Treasury is rightly focused on nonprofit transparency

This post originally appeared in Legal Insurrection 

The Treasury Department recently announced the IRS would be proposing revisions to Form 990, the annual return that most nonprofits are required to file with the IRS. While the regulatory language has yet to be released, the Department’s focus appears to be on two issues that indeed warrant further scrutiny within the tax-exempt sector: government funding for nonprofits and fiscal sponsorship. This makes the announcement welcome news.

Form 990 is a public document, and the most comprehensive source of information about the financials and operations of American nonprofits. Public transparency is the 990’s core purpose, and the Treasury Department’s press release promises to improve this by providing “clearer reporting” in two specific areas.

The first of these concerns government grants and contracts, a topic that has been of heightened interest amid recent allegations of fraud and mismanagement in federal funding. Many nonprofits receive substantial funding from the federal government, and some receive almost all of their revenue from taxpayers. In other instances, public dollars flow to activist groups with clear ideological agendas. This places the American taxpayer in the position of not only incentivizing these groups with favorable tax treatment, but also directly funding their operations.

While it would seem wise to favor robust transparency in such cases, Form 990 currently provides almost no detail regarding government funding to the filing nonprofit. There is merely a single revenue line aggregating all contributions from federal, state, local, and foreign governmental entities into a single lump sum. More detailed public disclosure of government funding on the 990 would give Americans a much more comprehensive picture of a given nonprofit’s finances. Moreover, it raises none of the legitimate privacy concerns that accompany other forms of donor disclosure.

The second area of focus concerns fiscal sponsorship, an arrangement through which a nonprofit “sponsor” houses a “project” group, providing it with administrative support and allowing it to make use of the sponsoring nonprofit’s tax-exempt status in exchange for a fee. Fiscal sponsorship has become increasingly common, and it offers legitimate benefits. However—intentionally or not—it can also conceal details about the sponsored projects from public scrutiny. Those sponsored projects do not file their own Form 990s, and the current version of the form does not require nonprofits to disclose their fiscal sponsorship activities; in practice, very few do.

The Capital Research Center has previously called for reforms along these lines, suggesting that a new schedule could be appended to Form 990, in which basic details regarding projects and their financials would be reported by the sponsoring nonprofit. This would significantly improve fiscal sponsorship transparency without meaningfully restricting any of its legitimate purposes.

Notably, the Department’s press release refers only to section 501(c)(3) public charities. If the proposed regulations end up excluding section 501(c)(4) social welfare organizations, that would be a significant oversight.

501(c)(4)s engage in fiscal sponsorship as well, but unlike 501(c)(3)s they can do so in partisan ways. The Sixteen Thirty Fund and Beyond Impact (formerly Tides Advocacy) are two examples of major 501(c)(4) fiscal sponsors that operate in an explicitly political manner. Any requirement to report fiscal sponsorship on Form 990 should apply equally across all nonprofit categories.

Ultimately, details like these can be worked out through the public comment process, and there may be other important considerations to address once the regulatory text is officially released. For now, the Department is to be commended for its attention to this important and overlooked matter of nonprofit transparency.