Article Highlights
- The US Treasury has announced upcoming changes to IRS Form 990 designed to improve financial accountability at nonprofits, with a focus on three areas: government grants, government contracts, and fiscal sponsorship arrangements.
- No timeline or specific guidelines have been released yet, but nonprofits can begin preparing now by reviewing how they track and document the movement of funds through their organization.
- Organizations that receive government grants or operate under government contracts should expect greater scrutiny into how that funding is classified, spent, and tied back to their mission.
- Fiscal sponsorship arrangements are under particular attention, with the Treasury describing the model as potentially opaque. Both fiscal sponsors and the projects they support may face expanded disclosure requirements.
- Proactive steps nonprofits can take today include auditing internal financial tracking, clarifying who controls and approves spending, identifying documentation gaps, and establishing new reporting processes before formal guidance is released.
Back in April, the US Treasury announced that it would be making some significant changes to IRS Form 990 in order to crack down on financial misconduct at nonprofits and to improve accountability. There is no timeline in place for these changes, nor are there any specific guidelines around what form the changes will take, but their announcement did specify some key areas that 501(c)(3) organizations would need to focus on going forward. The three areas are government grants, government contracts, and fiscal sponsorship arrangements.
Even though the guidelines are currently unavailable, the potential clerical and compliance burden of these changes mean that preparing ahead of time could help you reduce the risk of any missed steps, and allow you to firm up your internal financial tracking and disclosure process. For many organizations, having highly granular financial tracking is the norm, but for smaller or less-resourced nonprofits, it may be a lower priority, so assessing where you stand would be worthwhile.
Here’s what they said and how the changes might affect your organization:
IRS Form 990
You’re probably at least a little familiar with this form, which is an informational tax filing that provides the IRS with specific information about a nonprofit’s mission, finances, and organizational structure. It also contains an in-depth account of an organization’s revenue, expenses, and details about where financing comes from and is spent. This information is made public by the IRS and used by organizations like Charity Navigator to assess nonprofits.
Key Changes to Form 990
Although the details haven’t been released yet, the proposed changes seem to be directed at three key areas:
Government Grants
This element focuses on the use of grants and the specificity of your organization’s reporting on any grants received and where the money is spent. You can expect greater scrutiny into the way this revenue is classified, what it is spent on, and expanded detail about whether your use of government grants complies with the purpose of the grant and with your mission.
Government Contracts
If your organization works with any government body to provide services, there may be added scrutiny into how government resources and funding are used and whether the requested reimbursement for nonprofit services is accurate and clearly traced to service expenditures.
Fiscal Sponsorship Arrangements
A fiscal sponsorship model can be useful to mission-driven organizations for a number of reasons, as it can allow them to forgo seeking 501(c)(3) status and instead use the sponsor as a funding and support resource. This is most often used by newer organizations which are still working towards 501(c)(3) status, but it is sometimes used by established, mission-driven orgs, as having a fiscal sponsorship can be a more efficient organizational model than a “standard” 501(c)(3) org.
The treasury’s announcement describes this model as “opaque” and potentially a tool for financial abuse or to obfuscate who is funding an organization and how much funding they have provided. As a fiscal sponsorship arrangement creates a step between revenue sources and the actual mission-driven work, this announcement implies that both fiscal sponsors and the projects they fund will be under added scrutiny to track and disclose their use of funds.
How You Can Prepare for these Changes
Once the IRS releases guidance on their expectations, we can dive deeper into the exact details, but their announcement offers enough clues to help mission-driven organizations take concrete steps to prepare:
Assess how you track and label revenues and spending
Whether you use manual or automated reporting, you can look into what existing revenue sources you have and how each of these is being managed. For grants and contracts, you can look at how that funding moves through the organization and whether the amounts match up. You may also need to more clearly establish how your work aligns with the purpose of the grant or contract.
Clarify who is in charge of funds at every step
Another key focus of Form 990 is organizational structure, in particular who controls funding, who is responsible for approving spending, and how these decisions are reported and tracked. Because of the greater attention on potential fraud, having a clear organization and decision-making structure could be critical.
Check your process for gaps
Tracking a hypothetical or real tranche of funding through your organization can help you identify any areas where reporting falls short or fails to attach the funding to a specific purpose. You could do this with different funding sources, including donations, grants, contracts, or other funds, to make sure each step is documented and transparent.
Establish proactive reporting
As you go through these self-assessments, you can look into parts of the organization where reporting doesn’t exist or isn’t thorough and establish new rules and processes to track the movement of funds through these areas. By establishing these processes before the changes to the Form 990 are released, you could reduce the amount of time you will have to spend looking into past cycles and trying to reconstruct the movement of funds.
Reassess fiscal sponsorship
While the statement does assert that the fiscal sponsorship model is perfectly legal, the added administrative burden of these disclosures and tracking may change how organizations view the viability of fiscal sponsorship. For many, it may be an incentive to accelerate the 501(c)(3) process, as the work of tracking every dollar may counteract the benefits of fiscal sponsorship.
Navigating IRS changes is rarely simple, and the lack of specific guidance so far makes preparation even more important. By taking stock of your financial tracking, tightening up your internal controls, and addressing any gaps in how funds are documented and disclosed, you can put your organization in a strong position before the details are finalized. The uncertainty won’t last forever, and when the IRS does release its guidance, nonprofits that have done the groundwork will be far better prepared to respond quickly and confidently.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
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