On March 31, 2025, the Trump administration initiated a "comprehensive review of federal contracts and grants at Harvard University and its affiliates" by the Joint Task Force to Combat Anti-Semitism (Task Force) to ensure that Harvard is "in compliance with federal regulations, including its civil rights responsibilities."1 Later that same day, Alan Garber, Harvard's President, emailed a statement to the Harvard community expressing an intent to engage with the Task Force.2
In response, on April 3, 2025, the administration notified Harvard that it would be "reviewing Harvard's federal funding" and broadly outlining the areas of reform that the administration asserted are necessary for a "continued financial relationship" with the U.S. government.3
On April 11, 2025, the administration sent another letter to Harvard incorporating and superseding the terms of its April 3, 2025 communication.4 Among other terms, the administration demanded that Harvard discontinue all diversity, equity, and inclusion (DEI) programs, make changes to its governance structure, and permit significant government oversight.
Three days later, on April 14, 2025, Harvard, through its attorneys, responded to the administration by rejecting its demands, which, it asserted, "go beyond the lawful authority of this or any administration."5 A few hours later, federal officials announced that they would freeze more than $2 billion in federal funding for Harvard.
On April 16, 2025, several news outlets reported that the Trump administration has asked the Internal Revenue Service (IRS) to revoke Harvard's tax-exempt status. On April 21, 2025, Harvard filed a lawsuit to halt the funding freeze.
Whether or not the IRS ultimately examines Harvard's tax-exempt status and proposes to revoke it, the administration's request of the IRS is an indication that this administration intends to use tax-exempt status as a tool to threaten organizations that it believes are not acting in accordance with its executive orders and policy goals.
Precedent for Revoking Tax-Exempt Status—The Illegality Doctrine
The president does not have unilateral authority to revoke an organization's tax-exempt status, and federal law prohibits senior officials of the executive branch of the U.S. government from requesting (directly or indirectly) any officer or employee of the IRS to conduct an audit or other investigation of any particular taxpayer.6 Even so, the IRS has the ability, based on the application of the judicially created "illegality doctrine," to both deny tax exemption applications filed with the IRS and retroactively revoke existing organizations' tax-exempt status.
In Bob Jones University v. United States, 461 U.S. 574, 592 (1983), the Supreme Court addressed whether nonprofit private schools with racially discriminatory admissions policies qualified as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. Because of Bob Jones University's racially discriminatory policies, the IRS had revoked the university's pre-existing tax-exempt status.
The Court concluded that the IRS had the authority to revoke the organization's tax-exempt status because "the agency Congress vests with administrative responsibility must be able to exercise its authority to meet changing conditions and new problems."7The Court emphasized that since "every pronouncement of [the Supreme] Court and myriad Acts of Congress and Executive Orders" over the previous quarter of a century "attest a firm national policy to prohibit racial segregation and discrimination in public education," the school's discriminatory practices went against public policy.8
The illegality doctrine, as announced by the Supreme Court in Bob Jones, serves as a basis for denial or revocation of tax-exempt status when an organization has an "illegal" purpose or violates the "fundamental public policy" against racial discrimination in education. Since Bob Jones, courts have found that when a taxpayer challenges the IRS's denial of tax-exempt status, "the burden is on the taxpayer seeking exemption to demonstrate that it is in fact entitled to tax-exempt status."9
Additionally, Executive Order 14173 is aimed at "ending illegal discrimination" and orders federal agencies to identify civil compliance investigations into, among other organizations, certain foundations with large endowments and large nonprofits. There is no legal definition of "DEI" or "illegal DEI," and there has been little guidance so far with respect to what the administration considers illegal DEI activities, but the administration seems to be targeting race-based and gender-based DEI activities. The IRS could, based on EO 14173, apply the illegality doctrine to deny or revoke an organization's tax-exempt status.
What Organizations Can Do Now if the "Illegal DEI" EO Implicates Tax-Exempt Status
As we have recommended in previous client alerts, organizations should consider a legally privileged review to assess the risk that any of its governance documents, materials, or programming is race-exclusive, ethnicity-exclusive, gender-exclusive, or even just race-, ethnicity-, or gender-conscious. For example, if the name of an organization is perceived to relate to a DEI initiative, the organization should consider changing its name. Similarly, if the organization's exempt purpose is perceived to relate to DEI, organizations may want to consider adapting their activities in a way that minimizes exposure to loss of tax-exempt status—all of which depends on the organization's risk profile and tolerance.
What Happens if the IRS Proposes Revoking Tax-Exempt Status
If your organization receives a notice of proposed adverse determination with respect to the organization's tax-exempt status, the organization has the right to engage in a multistep appeals process before losing its status.
- First, request a conference with the manager of the IRS employee who issued the letter.
- Next, file a protest within 30 days of the date of the formal written letter from the IRS.
- The organization (and its representative) will have a conference with an IRS Appeals Officer.
- If settlement is not reached during the conference, the IRS will send a final determination that the organization does not qualify for exemption from federal income tax.
- The organization has 90 days from the date the final determination was mailed to appeal by petitioning one of (1) the U.S. Tax Court, (2) the U.S. Court of Federal Claims, or (3) the federal district court in the District of Columbia for a declaratory judgment as to the organization's qualification for exempt status.
- Upon receipt of a final determination letter from the IRS, the organization's tax-exempt status has been revoked as of the effective date in the letter and remains revoked unless and until a court decides otherwise.
- If the organization believes it has corrected the issue(s) that led to revocation, it may apply to the IRS for reinstatement of its tax-exempt status.
Footnotes
2. https://www.harvardmagazine.com/2025/03/trump-administration-harvard-funding-challenges
3. https://s3.documentcloud.org/documents/25879226/april-3-harvard-preconditions-letter.pdf
6. 26 U.S.C. § 7217.
7. Bob Jones, 461 U.S. at 576.
8. Id. at 593.
9. See e.g.,Fund for the Study of Econ. Growth & Tax Reform v. IRS, 161 F.3d 755, 759 (D.C. Cir. 1998). tax-exempt tax-exempt
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