Republican lawmakers are moving to impose new disclosure requirements and tax penalties on nonprofit fiscal sponsors.

They said that such arrangements can obscure charitable funding routed to groups without their own federal tax-exempt status.

Sen. Tom Cotton, R-Ark., introduced the Fiscal Sponsorship Transparency Act of 2026. Rep. Lloyd Smucker, R-Pa., introduced the House companion, HR 9721, which was referred to the House Ways and Means Committee.

The bill would require covered nonprofits to identify each organization participating in a fiscal sponsorship arrangement on annual tax filings, disclose the aggregate amount transferred or made available, describe the activities funded, and name the principal officer overseeing the arrangement.

Organizations would also have to report when each arrangement began and, when applicable, ended.

Fiscal sponsorship is a long-standing nonprofit practice in which an established tax-exempt charity provides administrative, financial, and legal support to a project or organization that lacks its own IRS-recognized exemption.

The sponsor generally receives charitable contributions, issues tax receipts, and manages the money while retaining discretion and control to ensure it is used for purposes consistent with the sponsor's tax-exempt mission.

The legislation would create penalties for an improper conduit arrangement, defined as one in which contributions are solicited or received for transfer to a specifically identified nonexempt recipient, but the sponsor fails to exercise discretion and control over the money.

A nonprofit that knowingly transfers money through such an arrangement would face an initial excise tax equal to 20% of the transfer.

The penalty could increase to 100% if the organization fails to recover the money or take other corrective action before the IRS assesses the tax.

Managers who knowingly approve an improper transfer could face a 5% tax, capped at $10,000, while those who refuse to support corrective action could face a 50% penalty capped at $20,000.

Donors would also lose their charitable tax deductions for contributions made through improper conduit arrangements.

"Far-left terrorist organizations shouldn't be able to manipulate our tax code for their advantage," Cotton said in a statement. "My bill would close these loopholes, tax the charities that funnel the money, and strip the tax write-off from anyone who tries to bankroll such organizations."

Cotton cited the Alliance for Global Justice, WESPAC Foundation, Tides Foundation, Thousand Currents, and nonprofit networks affiliated with Arabella Advisors as organizations warranting greater scrutiny.

The Alliance for Global Justice says it charges an 8% administrative fee to provide tax filings, donation processing, payroll, health insurance, and financial reports for sponsored projects approved by its board.

Nonprofit attorney Gene Takagi said in a July 19 analysis that the bill's definition could extend beyond traditional fiscal sponsors and impose substantial compliance costs on charities and the IRS.

If enacted, the measure would apply to tax years beginning after Dec. 31, 2027.

Neither chamber has voted on the proposal, and its prospects for enactment remain uncertain.