Illegality or violation of public policy. This is the theory behind threats to revoke exemption over “illegal DEI,” or over an organization’s role in immigration, reproductive health, or environmental advocacy the government characterizes as unlawful. Ellen Aprill, in a widely circulated 2025 paper, walks through this and three related doctrines in detail and concludes that organizations have real statutory and constitutional arguments available to push back, but the doctrine itself is genuinely unsettled and worth taking seriously.

Terrorism designation. As we’ve written before, revoking exempt status, for any reason, still requires the IRS to follow an actual examination process with notice and appeal rights; a terrorism designation carries its own separate legal framework and consequences, and conflating the two threats can cause organizations to over- or under-react to either one.

False Claims Act exposure. Organizations receiving federal funds are exposed to FCA liability, which carries treble damages and allows private whistleblowers to bring claims on the government’s behalf, for misrepresentations in grant applications or reporting.

Fraud enforcement. The Department of Justice stood up a new National Fraud Enforcement Division in April 2026, with enforcement priorities announced in August 2026 that explicitly include federal grants and benefits paid to nonprofits alongside other federal spending. Civil False Claims Act inquiries can now run in parallel with criminal fraud investigations out of the same office, which raises the stakes of any inquiry considerably.