The U.S. Treasury Department has proposed a significant update to IRS Form 990, aiming to increase transparency in fiscal sponsorship arrangements, which enable emerging charitable projects to operate under established nonprofits. This initiative highlights the importance of public accountability in the nonprofit sector.
The U.S. Treasury Department has announced a long-awaited overhaul of IRS Form 990, the primary reporting form for tax-exempt organizations, introducing new disclosure requirements aimed at enhancing transparency in the rapidly evolving landscape of fiscal sponsorship. The proposal, unveiled on April 23, is part of the Treasury’s Form 990 Transparency Initiative and seeks to address accountability issues within the nonprofit sector.
Fiscal sponsorship allows new charitable initiatives to operate under the umbrella of established nonprofits, enabling them to accept tax-deductible donations swiftly. However, the lack of clear oversight and accountability mechanisms has raised concerns about the management of funds within these arrangements. Treasury Secretary Scott Bessent emphasized the importance of public trust, stating, “Public money and tax-exempt status demand public accountability.”
Understanding Fiscal Sponsorship
Fiscal sponsorship has become increasingly popular as individuals and small groups seek to address community needs through charitable efforts. These initiatives often begin informally, such as in local gatherings or community centers, where neighbors rally to provide support for families in distress. While this approach fosters community engagement, it can also lead to challenges in fund tracking and accountability.
Samuel Handwerger, a senior lecturer at the University of Maryland’s Robert H. Smith School of Business and a recognized expert in nonprofit governance, highlighted the inherent risks in these arrangements. “Donors give to the name on the flyer—the new charitable initiative. But legally, the money belongs to the sponsor,” he explained. This dynamic can create confusion regarding who is responsible for spending decisions and may complicate financial oversight.
The Fraud Triangle and Its Implications
Handwerger pointed to the concept of the fraud triangle, which outlines the three elements necessary for fraudulent activities: pressure, rationalization, and opportunity. In the context of fiscal sponsorship, the lack of transparency and oversight can create conditions favorable for fraud, as individuals may exploit gaps in accountability. “Transparency isn’t about assuming wrongdoing,” Handwerger asserted. “It’s about removing the opportunity for it.”
Currently, the financial data of sponsored projects can be obscured within a sponsor’s aggregated totals on Form 990, making it challenging for donors and regulators to determine the actual management and use of funds. The proposed changes would require sponsors to clearly identify each project, disclose who controls the funds, and elucidate how those funds are allocated.
Stakeholder Perspectives on the Proposal
Handwerger believes that the proposed disclosures would benefit various stakeholders, including donors seeking assurance about their contributions, nonprofits aiming to differentiate themselves from potential bad actors, and sponsored projects seeking legitimacy. “Trust is the real currency of the nonprofit sector,” he noted. “Once it’s spent, no tax exemption can buy it back.”
The Justice for Fraud Victims (JFV) program, which Handwerger founded, provides students with practical experience in forensic accounting and fraud investigations. This program closely aligns with the objectives of the Treasury’s proposal, as it highlights the vulnerabilities that the new disclosures aim to address. “Our students routinely see how small gaps in oversight—a missing ledger, an unclear approval process—can snowball into real harm,” Handwerger stated, underscoring the need for robust accountability measures.
Balancing Transparency and Compliance Burdens
While the proposal has garnered support for its intent to enhance transparency, Handwerger cautioned against imposing overly broad reporting requirements that could burden small community initiatives. He emphasized the need for “targeted sunlight” rather than overwhelming compliance obligations that small organizations may struggle to meet.
This proposal comes at a time when the nonprofit sector’s governance has faced scrutiny, notably during the previous administration when former President Donald Trump’s charitable foundation was dissolved due to self-dealing allegations. Some observers have pointed out the irony in the current administration advocating for stricter oversight of charities. Handwerger acknowledged the tension surrounding the proposal but argued that the merit of the idea should not be overshadowed by its political context. “A sound idea doesn’t lose its merit because of who delivers it,” he contended.
Next Steps for the Nonprofit Sector
The Treasury Department is currently accepting public comments on the proposed revisions to Form 990, with final rules anticipated later this year. If adopted, these changes could significantly reshape reporting practices for thousands of nonprofits and the expanding network of sponsored charitable projects.
For Handwerger, this moment presents an opportunity for the nonprofit sector to reinforce the trust that underpins every donation, irrespective of its size. “When people give, they’re handing over more than money,” he remarked. “They’re handing over faith. Our systems should honor that.”
