10 Key Issues in 501(c)(3) Nonprofit Legal Compliance: A Resource Roadmap for Public Charities

Published: May 2025

Nonprofits are confronting an environment of heightened legal risks. Some organizations—including groups whose views or activities are disfavored by those in power—are facing Congressional investigations, investigations by state attorneys general, and third party calls for IRS scrutiny. The Trump Administration has launched criminal investigations into several nonprofits and threatened to revoke the tax-exempt status of others. While nonprofits must comply with a number of laws and regulations, this roadmap highlights ten legal issues that government and private actors have recently cited to justify heightened scrutiny of certain organizations. The roadmap focuses on legal threats to public charities, which form the overwhelming majority of 501(c)(3) organizations, and identifies tools to help you strengthen your organization’s legal compliance.

Does your public charity:

1. Regularly submit Form 990?

For example: Does your organization submit a complete Form 990 to the IRS each year? Has it done so on a continuous basis since your organization was granted tax-exempt status?

Why it matters: Public charities are required to submit a version of Form 990 to the IRS annually. The form asks for information about the organizations’ activities, relationships, and governance, as well as their assets and financial transactions. Public charities with more than $500,000 in assets or more than $200,000 in gross receipts must fill out the full Form 990, while smaller organizations may submit shorter versions—the 990-EZ or 990-N. The IRS and state agencies use Form 990 to ensure organizations’ compliance with requirements for tax-exempt status. Once filed, an organization’s Form 990 is also generally available to the public. Exempt organizations that fail to file Form 990, or file an incomplete form, are subject to financial penalties. If an organization fails to file Form 990 for three consecutive years, it will automatically lose its tax-exempt status and may owe federal and state income tax.

Find out more: The IRS provides extensive guidance to organizations about how to file Form 990. The National Council on Nonprofits has additional tips and tools.

2. Engage in fundraising in the U.S.?

For example: Do you conduct email or direct mail fundraising campaigns, hold fundraising events, or submit proposals to U.S.-based foundations or other donors?

Why it matters: Approximately forty states have charitable solicitation laws that require organizations to register with a state agency before they can publicly solicit for charitable contributions within that state. In addition to registering, organizations are usually required to file periodic reports with the state’s charity regulator. Failure to comply with charitable solicitation laws can result in investigation or substantial fines; in some states it can be a serious criminal offense. State charity regulators can also revoke an organization’s state tax-exempt status and prohibit it from conducting activities in the state until it has fulfilled its registration requirements.

Find out more: Foundation Group has numerous resources and services to help organizations navigate charitable solicitation laws.

3. Work to influence legislation?

For example: Does your organization advocate for or against specific legislation at the federal, state, or local level? Does your organization encourage the public to contact lawmakers about action on specific bills?

Why it matters: The Internal Revenue Code provides that public charities and other 501(c)(3) organizations may only engage in a limited amount of lobbying. An organization may choose one of two tests to measure its compliance: lobbying must be an “insubstantial part” of its overall activities, or it may elect the 501(h) expenditure test. A public charity that engages in lobbying above these thresholds risks losing its tax-exempt status. Organizations that engage in any amount of lobbying at the state or local level may also be subject to state and local lobbying rules, which generally require disclosure of lobbying activities aimed at influencing state or local policy.

Find out more: Bolder Advocacy has a self-assessment tool to help 501(c)(3) charities assess their compliance with federal and state requirements related to advocacy, as well as practical guidance on the state lobbying rules in all 50 states and DC.

4. Support or oppose any candidate for elective public office?

For example: Does your organization contribute to political campaign funds? Does your organization make verbal or written public statements of its position in favor of or against any candidate for public office?

Why it matters: The Internal Revenue Code prohibits all 501(c)(3) organizations from directly or indirectly participating in a political campaign on behalf of or in opposition to any candidate for elective public office. Engaging in any political campaign activity may result in revocation of an organization’s tax-exempt status and the imposition of excise taxes. Organizations may, however, engage in certain voter education activities and activities intended to encourage people to participate in the electoral process if the activities are conducted in a nonpartisan manner.

Find out more: The National Council on Nonprofits has an overview of political campaign activities that includes practical guidance for compliance. The Congressional Research Service’s report on political activity restrictions also provides illustrative examples of permissible political activities.

For example: Does your organization receive any federal grants or contracts for which you are required to submit a certification regarding diversity, equity, and inclusion (“DEI”) programs?

Why it matters: Federal funding recipients may be required to make certifications that raise a risk of litigation and penalties under the False Claims Act (FCA). The FCA imposes liability on organizations that knowingly or recklessly make false claims to the government. The government may enforce the FCA on its own, but private actors may also initiate lawsuits on the government’s behalf. Organizations that are found to have violated the FCA can be liable for three times the amount of the government grant or contract at issue, in addition to significant civil penalties. The Justice Department has indicated that it seeks to increase FCA enforcement related to DEI; depending on an organization’s purpose and activities, FCA issues may also arise in the context of certifications related to terrorism.

Find out more: Charity & Security Network’s briefer provides more information on the FCA as well as steps nonprofits can take to mitigate risk of an FCA claim. Venable LLP produced a memo on the implications of the FCA for nonprofit organizations, and tracks trends and cases related to FCA litigation.

6. Do you have programming or policies that are motivated by the race, sex, or other protected trait of an applicant or employee?

For example: Does your organization make hiring or promotion decisions based in part on race or sex? Do you conduct trainings or other activities that separate staff into groups based on race or sex?

