NIL Collectives in IRS Crosshairs: Schools Brace for Major Changes

IRS crackdown on NIL collectives threatens tax-exempt models, forcing schools to adapt or risk losing critical funding ahead of revenue-sharing changes in 2025.

Nov 30, 2024; Eugene, Oregon, USA; Oregon Ducks linebacker Bryce Boettcher (28) does a back flip during a break in the second half against the Washington Huskies at Autzen Stadium. Mandatory Credit: Troy Wayrynen-Imagn Images / Troy Wayrynen-Imagn Images

The IRS is targeting NIL collectives, and the message is clear: the days of nonprofit collectives running unchecked are numbered. With the agency naming NIL collectives a compliance enforcement priority for the 2025 fiscal year, the foundation of tax-exempt collectives looks ready to collapse under the weight of federal scrutiny.

Nonprofit collectives have been a driving force behind NIL fundraising, leveraging their tax-exempt status to attract contributions from wealthy boosters. The justification? Athletes would promote charitable causes as part of the arrangement. However, the IRS has seen through this veneer, pointing to the reality that these organizations primarily exist to pay athletes and bolster recruiting, not fulfill legitimate charitable purposes.

This isn’t a new battle. In a 2023 memo, IRS Deputy Associate Chief Counsel Lynne Camillo bluntly stated that the primary function of NIL collectives is to compensate athletes, which disqualifies them from being considered charitable entities. That stance has already led to denied applications for tax-exempt status, and now the IRS is ramping up efforts to challenge collectives already operating under the 501(c)(3) umbrella. The pressure is mounting with NIL collectives officially a focus for the 2025 fiscal year.

Recent developments only reinforce the direction this is heading. The BPS Foundation, which managed NIL funds for multiple schools, announced it would shut down by year’s end. In a donor memo, the foundation cited legal inquiries from federal and state authorities and declared there was "no path forward." Other nonprofit collectives tied to major programs like Alabama and Notre Dame have similarly folded, signaling a broader reckoning is already underway.

The fallout will be significant. Without the tax incentives that come with the non-profit designation, these collectives will likely see a steep donation drop. Programs that relied heavily on these contributions to support athletes now need help with decisions,l having to either pivot to for-profit models, which come with their challenges or potentially scale back operations entirely. Athletes, particularly those in non-revenue sports, could feel the pinch as funding shrinks.

The timing of this IRS crackdown is critical, as it coincides with the anticipated implementation of the House settlement in July 2025. The settlement will allow schools to share up to $22 million annually with athletes, potentially reducing the reliance on NIL collectives.

The combined impact of revenue sharing and the IRS crackdown on nonprofit collectives means that many schools could be forced to overhaul their entire approach to athlete compensation and NIL funding. Programs that lean heavily on collectives to stay competitive may have to restructure or dissolve those operations, shifting their focus to direct payments and more transparent funding models. By July 2025, the way schools handle athlete payments could bear little resemblance to the current landscape, ushering in a new era of college sports economics.

The IRS forces NIL collectives to confront an uncomfortable reality: adapt or face extinction. These organizations operated in a gray area for years, but now the rules are being written—and enforced. By 2025, the NIL market will look drastically different, and only the most resourceful collectives will remain standing.