State AGs As Sources of Exempt Organizations Guidance

Our September 8th post celebrated the viability of an excellent IRS educational series, the Exempt Organizations Technical Guides. Five new titles had been published recently amidst the chaos and deep uncertainties in the federal government.

We relayed more good news in the September 12th post: The popular cartoon-hosted StayExempt video collection appears to be safe; indeed, it’s now easier to find on the web and reconfigured to be mobile friendly.

In 2025, though, the status quo can evaporate in a flash: either through funding cuts that happen in an instant, or by changes of policy or priorities. There have been attempts to erase entire federal agencies and departments with the swipe of a pen on an executive order.

In the federal government these days, everything is on borrowed time.

That’s all the more reason that the ascendancy in recent years of the role played by the state attorneys general in charity oversight and assistance has been a welcome  development.  See, for instance, State AGs Continue Aggressive Oversight of Nonprofits (January 21, 2022) FPLG Blog and New Guidance for Charity Boards (February 13, 2023) FPLG Blog.

A New Sheriff In Town 

For charitable nonprofits – and their professional advisors – having complete information and definitive guidance is critical to achieving legally compliant mission success.

“Most of us are conditioned to view the Internal Revenue Service, through its statutory authority under the Internal Revenue Code to grant or deny tax-exempt status, as the focus of charity oversight in the United States.” That agency’s “preeminent power” was clear “in the second half of the twentieth century.”

However, since the turn of the 21st century, “the IRS – including, notably, its exempt-organizations operation – has been beaten down by a Congress intent on imposing draconian budget cuts and otherwise reining it in….”

Into this space, the state attorneys general “with long-established authority within their borders for the public protection of charitable assets and funds” have stepped up their activities and voices.

“The IRS is not the only sheriff in town,” wrote Notre Dame law professor and nonprofit-law expert Lloyd Hitoshi Mayer almost a decade ago in The Rising of the States in Nonprofit Oversight (August 11, 2016) The Nonprofit Quarterly. His article was included as part of a series that summer titled The New Nonprofit Regulatory Environment: What You Should Know.

Pivot from IRS to State AGs

Our posts from a week or so ago focused on the availability of helpful information from Point A (the IRS) to Point B (organizations, advisors, and other stakeholders or interested parties). It’s important to have access to official guidance from the federal regulatory agency. The drama, if any, is whether that pipeline will be obstructed in whole or in part, sooner or later.

In either event, the availability of information from state regulators around the U.S. is a significant benefit for the charitable sector.  While federal/state jurisdiction and issue-focus is not a perfect or complete overlap, there is enough commonality that an IRS retreat will not be a fatal blow in this knowledge base.

As we’ve discussed in recent years, the state regulators are not the runners-up or merely second-best to the federal regulators. They have a separate – and perhaps superior in many ways – claim to front-line responsibilities and authority to ensure that charitable funds and assets are properly used.

Notre Dame’s Professor Mayer pointed out in his 2015 article in The Nonprofit Quarterly, that these state officials are more than pleased that the 500-year-old legacy of their regulatory jurisdiction has been so forcefully recognized in recent years. See for background: Donor-Disclosure Hottest Ticket: Part 3 (June 16, 2021) FPLG Blog [“The Statute of Charitable Uses of 1601 is considered the ‘birth of the modern law of philanthropy.”’] And there is a direct line from the Crown Attorney General of the late Elizabethan era to the modern-day attorneys general of the 50 states, the District of Columbia, and certain U.S. territories.

The original reason for our keen interest and extensive coverage of this fascinating history was the epic U.S. Supreme Court battle in the final weeks of the 2020-2021 Term in Americans for Prosperity, Inc. v. Bonta. There, a private litigant [well-funded and well-connected, politically]  challenged a rule by the California attorney general that charitable organizations submit to state officials a copy of the entire federal Form 990 (including Schedule B with disclosure of top donors) that they routinely and without objection file with the IRS each year.

The blue state AGs around the nation forcefully and with outstanding friend-of-the-court briefs backed California AG Rob Bonta. The red state AGs lined up on the other side with weak amici curiae briefs. However, a majority of the high-court justices lined up with the red states, bending over backwards to smack down AG Bonta’s rule in a ruling that was unnecessarily expansive.

Many more confrontations involving the state attorneys generals (red vs. blue) have happened since then, building up to a crescendo of disharmony in 2025. Recent case in point: On August 20, 2025, the attorneys general of several blue states released new guidance for nonprofits who hold and administer restricted funds intended for scholarships and grants for racial minorities and other protected classes. These AGs, unsurprisingly, “reject the Federal Administration’s position that such scholarships and grants are ‘illegal DEI.’”

The “big takeaway: These AGs explain that, because race-conscious scholarships are not illegal, their offices may not be supportive of requests to modify the terms of such scholarship program….” See SFFA Scholarship Multistate Guidance Letter.pdf

Conclusion

On the one hand, there is a great deal of commonality among the states in terms of guidance offered to charitable nonprofit organizations on how to (a) safeguard charitable assets and (b) avert fraud by insiders as well as outsiders. Most jurisdictions, in the early 2000s, enacted updated versions of a model code. See, for instance, The Charity Oversight Role of the California Attorney General: An Introduction (April 24, 2015) FPLG Blog.

Several of the top states with the largest concentrations of charitable nonprofits (and the largest oversight budgets) offer considerable educational resources. See, e.g., Major Revisions to California AG’s Guide to Charities (December 5, 2024) FPLG Blog.

“The particular value of guidance from state charity officials is their extensive, on-the-ground, experience with some of the over one million 501(c)(3)s in the United States. They have direct knowledge of the way that many charity directors and trustees comply with the laws and succeed in their missions; alternatively, how some inadvertently fail or intentionally violate the rules.”

So – first up – we’ll discuss this available educational material: as not only a back-up to the IRS resources already offered, but as useful additions in their own right to this base of collective knowledge.

In a follow-up post or two, we’ll then tackle the deep blue-red divide on key issues playing out at the federal level especially in Supreme Court cases. That discussion will include some thoughts on that August 20, 2025, guidance on the volatile new DEI restrictions coming from the White House and the federal agencies.

– Linda J. Rosenthal, J.D., FPLG Information & Research Director