TheU.S.Department of the Treasuryrecentlyannounced IRS plans to revise Form 990.The revisions will focus on government contracts, government grants, and fiscal sponsorship arrangements.“The changes,”statestheTreasury, “are intended to detect misconduct and hold wrongdoers accountable.”
For 501(c)(3) organizations, this announcementisn’tfinal law, but it is a clear signal: The IRS is increasing its regulatory focus on areas where public funds, charitable status, and complex nonprofit structures intersect. The best preparation starts now.
Below,we’llshow youwhatyour nonprofitshouldknow and doto prepare.
Impactof Form 990ChangesonRevenue Classification& Use of Funds
Government fundingcanrepresentsubstantialpublic dollars flowing through charitable organizations. For Form 990 purposes, the way an organization classifies those payments has meaningful implications. It affects the presentation of revenue, may affect public support calculations, and can influence how clearly the filing explains the organization’s role in administering public funds.
Current Form 990 reporting already distinguishes betweentwo types ofgovernmentfunding:
- Government grants:Payments from a governmental unit aregenerally reportedas governmental grants onPart VIII, Line1eif the funds are provided primarily tobenefitthegeneral public.
- Government contract revenue:Conversely, funds provided primarily for the benefit of a governmental unit aregenerally treatedas an exchange transaction and reported as program service revenue on Part VIII, Line 2.
Although this classification distinction remains important, the potential Form 990 changes appear to focus on a broader transparency question: whether the organization can explain how government funds were received, what restrictions applied, which programs used the funds, and whether the funds were spent consistently with the applicable grant, contract, or award terms; while the final reporting requirements are not yet known, tracking these categories is a practical starting point for preparation.
What isFiscal Sponsorship, and Why is the IRS Focusingon It?
Fiscalsponsorshiprefers to anarrangementin which an existing tax-exempt organization supports a charitable project or initiative, often before the project has its own exempt status or administrative infrastructure.
These arrangements can be entirely lawful and useful, but they are sensitive from a tax compliance perspective because they raise questions about who controls the funds, whooperatesthe project, and whether the funds are used for exempt purposes.
According to the Treasury Department, recent congressional oversight has raised concerns that some fiscal sponsorship arrangements may be used to obscure fund control and project operations. The IRS intends to increase reporting requirements in this area to address those concerns and make it harder for bad actors to hide behind opaque arrangements.
It’s worth noting that the vast majority of fiscal sponsorship arrangements are legitimate. Still, organizations that use them should expect closer scrutiny and should ensure their written agreements clearly establish the sponsor’s control and discretion over funds.
What Should My Organization Do Now?
Don’t wait for the final regulations to begin preparingfor the implementation of Form 990 changes.Here’sa practical roadmaptoget your organization ready:
- Review government funding classifications:Confirm that government payments are properly classified as grants or program service revenue based on who primarilybenefitsfrom the payment.
- Document grant vs contract determinations:Maintainagreements, award letters, scopes of work, and internal analyses supporting Form 990 treatment.
- Connect funding to program activity:Confirm that accounting records and program documentation can show which programs used government funds and how those expendituresadvancedthe organization’s exempt purposes.
- Evaluate fiscal sponsorship agreements:Confirm that written agreements clearlyestablishthe sponsor’s control and discretion over funds and define project oversight, reporting, and termination rights.
- Prepare for enhanced disclosure:Organizations with material government funding or fiscal sponsorship activity should expectadditionalquestions if the IRS revises Form 990 as described in the press release.
Remember,Treasury’s Form 990 Transparency Initiative is not final law, and any changeswillbe subject to proposed regulations and public comment. Still, the announcement signals increased regulatory focus in areas where public funds, charitable status, and complex nonprofit structures intersect. For 501(c)(3) organizations, the best preparation is straightforward: classify government funding carefully, document fiscal sponsorship control, and ensure that Form 990 tells a clear and supportable story about who controls the money and how it is used.
ݮƵ’s public sector team closelymonitorsthe evolving legislative and regulatorylandscapeso youdon’thave to.We’recommitted to keeping your organization prepared fornew developmentsas theyemerge.In the meantime,if you have any questionsabout Form 990or otherchangesthat mayimpactyour organization,Dz’thesitate to reach out tous.
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Frequently Asked Questions
Q: Does the Form 990 Transparency Initiative apply to all nonprofits, or only large ones?
A: The initiative applies to all 501(c)(3) organizations that file Form 990. While large and complex organizations face the heaviest disclosure burden, small to mid-sized nonprofits with government funding or fiscal sponsorship arrangements should also prepare. Even organizations withrelatively straightforwardfinances may face increased administrative requirements due to the shift from narrative to structured data reporting.
Q: Is my organization required to change anything on Form 990 right now?
A:No immediate changes arerequired. The Form 990 Transparency Initiative is not yetfinallaw. However, using the current period to review classifications, strengthen documentation, and assess your accounting systems is a proactive step that can reduce riskif/when theproposed changestake effect.