The U.S. Department of the Treasury recently announced IRS plans to revise Form 990. The revisions will focus on government contracts, government grants, and fiscal sponsorship arrangements. “The changes,” states the Treasury press release, “are intended to detect misconduct and hold wrongdoers accountable.”
For 501(c)(3) organizations, this announcement isn’t final 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’ll show you what your nonprofit should know and do to prepare.
Impact of Form 990 Changes on Revenue Classification & Use of Funds
Government funding can represent substantial public 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 between two types of government funding:
- Government grants: Payments from a governmental unit are generally reported as governmental grants on Part VIII, Line 1e if the funds are provided primarily to benefit the general public.
- Government contract revenue: Conversely, funds provided primarily for the benefit of a governmental unit are generally treated as 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 is Fiscal Sponsorship, and Why is the IRS Focusing on It?
Fiscal sponsorship refers to an arrangement in 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, who operates the 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 preparing for the implementation of Form 990 changes. Here’s a practical roadmap to get your organization ready:
- Review government funding classifications: Confirm that government payments are properly classified as grants or program service revenue based on who primarily benefits from the payment.
- Document grant vs contract determinations: Maintain agreements, 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 expenditures advanced the organization’s exempt purposes.
- Evaluate fiscal sponsorship agreements: Confirm that written agreements clearly establish the 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 expect additional questions 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 changes will be 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.
Rehmann’s public sector team closely monitors the evolving legislative and regulatory landscape so you don’t have to. We’re committed to keeping your organization prepared for new developments as they emerge. In the meantime, if you have any questions about Form 990 or other changes that may impact your organization, don’t hesitate to reach out to us.
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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 with relatively straightforward finances 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 are required. The Form 990 Transparency Initiative is not yet final law. However, using the current period to review classifications, strengthen documentation, and assess your accounting systems is a proactive step that can reduce risk if/when the proposed changes take effect.