Nonprofits Need to Brace for Planned Tax Reporting Revisions

The Department of the Treasury’s announcement last month that the IRS plans to revise Form 990 signals that significant changes may be coming to how nonprofits report their activities, but many details remain uncertain.

Form 990 is the annual information return that most tax-exempt organizations are required to file. According to the Treasury Department, the goal of the revision is to improve transparency and provide clearer reporting on certain activities of tax-exempt organizations.

Here is what we know so far and how your organization can prepare.

What to Expect

It’s too early to tell exactly what the changes will look like or when they will take effect. But we can anticipate greater reporting requirements in several key areas based on the Treasury’s stated priorities and a congressional hearing on the subject held in February.

Government contracts and grants: Nonprofits that receive funding through government contracts and grants already provide the government with detailed reports about how they use those funds. A revised Form 990 likely will require businesses to disclose some of this information to the public as well, for greater transparency into how nonprofits use federal and state funds.

Fiscal sponsorship arrangements: Fiscal sponsorship allows a tax-exempt organization (the sponsor) to support another organization that doesn’t itself hold tax-exempt status (the project). This structure allows the project to attract donations and funding, including providing donors with the benefit of tax-deductible donations.

Although fiscal sponsorship is legal and serves many legitimate purposes, the lack of required disclosure around these arrangements has created opportunities for bad actors to exploit the system. A revised Form 990 likely will require disclosure of how funds are used within these arrangements and who ultimately controls the project.

Foreign donors: Contributions from foreign individuals or entities aren’t unlawful, but there is serious concerns about foreign donors using contributions to exert political influence in the US. We can expect a revised Form 990 to include disclosure requirements around foreign donors, including the identity of the donors and amounts donated.

It’s unclear whether any of these new disclosure requirements will apply to all nonprofits or only to those exceeding certain financial thresholds or operate in particular sectors.

More Work?

The last time there were major changes to Form 990 was the 2008 tax year. The form previously hadn’t been overhauled since 1979, and it required major changes to enhance transparency and promote compliance.

These changes imposed additional burdens on some nonprofits, as the forms required much more information to be reported, including information on governance, independent contractors, and related organizations. Whether any new revisions will be as drastic as the 2008 changes or smaller in scale is unknown.

Before a new form can go into effect, the IRS is required to publish any proposed changes and allow for public comment. As part of this process, the IRS must consult with members of the public to minimize the burden that any new reporting might have on organizations.

The Treasury has stated that it will consider the reporting burden on nonprofits while developing the new form. This means there will be time before any new requirements take effect for nonprofits to offer input, including concerns about any burdens the new requirements might impose.

Next Steps

Nonprofits should take these steps at this stage of the process:

• Conduct an internal review of your current Form 990 compliance. Look beyond year-end reporting and examine whether the procedures you have in place are designed to ensure ongoing compliance.
• If your organization is a fiscal sponsor, take extra precautions to ensure you’re maintaining accurate, complete, and separate records for the project. Confirm you have a written agreement in place that clearly explains the nature of the relationship.
• Stay informed. As the IRS revises Form 990, there will be opportunities to participate in the public comment process. Organizations can engage with the IRS to advocate for or against any proposed changes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Allie Levene is the founder of Levene Legal and an adjunct professor for Wake Forest University’s Master in Studies of Law program.

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