Karen Kelly and Melissa Wiley co-wrote a Bloomberg Law article titled “IRS Vow to Amp Up Audits Puts Tax-Exempt Entities in Crosshairs.”
In the article, Karen and Melissa explain the possible changes in tax enforcement of exempt organizations after President Trump’s September memorandum ordering the IRS commissioner to “take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism” and to refer those entities to the Department of Justice (DOJ) “for investigation and possible prosecution.”
Exempt organizations can be subject to criminal tax investigations and prosecutions just like individuals and businesses. However, practitioners should now be prepared for criminal grand jury investigations to be the primary method of investigation for exempt organizations in the criminal space, instead of standard civil examinations.
In civil examinations, there is an opening letter and/or conference and requests for information via Information Document Requests (IDRs), and there may be in-person interviews as well. There is also written correspondence outlining both the target’s and the IRS’ positions. However, criminal tax investigations are often more opaque, and the matter is handled by prosecutors at DOJ rather than resolved between the target and the IRS.
For criminal tax matters, the prosecutor uses the tools of the grand jury to collect evidence and to determine if probable cause exists that a tax crime has been committed. If the submission meets this standard, the case is forwarded to the appropriate U.S. Attorney’s Office for a grand jury investigation.
Karen and Melissa elaborate on why a grand jury investigation is the most powerful tool in enforcing U.S. criminal laws: grand juries search for evidence of criminal conduct, which results in a broad investigative function. The target is also not entitled to legal representation during grand jury proceedings. Only the prosecutor appears before a grand jury, and testifying witnesses cannot have their attorneys present while they are questioned. Secrecy is also required in grand jury proceedings to safeguard both the target and jurors.
If an exempt organization, or its representatives are indicted by a grand jury,the consequences are severe. . In contrast, the “worst case scenario” of civil tax examinations of exempt organizations is the loss of their tax-exempt status.
You can learn more about the shift to criminal tax enforcement in exempt organization examinations by reading the article here.
About Karen
The former acting head of the Justice Department’s Tax Division, Karen joined Kostelanetz after more than 30 years of federal and state trial practice, including prosecuting tax and white-collar crime. Her practice focuses on defending clients in government investigations, including in criminal tax and white-collar matters, and representing clients in state and federal tax controversies.
About Melissa
With more than 20 years of experience in tax law, Melissa has represented a diverse range of clients, from large corporations to high-net-worth individuals, in complex disputes with federal and state taxing authorities. Known for her calm, empathetic style, Melissa excels at distilling intricate tax issues into clear, actionable insights — helping her clients efficiently resolve disputes and focus on what matters most in their businesses and lives.
