The IRS is expected to issue regulations revising Form 990, the annual information return required of tax-exempt organizations. Matthew Petroski, a tax partner at Armanino, said the changes are intended to clarify how charitable dollars are spent. But they could also create new administrative and reporting burdens for organizations.
Fiscal Sponsorships Face New Scrutiny
Treasury recently signaled that forthcoming regulations will target fiscal sponsorships — an arrangement where a new or small charitable project operates under the tax-exempt status of an established nonprofit.
These arrangements can be beneficial, Petroski explained, by helping mission-driven projects get started without the immediate burden of establishing their own 501(c)(3). In his practice, he commonly sees new organizations spin out of their fiscal sponsors. “For a lot of organizations, the fiscal sponsor arrangements have been great,” he said.
However, lawmakers have raised concerns about the lack of transparency around fiscal sponsorship arrangements.
Petroski explained that currently, fiscally sponsored projects do not necessarily appear on the sponsor’s Form 990. That’s particularly true for community foundations, which may be the fiscal sponsor of hundreds of programs. While the information lawmakers seek may be housed within the sponsor’s financial statements, it likely does not include the level of detail the government may soon require, he added.
If larger fiscal sponsors have to provide detailed information on sponsored programs, the Form 990 could become quite burdensome, Petroski said. “Do you have to hire someone to track the data, or do you outsource?” Other concerns are whether the burden would fall on the sponsor or the sponsored entities and how detailed the reporting would be. “Ultimately, there’s a cost,” Petroski said.
And the compliance cost could lead to fewer fiscal sponsorship arrangements. “I do feel like if the sponsor is filling out a form and if it gets so burdensome, they may say, ‘Why am I going through this arrangement?'” Petroski said.
Petroski also noted that the term “fiscal sponsorship” is not currently defined. He said any formal definition would likely have to go through the rulemaking process. However, Petroski is curious whether other Form 990 changes aimed at promoting transparency could “bypass” notice-and-comment requirements. Some changes could fall within what the IRS is already authorized to include on the form, he explained.
Donor Reporting Remains A Contentious Issue
Fiscal sponsorship is only one area where regulators may seek more disclosure via Form 990 changes. Petroski is anticipating new reporting requirements related to foreign activities.
While organizations already report money spent abroad on Schedule F to Form 990, he believes the IRS could increase scrutiny of foreign money flowing into U.S. nonprofits. Driving this potential change, he explained, is lawmakers’ concern that “money is coming to nonprofits to be used for political purposes.”
The debate over donor transparency is happening as the long-standing requirement to report domestic donor information to the IRS on Schedule B to Form 990 is being challenged in court.
In Buckeye Institute v. IRS, a 501(c)(3) organization is arguing that the requirement for exempt organizations to annually disclose the names and addresses of substantial contributors violates the First Amendment. The plaintiff claims the requirement has a chilling effect on donations due to donors’ fears about IRS data security and potential political targeting. The government counters that the information is essential for promoting voluntary compliance and that the rule is a rational condition for receiving the benefits of tax-exempt status.
The reporting requirement challenged in Buckeye is not merely contained in Form 990 and Schedule B. It is set forth in statute, under IRC § 6033(b)(5). Schedule B donor data, however, is not publicly available, Petroski noted.
While a court ruling could eliminate the Schedule B requirement for domestic donors, Petroski said that concerns about foreign influence could lead the IRS to create new disclosure rules specifically for foreign donors.
How Practitioners Can Prepare for Changes
For now, Petroski is advising clients to be prepared but to hold off on making major changes to their data collection systems. “I don’t know if I would do anything overly burdensome at this point,” he said. He recommends waiting for the proposed regulations to see what information will be required.
The best course of action, Petroski said, is for organizations to ensure their internal records are strong. For those in fiscal sponsor relationships, this means confirming they have robust documentation and data on their programs. He added that organizations already tracking this information for their own purposes will be best positioned to adapt to any new reporting regime.
He compared the potential disruption to the Form 990 redesign in 2008. While that change was burdensome and frustrating for some groups, the reporting is now a standard and accepted part of nonprofit compliance.
The forthcoming changes could follow a similar path, he suggested. For well-run organizations, it could simply amount to an additional reporting burden. “Just be open and paying attention, and be ready,” Petroski said.
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