The IRS Is Taking a Closer Look at Government Funded and Fiscally Sponsored Nonprofit Organizations

The U.S. Department of the Treasury announced on April 23, 2026, that the IRS is planning significant revisions to Form 990. While no immediate changes are in effect yet, this announcement provides direct insight into the IRS’s focus on providing greater transparency and stronger oversight, particularly for 501(c)(3) organizations receiving public funds or operating under fiscal sponsorship arrangements.

IRS and Treasury Focus

The Treasury and the IRS have been explicit about their intent. The expected updates to Form 990 are designed to:

Improve or enhance the tracking of government grants and contracts.
Clarify who controls the public and donated funds.
Expose misuse, misclassification or intentional obscuring of activities.
Make it harder for organizations to hide behind complex structures such as fiscal sponsorships.

Government Funding: More Scrutiny, Fewer Grey Areas

One of the biggest areas under review is how nonprofits report government grants and contracts.

The IRS has made clear that confusion around public funds is a problem. Misclassification of revenue or vague explanations may no longer be acceptable under increased scrutiny.

Future versions of Form 990 may require organizations to provide additional disclosures or information about:

The nature of government funding
Whether funds are grants or contracts
How they are classified, controlled and expended

For organizations relying on government dollars, this increases the workload around documentation, internal controls and narrative consistency across the return.

Fiscal Sponsorship Is Under the Microscope

Another area that is under scrutiny is fiscal sponsorship arrangements.

While these arrangements are perfectly legal, they have been flagged by the Treasury as areas where control over funds is unclear, operational responsibility is not well defined and oversight can be weak or undocumented.

The concern with these arrangements is that when something goes wrong, it’s often hard to tell who was actually in charge.

The newly revised Form 990 reporting is expected to require clear answers, making it much harder to mask responsibility behind layered relationships.
Organizations acting as fiscal sponsors, or operating under one, should expect more detailed disclosures and less room for lack of clarity.

What Happens Next

The IRS will release proposed regulations, followed by a public comment period. Final rules will take time and will consider administrative burden, especially for smaller organizations. There are no immediate filing changes yet.

The Bottom Line

If your organization:

Receives government funding
Acts as or operates under a fiscal sponsor
Has complex revenue streams or related entities
Hasn’t revisited governance and documentation recently

Now is a good time to review these items, as organizations are far more likely to encounter problems under new reporting requirements if they haven’t reviewed their structures, controls and disclosures in advance.

How We Can Help

Withum’s Not-for-Profit and Education Services Team works closely with nonprofit organizations to navigate exactly these kinds of changes, translating regulatory signals into practical, defensible compliance strategies. Whether that means reviewing current Form 990 disclosures, assessing fiscal sponsorship arrangements or helping boards understand their responsibilities, proactive work now can prevent painful issues later.

Stay connected as we continue to monitor and provide updates on this emerging issue.