The year 2025 brought meaningful shifts in nonprofit tax compliance, IRS oversight, and financial reporting expectations. As the sector adapts to regulatory changes, digital modernization, and new legislative guidance, nonprofits are facing greater scrutiny and higher expectations for transparency and documentation.
Below is a comprehensive look at the major nonprofit tax developments that shaped 2025 — along with what organizations should prepare for in the year ahead.
1. Working Families Tax Cuts Act: New Rules Impacting Payroll & Future Savings Accounts
One of the most significant legislative developments was the implementation of provisions under the Working Families Tax Cuts Act, including updates to payroll credits and the introduction of Trump Accounts, a new long-term savings mechanism for eligible children.
Nonprofits with employees needed to update payroll systems and review withholding, reporting, and documentation practices.
Looking Ahead to 2026:
The IRS is expected to issue more detailed guidance impacting employer responsibilities and coordination with future employee benefits.
2. Updated IRS Guidance on Charitable Contribution Substantiation
2025 saw renewed IRS emphasis on proper donor documentation, including:
- contemporaneous written acknowledgments
- required disclosure language
- appraisal requirements for large non-cash gifts
- substantiation for volunteer out-of-pocket expenses
- consistency in in-kind donation reporting
These updates affected fundraising teams, finance staff, and donor stewardship practices.
2026 Outlook:
Expect increased enforcement around inaccurate or incomplete documentation, especially for in-kind contributions and gifts requiring valuation.
3. Heightened IRS Scrutiny on Worker Classification
Nonprofits continued to face heightened oversight related to independent contractor vs. employee decisions.
Organizations that rely heavily on:
- program staff paid hourly or seasonally
- grant-funded workers
- instructors, artists, or gig workers
- consultants functioning like employees
… saw increased need to review classification policies.
2026 Outlook:
IRS examinations are expected to continue focusing on payroll taxes, Forms W-2 vs. 1099, and misclassification trends.
4. Growing Oversight of Donor-Advised Funds (DAFs)
DAFs remained under the spotlight throughout 2025 due to concerns about:
- distribution timing
- transparency in grantmaking
- donor advisory privileges
- fund-to-fund transfers
Many nonprofits receiving DAF grants had to update acknowledgment and reporting practices.
2026 Outlook:
Treasury is expected to propose new DAF regulations that may alter reporting requirements and operational standards for both sponsoring organizations and grantees.
5. Unrelated Business Income Tax (UBIT) Focus on Digital Revenue
Nonprofits generating revenue from digital or nontraditional sources saw increased IRS examination, particularly relating to:
- online advertising
- digital sponsorships
- affiliate marketing
- facility rentals
- sale of goods or digital products
- lead-generation partnerships
The challenge for nonprofits was properly identifying, allocating, and documenting unrelated activities.
2026 Outlook:
Additional IRS clarification is anticipated regarding digital advertising and the treatment of mixed-purpose revenue streams.
6. State Charity Registration Modernization
States continued updating their charitable solicitation systems, including:
- online-only registration platforms
- revised audit or review thresholds
- updated fee structures
- new mandated disclosure language
- modified renewal deadlines
Organizations fundraising in multiple states faced a more complex compliance environment.
2026 Outlook:
More states will adopt modernized portals, and cross-state enforcement is expected to increase.
7. Heightened Attention to Governance, Conflicts, and Related-Party Transactions
Form 990 reviews revealed strong focus on:
- board independence
- conflict-of-interest policies
- Schedule L reporting
- related-party transactions
- governance disclosures
- compensation transparency
Organizations with incomplete or inconsistent governance documentation faced increased review.
2026 Outlook:
Expect continued emphasis on governance and compensation clarity in Form 990 filings.
8. Increased Focus on Restricted Funds & Financial Transparency
One of the most common issues flagged in 2025 audits involved use of restricted funds, including:
- misaligned spending
- unclear donor intent documentation
- incomplete fund tracking
- weak internal controls
2026 Outlook:
Nonprofits should anticipate stronger expectations for fund accounting accuracy and donor communication practices.
What Nonprofits Should Prepare For in 2026
Based on IRS signals, sector trends, and federal/state regulatory activity, nonprofits should plan for:
✔ A more fully digital IRS experience
Expanded digital notices, online account tools, and e-file mandates.
✔ Tougher documentation standards
Especially for in-kind gifts, volunteer expenses, fringe benefits, and governance policies.
✔ Continued pressure on worker classification
More audits, more SS-8 determinations, and closer review of gig-style nonprofit work arrangements.
✔ UBIT guidance for online activities
Particularly sponsorships, ads, digital products, and affiliate revenue.
✔ More state-level oversight of charitable solicitation
New disclosure laws and compliance expectations.
Final Thoughts
2025 marked a significant shift in how nonprofits must approach tax compliance, financial transparency, and governance documentation. Looking ahead, 2026 will favor organizations that strengthen internal controls, modernize systems, and proactively align with evolving IRS expectations.
TrimnerBeckham continues to support nonprofits with the clarity, compliance, and strategy needed to navigate a changing tax landscape.
