Ministries engaged in fiscal sponsorships would face new reporting requirements under legislation recently advanced by a key committee in the U.S. House of Representatives. Supporters of the bill hope to root out bad actors taking advantage of such arrangements, but some observers are wary of unintended consequences. 

Fiscal sponsorship is a contractual relationship allowing a recognized 501(c)(3) organization to extend the gift deductibility benefits of its exempt status to a charitable project partner. In such an arrangement, the fiscal sponsor receives and acknowledges incoming gifts, and, while remaining legally responsible for the funds, it assigns them to the project. Such arrangements could allow, for example, one faith-based organization to help incubate a fledgling partner ministry or to allow an individual or group to test-drive a new mission-driven idea.  

The Fiscal Sponsorship Transparency Act aims to provide more definitions and disclosures for these arrangements. If the bill became law, sponsor organizations would be required to report details such as the activities, dates, funding amounts, and manager’s name for their supported projects. New penalties for improper conduit arrangements would also be established.  

Arguing for this bill during a meeting of the House Ways & Means Committee, Chairman Jason Smith (R-Mo.) said, “While most of these arrangements are legitimate and carry out the sponsoring organization’s charitable purpose, the Committee has found that some organizations are taking advantage of the lack of transparency these arrangements provide to skirt rules and fund bad and dangerous groups.” 

Rep. Lloyd Smucker (R-Pa.), author of the bill, similarly pointed to examples of individuals exploiting fiscal sponsorships, even using them to support terrorist causes. He stated, “This bill protects legitimate charities by promoting transparency, reinforcing responsible stewardship, and ensuring that bad actors cannot undermine public confidence in the nonprofit sector.”   

However, some observers, such as Philanthropy Roundtable, are wary that such new rules could unintentionally undermine these flexible arrangements that allow “private citizens to respond quickly to community needs, launch new charitable projects and support temporary or volunteer-led efforts without forcing every project to become a standalone nonprofit.” 

“The likely result is predictable,” wrote Claudia Cummings, Philanthropy Roundtable Senior Vice President of Public Affairs, prior to this bill’s introduction. “Small, law-abiding nonprofits would spend scarce resources trying to comply with vague new requirements. Bad actors would ignore or circumvent them.” 

The House Ways and Means Committee approved the Fiscal Sponsorship Transparency Act in a 23-15 vote on July 22. The committee session also focused on transparency bills related to funds from foreign donors, as well as a bill to defend the religious liberty of nonprofits on matters of marriage and sexuality. 

Of note, the U.S. Treasury Department has identified fiscal sponsorships as an area it plans to address in a revision of IRS Form 990 intended “to detect misconduct and hold wrongdoers accountable.” 

ECFA will continue to monitor these developments on Capitol Hill and beyond. In addition, ECFA published “Fiscal Sponsorship: Ask These 3 Questions First” earlier this year as a resource for ECFA members considering the opportunities, responsibilities, and possible risks of fiscal sponsorships.