Nonprofits Fear Drop in Charity Work After New Trump Policy

The Trump administration says an upcoming revamp to an IRS policy for nonprofits is meant to increase transparency, though advocates say it could threaten projects the nonprofits help fund.

The Treasury Department previewed proposed rules in April to revise tax-exempt reporting to better detect fraud and abuse. Republicans have been rallying against left-leaning groups they say fuel political violence, and the president has targeted the tax-exempt status of his perceived foes.

The looming changes worry Democrats and left-leaning tax-exempt groups of potential targeting of organizations the Trump administration deems not aligned with its priorities.

Part of the rules will address so-called fiscal sponsorship, where a tax-exempt entity may be funding charitable projects of other organizations. It’s a way that related groups, instead of forming a nonprofit, can align themselves with one already established and become a program of that nonprofit. Donors get a tax break.

New reporting mandates likely will create bottlenecks that curb these types of arrangements, even for ones that are following the law, tax exempt advocates said. They add there is little proof of widespread abuse in this area.

“Anytime you add more work for those to take place, you are going to cause less of that activity to take place,” said Phil Hackney, a University of Pittsburgh law professor and former IRS lawyer. “That might be appropriate if the activities are problematic but if you don’t tailor to the actual problems that may be out there, you can have all sorts of consequences.”

The expected additional reporting also comes after the IRS’s tax exempt division lost almost 30% of its staff to incentives to leave the federal government last year offered by Elon Musk’s so-called efficiency push.

“Considering the fact that we just have decimated the federal government, I have a lot of hesitancy in saying that they have the ability to process applications and to also follow up on applications, and to also follow up on compliance,” said Elaine Ng, president and CEO of Third Sector New England, Inc., the first fiscal sponsor in the country.

Chilling Effect

The IRS over the last two years saw consistently about 1.8 million returns for tax-exempt organizations, according to the agency’s data book. Fiscal sponsorship arrangements — which occur across a range of industries — help keep that number of nonprofits lower than it could be, tax exempt professionals said.

“It really is about efficiencies and also meeting the needs of your community and being able to stand up services quickly without having to go through the IRS process to become your own 501(c) entity, which takes a long time,” said Ng. She said it takes up a lot of resources and expertise that some people in the community don’t always have.

There generally hasn’t been bright line guidance for fiscal sponsorships. Amber MacKenzie, a Treasury attorney-adviser, told a conference in May the IRS will be defining fiscal sponsorship for the first time, and that she’s “not sure even all practitioners agree what fiscal sponsorship is in all cases.”

“Activities related to fiscal sponsorship on the whole aren’t easily seen in the federal Form 990 but I’m not sure that wasn’t the point,” said Candice Meth, a partner-in-charge at EisnerAmper. “The idea is that a nonprofit is acting as a sponsor for a mission aligned program and thus the activities that follow should be something they’re completely comfortable doing.”

House Ways and Means Committee Chair Jason Smith (R- Mo.) started an investigation into some tax-exempt organizations over their funding sources and fiscal sponsorship. The lawmaker has said the goal is to determine how some groups may have “helped to sow chaos and violence in the United States on behalf of foreign actors.”

While some tax exempt advocates said some more guidance could be helpful, they fear broader impacts beyond the bad actors the administration is targeting.

“If the definition that they craft doesn’t have a well thought out structure, it can be a real chilling effect on just a number of programs and projects that are serving everyday people in all of our communities,” Ng said.