Following Treasury’s recent announcement that it plans to revise Form 990 — the information return required annually of tax-exempt organizations — a former congressional staffer described the move as part of a much broader trend of increased scrutiny of the tax-exempt sector.
Cozen O’Connor’s Sean Clerget, former chief tax counsel at the House Ways and Means Committee, explained the political and legislative pressures that led to the initiative and what organizations can expect next.
Scrutiny Driven by Congress and the Administration
The plan to revise Form 990 did not arise in a vacuum, but rather amid increasing scrutiny from Congress and the executive branch, said Clerget during a June 9 webinar hosted by Cozen O’Connor. He pointed to several recent efforts that signal a more aggressive posture towards tax-exempt organizations.
He gave the example of the Ways and Means Committee’s recent investigation into “money in politics” with a focus on organizations described in IRC § 501(c)(3) and IRC § 501(c)(4). Clerget also noted ongoing concerns from lawmakers about foreign influence in the tax-exempt sector, unrest on college campuses, and the community benefit standard for nonprofit hospitals.
This congressional focus has been matched by “aggressive administration action” since President Donald Trump took office, Clerget said. That includes executive orders, agency investigations, and funding reviews. He noted that Ways and Means Chair Jason Smith (R-MO) has also sent requests to Treasury to review the tax-exempt status of certain organizations. These actions are the backdrop for Treasury’s recently announced Form 990 initiative.
Fiscal Sponsorships a Key Target
Treasury’s announcement specifically highlighted fiscal sponsorships as an area of concern, a point that Clerget emphasized. During congressional investigations into protests, investigators “ran into this idea of fiscal sponsorship used to mask the flow of funds,” said Clerget. “Of course, that’s not what happens in most fiscal sponsorship arrangements, but I think it certainly became a concern,” he added.
Treasury stated in its April 23 press release that “[r]ecent congressional oversight has raised concerns that some fiscal sponsorship arrangements may be used to obscure who is operating a project, who controls project funds, and how those funds are being used.”
Clerget expects fiscal sponsorship to be a “centerpiece of any proposed regs that come out.” He added that Ways and Means is also considering legislation in this area.
Potential Burdens of a Revamped Form 990
While the stated goal of the initiative is to target specific types of misconduct, Clerget warned of a “real risk of overreach and real risk of creating unintended consequences, burdens, etcetera.” He explained that once Treasury opens the topic for public feedback, he expects it will receive numerous suggestions that could lead to an “extremely broad revision of the form.”
A broad revision could be “incredibly complicated, difficult, time-consuming, and burdensome for huge portions of the tax-exempt world,” he added. This echoes concerns from other tax professionals.
Clerget also warned that some advocates are pushing Treasury to implement any new rules as soon as the current tax year. That would be a “pretty unusual and rapid change,” he said. “Typically, when these kinds of changes happen, there is some lag time and opportunity to prepare.”
He does anticipate that proposed regulations will be released this year. However, Clerget floated a theory that Treasury may wait to see what happens with legislation currently being contemplated.
Clerget acknowledged requiring organizations to use an updated Form 990 for the current tax year would create retroactive data collection issues. It would be “very difficult to perhaps have to go back and try to collect data that you weren’t prepared to collect throughout the year,” he said.
He expects Treasury will get a lot of pushback on retroactivity. While he doesn’t think that path is likely, he added, “I know that it’s on the table, so take that for what it’s worth.”
Regardless of the timing, Clerget stressed that organizations do not need to wait for proposed rules to be issued. Organizations can “go in and build relationships with the Treasury Department and start to try to shape a narrative,” he said. By doing so, they can “try to make sure that any changes that are made are carefully targeted and not overly broad and burdensome.”
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