Why it matters: Federal law prohibits employment discrimination on the basis of race, color, religion, sex, and national origin. Organizations that engage in unlawful discrimination may have to pay compensatory and punitive damages; if they receive federal funding they may also face liability under the False Claims Act, as described above. Recent developments related to DEI have not changed the state of antidiscrimination law, but have sown confusion and concern among many nonprofits. The President’s Executive Order 14173 purports to target “illegal DEI and DEIA policies” in both public and private sector, and directs agencies to “encourage the private sector to end illegal discrimination and preferences, including DEI.” The Order was followed by a document from the Equal Employment Opportunity Commission (EEOC) laying out the agency’s position regarding policies, programs, and practices that may give rise to a DEI-related discrimination claim.

Find out more: Jackson Walker LLP’s article on DEI-related developments includes “practical takeaways for employers” to ensure legal compliance. Law professors Kenji Yoshino and David Glasgow suggest a “leveling” vs. “lifting” framework when assessing the legality of DEI policies; they also discuss ways employers can reduce legal risks through careful DEI-related communications.

For example: Does your organization participate in coalitions that engage with company shareholders or take other actions to further an ESG-related goal, such as reducing greenhouse gas emissions? Has your organization engaged in a group boycott to promote an ESG goal?

Why it matters: In recent years, legislators and state attorneys general have investigated nonprofits and for-profit institutions for antitrust violations stemming from their work to promote ESG goals. Responding to investigations can take up an organization’s time and resources; public investigations can also undermine an organization’s reputation and staff safety. While courts have held that “non-competitive political” boycotts are not subject to antitrust law, the difference between such boycotts and “commercial” boycotts is not always clear.

Find out more: Several law firms have shared advisories on the potential application of antitrust laws against nonprofits, which include preliminary guidance for nonprofits to navigate antitrust issues.

8. Do you support individuals, communities, or causes that may be connected to international terrorism in any way?

For example: Do you issue grants or contracts in countries where designated foreign terrorist organizations are present? Do you provide services to individuals who may have ties to designated groups?  

Why it matters: Federal law prohibits providing or attempting to provide “material support” to designated international terrorist organizations or terrorist acts, with serious criminal penalties. “Material support” is broadly defined and includes funding as well as “any property… or service,” from humanitarian aid to legal aid or other “expert advice or assistance.” Additionally, if the executive branch designates a nonprofit as supporting or engaging in terrorism, the Treasury Department can freeze the organization’s assets and the organization’s tax-exempt status is automatically suspended under IRS Code 501(p). The scope of these provisions has significantly expanded with the Administration’s designation of eight international drug cartels, the Houthis in Yemen, and armed gangs in Haiti as Foreign Terrorist Organizations or Specially Designated Global Terrorists.

Find out more: This GuideStar report provides guidance for grantmaking organizations seeking to comply with counter-terrorism regulations. Companies like Electronic Verification Systems and FinScan provide public charities and other nonprofits with list-screening and other compliance services.

9. Face heightened risk of being accused of fraud or other financial mismanagement?

For example: Does your organization work on sensitive issues that may make it more vulnerable to politically motivated allegations of fraud? Does your organization receive government grants or contracts?  

Why it matters: State Attorneys General have used consumer protection laws and other anti-fraud laws to launch investigations of nonprofits—investigations that in some cases courts have found to be based on harassment or retaliation. Nonprofits must comply with a host of state and federal laws governing embezzlement, theft or bribery, false statements, false claims, and mail or wire fraud. Nonprofits that receive federal grants and contracts are subject to additional restrictions. 

Find out more: Organizations seeking to demonstrate sound administrative and financial management might consult relevant resources from the National Council on Nonprofits and the Hartford Foundation for Public Giving.

10. Engage in political activities with foreign individuals or entities, or receive foreign funding?

For example: Does your organization lobby in the U.S. in partnership with a foreigner or an international nonprofit? Does your organization receive funding from a foreign government or foundation? Do you engage in public advocacy campaigns in the U.S. with overseas partners?

Why it matters: The Foreign Agents Registration Act (FARA) requires agents of foreign principals engaged in covered activities to register with the Justice Department unless they meet an exemption under the Act. The Justice Department has heightened enforcement of the Act in recent years, and Congress has investigated environmental, pro-Palestine, human rights, and other nonprofits for claimed violations of the Act. Covered activities include “political activities,” which are defined as attempting to influence U.S. public officials or public opinion on any domestic or foreign policy issue. A foreign principal includes a foreign government, foreign company or nonprofit, or foreign individual outside the U.S. An agency relationship can be created under the Act if one engages in covered activities at the direction or control, or even “request” of a foreign principal, or if one is funded in “whole or in major part” by a foreign principal. An organization does not have to register under FARA if it meets an exemption, however, including if it engages in activity that is purely academic or religious, or that is “not predominantly serving a foreign interest.”

Find out more: The Justice Department’s FARA FAQ section answers basic questions about the Act and its enforcement. ICNL maintains a FARA page which includes background on the Act and advisory opinions on FARA from the Justice Department impacting nonprofits.   

Conclusion

Public charities are facing closer legal scrutiny—particularly organizations working on politically sensitive topics. Reviewing the legal issues and resources listed above can help organizations respond to these evolving legal threats. In addition, organizations at heightened risk can take steps to prepare for a government investigation, including by adopting a retention policy for email and other documents, establishing a cybersecurity protocol, and having legal counsel ready if needed. Focusing on compliance and preparation now can help to minimize cost and disruption that could result from heightened scrutiny, allowing public charities to continue to do their work.

For more information contact Elly Page (epage@icnl.org) or Lily Liu (lliu@icnl.org).