Lawmakers from across the political spectrum agreed that Form 990 – annual information reporting required of most tax-exempt organizations – could be revamped to combat abuse by foreign actors in the nonprofit sector. However, one practitioner told Checkpoint that while the intent may be “good,” she’s “a little bit concerned” about the proposed changes.
Form 990 Basics
Most tax-exempt organizations must file an information return, Form 990, annually. This filing provides the IRS, state regulators, and the public with detailed information about the organization’s mission, programs, governance, and finances. (Certain smaller organizations may file a Form 990-EZ or Form 990-N, while private foundations file the Form 990-PF.)
The IRS uses Form 990 to monitor ongoing qualification for tax-exempt status, assess compliance risk, and select entities for examination. Because Form 990 is publicly disclosable, it also serves as a transparency tool for watchdogs, the media, and donors to evaluate an organization’s activities, governance, and financial stewardship.
Witnesses at a February 10 House Ways & Means Committee hearing discussed modernizing the form to require more detailed disclosures on foreign money, fiscal sponsorships, and donor-advised funds (DAFs).
Form 990 Design Flaws
“Form 990 provides high level, aggregated information, it is not designed as a forensic tool capable of detecting financial malfeasance,” forensic accountant Bruce Dubinsky told lawmakers during the hearing. “Bad actors understand this,” he added. “They identify weaknesses and structure misconduct to blend into otherwise lawful operations.”
Dubinsky said a “practical and cost-effective remedy” is revising Form 990 “to include standardized questions focused on fiscal sponsorships, donor-advised funds, foreign operations, and pass-through funding structures.” Adding such disclosures would “generate structured data” for the IRS to use in analyzing filings, he explained.
Lack of Transparency on Donor Sources
A key concern among lawmakers during the hearing was the lack of transparency on donor sources.
On that, Dubinsky noted that “for most charitable organizations, donors’ identities reported on their Form 990, Schedule B, are not publicly disclosed.” He added that “as a result, we simply do not know how much foreign money is flowing through the U.S. nonprofits, or for what purposes This lack of visibility creates real national security risks.”
Dubinsky elaborated that the current Form 990 doesn’t allow those in enforcement to track layered or pass-through transactions. That includes donations through DAFs, which he said can “separate the identity of the original donor from the recipient organization.”
“It’s almost impossible to unpack the layering that goes on in these structures,” said Dubinsky. He suggested Form 990 could include “disclosures on how much, how many times you’re receiving money from a DAF per year, and what’s the total amount coming from DAFs.” That could “give a flag to the IRS,” he added.
Representative David Schweikert (R-AZ) pushed witnesses on whether including a “chain of lineage” would help. Capital Research Center’s Scott Walter agreed with the suggestion, noting that “EIN numbers are not always used on 990s when one nonprofit is giving to another.” He sees requiring inclusion of this information as “an important way to help track” nonprofit funding sources.
Hearing participants discussed the risk of fiscal sponsorships – where an individual or group looking to conduct a charitable project operates under another, existing 501(c)(3) organization’s tax-exempt status. “Current law imposes no requirement for separate project level reporting of fiscally sponsored activities on Form 990,” said Dubinsky. “These activities are absorbed into aggregated reporting, producing little meaningful transparency.”
Dubinsky suggested that “identifying on the Form 990 if a tax-exempt organization is involved with fiscal sponsorships” via “a simple check box.” For those that answer “yes,” he recommends sub-questions that could “arm the IRS with the information they need to then properly see if they if it’s legitimate, if they need to investigate further.”
Walter agreed that “sponsored projects [should] be named on the 990.” Information to report might include “the basic budget of revenues, expenses, assets,” a designated principal officer for the fiscally sponsored project, and when the sponsorship began and ended, Walter explained.
Getting at the Foreign Spending Issue
While lawmakers and witnesses discussed broad potential changes to Form 990, the hearing, as announced, was meant to cover “the ways foreign actors have funneled millions of dollars through networks of tax-exempt organizations.”
There seemed to be some consensus among lawmakers that foreign spending in the U.S. nonprofit sector is problematic. As Representative Jodey Arrington (R-TX) remarked, “we all agree on this backdoor foreign national influence.” Arrington offered his time to Representative Gwen Moore (D-WI), who commented, “I just want to just reiterate the through line is that none of us want to see foreign influence, particularly in our elections.” Moore, likewise, called for monitoring contributions to 501(c)(3)’s and 501(c)(4)’s to combat foreign influence.
But foreign money is spent on more than just election interference, Rachael Chamberlain, a partner at FBT Gibbons, told Checkpoint. “At the end of the day, it shouldn’t really matter where the money is coming from, it’s how that money is used,” she stressed.
While changes to the Form 990 could capture some degree of foreign influence, Chamberlain was skeptical that beefed up reporting would reveal all money coming from abroad. But reporting challenges aside, to her, there’s “nothing inherently wrong” with U.S. nonprofits receiving foreign funds for some activities, like research.
Chamberlain said the real question is: “Are you using these donations to push some sort of propaganda that we have decided is inappropriate?” But deciding what’s inappropriate could be a “very slippery slope,” she added. “There’s not a good way to do it practically, and I don’t know that there’s necessarily a good way to do it ethically.”
Hearing witness Robert Weissman of Public Citizen added another wrinkle. He agrees with lawmakers that foreign spending, particularly in the 501(c)(4) space, is problematic. But in Weissman’s view, “most of the ‘secret spending,’ by far, is coming from Americans who are not disclosing and are using these vehicles.”
For more on tax-exempt organization information filing requirements, see Checkpoint’s Federal Tax Coordinator 2d ¶ S-5143.
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