Trump’s Harvard Threat Raises Specter of IRS Nonprofit Crackdown

President Donald Trump’s threat to yank the tax-exempt status of Harvard University fuels concerns that the president may use the IRS to target perceived adversaries.

That concern is leading some organizations to wipe diversity, equity, and inclusion references from their websites, their lawyers said. It’s also causing a broader chilling effect, where nonprofits worry about carrying out their mission if it could be construed as the “illegal DEI” referred to by President Donald Trump in a January executive order.

“This looks like the president is directing an agency he does not have control over to attack who he perceives as his political enemy,” said Philip Hackney, a professor in tax-exempt law at the University of Pittsburgh. “This is not the rule of law but the rule by whim of a president.”

Targeting Worries

The administration has yet to use the IRS to increase its scrutiny of tax-exempt applications and status to carry out its mandate against DEI, said Andrew Grumet, a Holland & Knight tax-exempt attorney.

Early signs indicate it could be a possibility.

Trump threatened to pull Harvard’s exempt status after the university said it wouldn’t accept his demands in exchange for federal funding. The federal government said it would freeze at least $2.2 billion in multiyear grants for Harvard.

It has also frozen money for Columbia, Princeton, Northwestern, and Cornell. The moves come as some universities have faced Republican criticism that schools haven’t done enough to address antisemitism on campus after a series of student protests against the Israel-Hamas war in Gaza.

In the private sector, a separate federal agency is investigating diversity programs in law firms.

Hackney said IRS workforce cuts might make it easier for the administration to change the way the agency evaluates tax-exempt status.

“You don’t have people who actually understand the law and believe in enforcing the law as it’s supposed to be enforced,” said Hackney, who spent several years working at the IRS.

The executive order came as Congress is looking at the nonprofit sector as a possible way to raise money to extend the GOP’s 2017 tax law—including eliminating nonprofit status of hospitals and expanding the endowment tax on private universities.

The sector is also watching to see if a bill that gives the Treasury secretary power to take away tax-exempt status of “terrorist-supporting organizations” resurfaces. Introduced last year, the bill sparked pushback from groups like the National Council of Nonprofits and the United Philanthropy Forum.

“The administration has taken an absurdly broad view of what a terrorism-supporting organization is,” said Brian Galle, a professor of tax policy at Georgetown Law. “That could be another thing down the line that organizations should worry about.”

Politicization of the IRS is historically unpopular.

When former President Richard Nixon tried to use the agency against his political enemies in the 1970s, Congress passed a law making that a crime, Galle said. And a 2013 controversy surrounding the IRS use of certain keywords associated with conservative groups to choose nonprofits to audit also caused widespread uproar, especially from those on the right.

Laws governing which organizations can get tax-exempt status aim to be objective. Punishing organizations for ideological differences beyond programs that illegally discriminate against certain races would be a violation of the First Amendment, Hackney said.

“Unfortunately, there are still a lot of things that I think an aggressive administration that was determined to do damage could probably do,” Galle said.

Legal Challenges

The American Alliance for Equal Rights has asked the IRS to investigate the Gates Foundation, the Creative Capital Foundation, and The Lagrant Foundation because of their scholarship and grant programs that are only open to people of color.

The group is led by conservative activist Edward Blum, who also led the Students for Fair Admissions, which successfully challenged Harvard’s affirmative action process. Blum is spearheading multiple lawsuits against companies, law firms, and other schools because of programs that he says are discriminatory.

The complaints to the IRS are a first for the group, Blum said. He expects that an IRS ruling that the foundations’ programs are illegal would have a large impact on other foundations with similar programs.

“These organizations are free to operate as they wish—but not with the public subsidy that tax-exempt status provides,” Blum said in a statement.

But many nonprofits don’t have the money for legal battles defending their tax-exempt status, Grumet said, leading them to take the easier route to remove DEI references from their websites and conduct internal reviews.

Appetite for Risk

Grumet said he spends about a third of his time now on “DEI audits,” where he helps organizations understand the line between legal and illegal DEI initiatives. Generally, programs that explicitly exclude another race are illegal. But programs that focus on a person’s experiences as an individual rather than their race aren’t a problem.

Still, each organization must decide their own appetite for risk, and there’s concern that any DEI references on websites could lead to increased enforcement, Grumet said. The University of Michigan cut a DEI program in response to administration pressure, and multiple other universities have reportedlyremoved DEI language from their websites.

The uncertainty around if, when, and how the IRS will enforce the DEI order is also making it harder for nonprofits to provide grants to the communities they serve, said Sara Barba, a principal at Integer LLC who specializes in tax policy and nonprofits.

“There is not a desire to completely change philanthropy based on a somewhat unclear order right now until it becomes clearer how it’s going to be enforced or carried out by the agency heads,” Barba said.