Organization Trends
Thinking About Fiscal Sponsorship: Potential Reforms
Internal Revenue Service Form 990, for nonprofit tax-exempt organizations.

Thinking About Fiscal Sponsorship (full series)
Purpose and Politics | Pop Ups and Perpetuity
The Form 990 Black Hole | Potential Reforms
Potential Reforms
So what should be done about all this? A balance could be struck. On the one hand, fiscal sponsorship is a common and legitimate arrangement that can provide important benefits to small and/or new tax-exempt ventures. At the same time, some issues—particularly with respect to transparency—clearly need to be addressed. Accordingly, the best course of action might simply be to focus on implementing some new nonprofit disclosure requirements specifically targeting fiscal sponsorship. This would likely involve updates to Form 990.
Depending on its activities, a nonprofit may be required to attach any number of supplementary schedules to its Form 990. It would be straightforward to create a new schedule for fiscal sponsorship activities—perhaps called “Schedule S,” which is conveniently the very next unused letter (after Schedule R) in the current version of the form. Such a schedule could require the filing nonprofit to provide basic information about its sponsorship activities, such as how many projects it sponsored during the reporting year and the amount of money it spent doing so.
In addition, a hypothetical Schedule S could feature a table (perhaps similar in design to the one currently used for Schedule I) wherein the filing nonprofit would be required to list all its fiscally sponsored projects by name. This table could also include columns for each project’s top-line budget information (such as revenue, expenses, and assets), the name of an individual designated as the project’s principal officer, the date when the fiscal sponsorship began and (if applicable during the filing year) ended, and a yes/no attestation as to whether the project had applied for its own tax-exempt status from the IRS.
On the grantmaking side, the IRS should instruct all nonprofits that make grants to support a fiscally sponsored project housed at another nonprofit to specifically disclose that fact in the grant purpose columns of Schedule I and Part XIV of Form 990 and Form 990-PF, respectively. The goal would be for all grantmakers to adopt the disclosure practices of funders that already report their grants in this way.
None of these changes would involve data that would be particularly burdensome for the filing nonprofit to collect and report, and neither would they entail any new restrictions to hinder the use of fiscal sponsorship. Yet adopting them would provide a great deal of valuable information to both the IRS and the general public. It would dramatically reduce current ambiguities as to which nonprofits are sponsoring which projects, the finances of those projects, and their organizational sources of funding.
Beyond new disclosures on Form 990, an argument could be made that there should be a threshold—perhaps a budgetary one—above which a project presumptively should apply for its own tax-exempt status and assume the transparency obligations required of standalone nonprofits. Such a requirement would arguably to be in keeping with the spirit of nonprofit tax-exemption in the United States. Of course, a one-size-fits-all standard such as this would bring with it its own set of problems. It is also important to maintain a certain deference to the judgments that organizations make about what operational structure best suits their needs. Overregulation is often more harmful than under-regulation, and it’s generally better to err on the less-prescriptive side of any regulatory debate.
Whether or not it ultimately proves to be the only step, the first step in fiscal sponsorship reform should simply aim at bringing a measure of transparency to what is presently a rather “dark” corner of the tax-exempt sector.