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By , CPA, Faculty Advisor for TerpTax

News — You know that feeling when you hear a knock at the door and somehow just know it's bad news? That's pretty much how nonprofit leaders feel when they get certain letters from the IRS. Their prized —that golden ticket that shields them from federal income taxes and makes donors feel warm and fuzzy about tax deductions—could be on the line.

But what does it take for the IRS to snatch away this coveted status? Can a president with a grudge just make a phone call and poof—your tax exemption disappears? And just how common is this organizational nightmare scenario?

How the IRS Can Pull the Tax-Exempt Rug Out from Under You

The IRS has several ways to revoke that precious tax-exempt status, but don't panic just yet.

The most common way organizations lose their status is almost embarrassingly mundane—they simply forget to file their paperwork. I once knew a small environmental nonprofit that was doing amazing restoration work along Chesapeake Bay. Their volunteers were out planting trees and cleaning shorelines while their administrative duties... well, let's just say Mother Nature was getting more attention than Uncle Sam. Three years of missing Form 990s later, and they were automatically booted from tax-exempt paradise. This "automatic revocation" happens by law rather than through any dramatic government investigation.

For the more serious stuff, the IRS might open an investigation after an audit raises red flags. Think of it as the tax equivalent of being called to the principal's office—except the principal can fundamentally alter your organization's financial future. Common violations that might get you in this pickle include:

The process isn't as sudden as a lightning strike, though. You'll typically face an IRS examination, get chances to plead your case, and go through multiple levels of review before any final determination. It's like a drawn-out episode of a courtroom drama, just with more paperwork and fewer dramatic speeches.

I once attended a conference where a former IRS agent described revoking a nonprofit's status as the “nuclear option.” He said they'd exhausted every other possibility with one particular health organization that had essentially become a profit-generating machine for its founder, who was buying vacation homes with donor money. Even then, the process took nearly two years.

The IRS generally prefers to work with organizations to fix problems before dropping the revocation hammer. They might impose intermediate sanctions (fancy talk for penalties) before going full doomsday. When revocations do happen, for substantial reasons rather than filing failures, it's typically after years of warnings and noncompliance.

The Bob Jones University Saga: When the Supreme Court Weighs In

Picture this: It's 1970, and the civil rights movement has fundamentally changed America's conversation about race. The IRS announces it won't grant tax-exempt status to private schools with racially discriminatory policies. Meanwhile, Bob Jones University prohibited interracial dating and marriage among its students.

In 1976, the IRS revoked the university's tax exemption. Bob Jones University fought back all the way to the Supreme Court, which ruled in 1983 that the IRS was within its rights. The Court essentially said: tax-exempt organizations must serve a public purpose and can't run contrary to established public policy, including racial discrimination.

This wasn't just another tax case—it established a crucial precedent about what limits can be placed on tax-exempt status and gave the IRS authority to define what constitutes charitable purposes consistent with public policy. The key takeaway? Tax-exemption isn't a constitutional right; it's a privilege the government grants for the public's benefit.

Fast forward to 2010-2012, when the IRS faced accusations of unfairly targeting conservative groups—particularly those with “Tea Party” or “Patriot” in their names—by slow-walking or denying their applications for 501(c)(4) status (a cousin to the 501(c)(3) designation).

A nonprofit attorney I know represented several of these organizations. She described endless rounds of additional questions and documentation requests that weren't being asked of other applicants. The controversy sparked congressional investigations, leadership shakeups at the IRS, and reforms in how the agency reviews applications. This episode highlighted just how sensitive IRS enforcement decisions can be and why political neutrality in tax administration isn't just nice—it's necessary.

Can Presidents Play the Revocation Card?

Here's where things get interesting (and a bit Machiavellian). While presidents can't directly revoke tax exemptions—that power sits with the IRS, which operates as an independent agency—history shows some have certainly tried to exert influence.

The most notorious example? The Nixon administration, which maintained an actual "enemies list" and allegedly attempted to use the IRS as a political weapon. 

The Nixon tapes eventually revealed the president discussing using the IRS against political enemies, saying: “We have the power, but we're not using it.” This wasn't just ethically questionable, it became part of the articles of impeachment against Nixon, specifically cited as an abuse of power. The scandal ultimately led to reforms strengthening the IRS's independence from political pressure.

More recently, critics accused the Obama Administration of involvement in the targeting controversy I mentioned earlier, though investigations found no direct White House involvement. Nevertheless, the episode reinforced public concerns about potential political influence in tax enforcement.

Keeping Your Nonprofit Safe

For organizations worried about maintaining their tax-exempt status (which should be all of them), the best approach is maintaining meticulous records, sticking to the operational requirements of 501(c)(3) status like they are sacred commandments, and responding to any IRS inquiries faster than you'd answer a call from your biggest donor.

Keep those board minutes reviewed, approved, and up to date…documenting the board’s decision and the reasons. That's solid advice for any nonprofit that wants to keep the IRS happy and that tax-exempt status secure.

After all, that knock on the door doesn't have to be bad news if you've done your homework.

Samuel Handwerger is a full-time lecturer in the accounting and information assurance department at the University of Maryland’s Robert H. Smith School of Business. He is co-director of the  and faculty advisor to a pair of student-volunteer organizations:  and , the nonprofit organization affiliated with UMD that provides free tax preparation services for low to mid-income individuals in the University of Maryland, College Park community.