Navigating Uncertain Times: How Nonprofits Can Prepare for Increased Scrutiny  – Charity Lawyer Blog

Nonprofits today are operating in a rapidly shifting environment where legal compliance, government scrutiny, and funding uncertainties are becoming more complex. With recent reports of politically motivated investigations, funding freezes, and compliance challenges, nonprofit leaders must be proactive in protecting their organizations.

Whether your nonprofit receives government funding, operates DEI-related programs, or simply wants to ensure long-term stability, now is the time to assess your risk, tighten compliance, and develop contingency plans.

1. Watch Out for Targeted Scrutiny

Some organizations have reported receiving suspicious emails asking about their policies, particularly on DEI (Diversity, Equity, and Inclusion). These could be phishing attempts designed to collect information that may later be used against them.

• Be cautious with unsolicited requests for information—never click unknown links or share internal policies unless you verify the sender.
• Review your email lists and check for suspicious sign-ups from unknown domains.
• Train staff to recognize phishing attempts and maintain cybersecurity best practices.

2. Strengthen Compliance to Reduce Legal Vulnerabilities

Regulatory scrutiny is increasing, making it more important than ever for nonprofits to be fully compliant with existing laws. Even if your organization is not a direct target, mistakes in compliance could expose you to enforcement actions.

• Ensure your 990 filings, state registrations, and annual reports are up to date.
• Properly classify employees vs. independent contractors and follow all applicable labor laws.
• If your nonprofit engages in advocacy, make sure all required disclosures are accurately reported.
• Review website language, public statements, and materials to ensure they align with legal guidelines and do not create unnecessary risks.

Now is an ideal time to engage in a legal checkup  to ensure compliance mistakes are kept to a minimum. 

3. Be Strategic in DEI & Anti-Discrimination Programs

Many nonprofits have built programs to promote diversity and inclusion. However, some government agencies and funders are now asking grantees to certify that their programs do not include race-based criteria.

• Consider reframing DEI initiatives around “anti-discrimination” or “inclusive access,” which are legally protected concepts.
• Stay mission-aligned while ensuring compliance with new funding requirements.
• If your organization relies on federal funding, assess whether new certification requests could impact your eligibility.

4. Prepare for Government Funding Cuts & Freezes

Nonprofits receiving federal grants are facing unprecedented funding disruptions. USAID recently terminated 92% of its grants and contracts, and other agencies may follow. Some nonprofits have reported receiving vague, politically charged questionnaires that could be used to justify further funding cuts.

• Review your funding sources and assess the risk of potential cuts.
• Develop alternative funding strategies such as major gifts, donor-advised funds, and endowments to reduce reliance on government grants.
• Strengthen financial reserves to weather temporary funding disruptions.
• Monitor funding policies and be prepared to respond quickly to new restrictions.

5. If Your Organization Is at Risk, Focus on Protecting Core Programs

Preserving key programs should be the top priority for organizations facing financial hardship. If funding is uncertain, now is the time to explore creative solutions that keep essential services running.

• Identify the most mission-critical programs and ensure resources are allocated to sustain them.
• Consider partnerships, joint ventures, or sharing administrative functions with other organizations to reduce costs.
• Explore merging with a like-minded nonprofit if financial survival is at risk.
• Look for ways to collaborate on grants and funding opportunities to increase financial stability.
• Engage key stakeholders, including major donors and board members, to develop contingency plans.

6. Expect Delays in IRS Processing & Nonprofit Approvals

With staffing cuts at the IRS and potential government shutdowns, processing times for nonprofit tax-exempt applications (Form 1023) and compliance reviews are expected to slow down. Nonprofits seeking expedited IRS approvals are now being asked to provide affidavits proving financial hardship if they don’t receive exemption quickly.

• If you’re starting a new nonprofit, file your IRS application as soon as possible to avoid long delays.
• If you’re seeking expedited approval, be prepared to provide documentation of financial urgency.
• Expect longer review times for compliance audits and exemption requests.

7. Build Resilience & Collaborate With Sector Leaders

Nonprofits should think proactively about how to navigate these challenges. Consider partnering with membership organizations, legal advisors, and advocacy groups to share resources and strategies.

• Join nonprofit advocacy groups that can provide legal guidance and coordinate responses to policy changes.
• Plan for different scenarios—what would your nonprofit do if certain funding sources were cut or regulatory burdens increased?
• Encourage transparency and professionalism in all operations to maintain public trust.

Final Thoughts

The nonprofit sector is facing a period of uncertainty, but organizations that prepare now will be in the best position to withstand challenges. Stay compliant, be cautious with sensitive information, diversify funding sources, and engage in strategic planning. By taking these steps, nonprofits can continue serving their missions effectively, even in unprecedented times.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.