US Supreme Court.
The key to protecting an organization from a claim that its DEI policies jeopardize its tax-exempt status is obtaining assurance that the policies comply with current nondiscrimination laws. Organizations that are committed to DEI would be well-advised to have counsel knowledgeable in these matters review their DEI policies.
Providing Services to the Historically Underserved
On April 1, 2025, the American Alliance for Equal Rights (AAER) filed complaints with the IRS challenging the tax-exempt status of three organizations for providing services exclusively to historically underserved populations.5 One complaint challenged the tax-exempt status of the Bill and Melinda Gates Foundation because it offers a college scholarship program solely for individuals identifying as racial or ethnic minorities, to the exclusion of white students. Another complaint alleged that the Lagrant Foundation offers scholarships, mentorships, and career opportunities solely to African American/Black, Alaska Native, Native American, Asian American/Pacific Islander, and Hispanic/Latino persons, to the exclusion of white students and professionals. A third complaint alleged that Creative Capital Foundation provided grants and career support solely to Asian, Black, Indigenous, and Latinx artists, to the exclusion of white artists.
IRS regulations define “charitable” in nonracial terms. They refer to “relief of the poor and distressed and of the underprivileged.”6 Notwithstanding, many organizations that focus on reversing the effects of prior discrimination against minorities, the handicapped, LBGTQ+, and similar groups define eligibility for charity using classifications similar to those complained of by the AAER. The IRS has never challenged these classifications in the past. However, recent court decisions reflect that the legal standards regarding the use of these classifications are shifting.7
What should organizations that define eligibility for charity using racial, gender-based, or similar classifications do?
- They can reexamine and redefine eligibility criteria to eliminate those classifications. This is the course chosen by the Bill and Melinda Gates Foundation. On April 11, 2025, the Gates Foundation announced that it would open its scholarship program to all Pell Grant–eligible students.8
- Organizations may also choose to stay the course. The IRS has not announced any initiative targeting charities for using racial or other criteria in the selection of the recipients of charity. Although organizations such as the AAER can file complaints with the IRS against charities that they disagree with, the IRS is not required to act on those complaints. If the IRS changes course, the risk of being targeted appears low, at least at first. Also, it is far from settled that using racial or other criteria to determine eligibility for charity is improper, or even if so, that it would constitute grounds for loss of exemption.
Regardless of the risk of being targeted, charitable organizations that use racial, ethnic, gender-based, and similar criteria to define eligibility for its programs and services would be wise develop strategies to respond to the changing political landscape.
If you have any questions regarding the content of this alert, please contact Ray McCabe, partner, at rmccabe@barclaydamon.com, or another member of the firm’s Health & Human Services Providers Team or Corporate Practice Area.
1Susan Heavey and Jonathan Allen, “Trump says Harvard University’s Tax-Exempt Status Will be Revoked,” Reuters, May 2, 2025, https://www.reuters.com/world/us/trump-take-away-harvards-tax-exempt-status-2025-05-02/.
2Internal Revenue Code Section 7217.
3IRS Pub 892, How to Appeal an IRS Determination on Tax Exempt Status (Rev. 2-2017).
4The United States Tax Court, the United States Court of Federal Claims, or the US District Court for the District of Columbia. Internal Revenue Code Section 7428(a)(2).
5American Alliance for Equal Rights, “American Alliance for Equal Rights Files Request to IRS to Examine Racial Practices at Three Tax-Exempt Foundations: Gates Foundation, Lagrant Foundation and Creative Capital Foundation,” press release, April 1, 2025, https://americanallianceforequalrights.org/american-alliance-for-equal-rights-files-request-to-irs-to-examine-racial-practices-at-three-tax-exempt-foundations-gates-foundation-lagrant-foundation-and-creative-capital-foundation/.
6Treas. Reg. § 1.501(c)(3)-2(d).
7See Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023); American Alliance for Equal Rights v. Fearless Fund Mgt., 103 F.4th 765 (11th Cir. 2024).
8Gates Foundation, “Gates Foundation Statement on Scholarship Program,” press release, April 11, 2025, https://www.gatesfoundation.org/ideas/media-center/press-releases/2025/04/scholarship-program.