The current administration’s focus on tax-exempt organizations is no secret.  But the recent release of the IRS Databook for FY25 shows that the IRS is following through on the administration’s publicly announced objectives.  Based on information from IRS Databooks for the last 10 fiscal years, the year-over-year increase (FY24 to FY25) in IRS examinations of tax-exempt organizations is extraordinary.

Tax-exempt audit data (FY16 to FY25)

The chart below shows the year-over-year increase (or decrease) in IRS examinations of tax-exempt organizations from FY16 to FY25.

IRS examinations of Forms 990, 990-EZ, and 990-N increased 33.48% from FY24 to FY25

IRS examinations of all tax-exempt organizations increased year-over-year only 3 times from FY16 to FY25: (1) FY17-FY18 increased by 1.07%, (2) FY21-FY22 increased by 1.30%, and (3) FY24-FY25 increased by 12.85%. And examinations of only Forms 990, 990-EZ, and 990-N increased year-over-year only twice over that same period: (1) FY19-FY20 increased by 6.14%, and (2) FY24-FY25 increased by 33.48%.

The 33.48% increase in IRS audits of organizations filing Forms 990, 990-EZ, and 990-N from FY24 to FY25 is shocking given that IRS audits of those same forms decreased year-over-year 7 times from FY16 to FY25.  If that were not enough, the only other year-over-year increase in IRS audits of those forms was 6.14% (FY19-FY20) or 445% less of an increase than from FY24 to FY25.

Although the administration’s public statements suggest its focus has shifted from educational tax-exempt organizations to left-leaning organizations or organizations formed by political adversaries, the numbers make clear that no tax-exempt organization is immune from IRS scrutiny. 

Tax-exempt organizations should prepare in advance for IRS audits

The exponential increase in examinations from FY24 to FY25 provides a stark reminder to tax-exempt organizations that they should prepare in advance of an IRS audit.

Taking action now is crucial as any missteps (even minor ones) could spell disaster.  For example, the IRS could revoke an organization’s exempt status which may result in the recharacterization of tax-exempt bonds as taxable bonds.  And the IRS could revoke an organization’s exempt status retroactively which would have significant impacts both financially and from a tax perspective as the IRS could require donors to amend prior year returns.

While certain large tax-exempt organizations have attracted government scrutiny since FY24, the raw numbers suggest that smaller organizations are likewise experiencing increased audit activity.  Larger tax-exempt organizations have the financial resources to defend against an IRS examination, but most smaller organizations likely do not.  In either case, organizations should take steps now to potentially reduce audit defense (and possible litigation) costs by examining prior-year income and expenses, identifying prior-year donors, enforcing (or enacting) financial controls, and monitoring current income and expenses. 

There may be other areas in which tax-exempt organizations can batten down the hatches, but those areas may not be known until the administration publicizes the next investigation. A head start may be frowned upon during the World Cup, but tax-exempt organizations shouldn’t worry about being offsides as planning ahead could be key to maintaining exempt status.