In tax-code parlance, a “fiscal sponsor” is an established tax-exempt, nonprofit organization categorized under Internal Revenue Code § 501(c)(3) that can accept tax-deductible donations on behalf of another, separate nonprofit group that either has applied or plans to apply to the Internal Revenue Service for § 501(c)(3) status.

As an existing (c)(3), a fiscal sponsor files a Form 990 annually with the IRS, and this form is available for the public to view. The separate, sponsored nonprofit files no such form unless and until it’s formally granted (c)(3) status by the IRS.

Historically, a fiscal sponsorship’s duration was meant to last as long as necessary for the IRS to grant the new group its (c)(3) status. There’s nothing in tax law or regulations, however, mandating any end date to a fiscal sponsorship.

Fiscal sponsors’ 990s don’t include information about the sponsored “new” groups. Some donors may thus be incentivized to extend the duration of fiscal sponsorships. So may some fiscal sponsors, who usually take a “cut” of the donors’ money to serve (what’s supposed to never officially be acknowledged as) the “pass-through” role. And so may some sponsored groups, who get to raise tax-deductible support without having to subject themselves to what would otherwise be the 990-documented transparency and accountability that the government requires in return for (c)(3) status.

Fiscal sponsorship currently seems to be an increasingly popular mechanism through which funds are flowing to sponsored nonprofit groups, which don’t even have to file a (c)(3) application to get such funds. In fact, they don’t even have to incorporate, have a board, or report their spending. They really don’t exist as legal entities.

In other words, fiscally sponsored non-(c)(3) groups don’t have to become a (c)(3) and observe any terms of the “bargain” that the government makes with (c)(3) groups, including about transparency and accountability, to raise tax-incentivized money in the way that actual (c)(3)-status groups do. Popular, indeed.

And an abuse of the system, and the intent originally underlying it.

Congress or the IRS could meaningfully respond, with some simple clarity: 1.) no fiscal sponsorship allowed unless the sponsored group has filed a (c)(3) application; 2.) fiscal-sponsorship duration ends upon the IRS’s determination of the sponsored applying group’s status; and, 3.) both the fiscal sponsor and the sponsored group have to file 990s, fully disclosing all transactions during the sponsorship period.

All well worth seriously exploring, perhaps along with other reforms.