On August 26, 2026, the IRS’s chief tax compliance officer told a tax conference in St. Louis that a redesigned Form 990 will be ready by the next tax year, aimed at government contracts, government grants, and fiscal sponsorship relationships. That followed the Treasury Department’s April 23, 2026 announcement of a Form 990 Transparency Initiative meant to expose “hidden funding” and illegal activity inside tax-exempt organizations.
New Mexico should pay attention. The state has an unusual number of small charities for its population, from tribal-serving organizations and Santa Fe arts groups to rural volunteer fire and water associations, and many of them run on grants and use fiscal sponsors. That is what the new form targets.
What is the IRS actually changing on Form 990?
Treasury’s April statement says the IRS will revise the form so that section 501(c)(3) organizations report government contracts, public grants, and fiscal sponsorships more clearly, with proposed changes going out for public comment first. The August remarks by Jarod Koopman, the IRS chief tax compliance officer, added a timeline (“by the next tax year”) and a method: with staffing down by roughly a third, enforcement will rely on automation and analytics rather than more agents.
The form itself has not been published. As of September 12, 2026, there is no draft schedule and no revised instructions. The likeliest reading of “next tax year” is that returns for tax years beginning in 2027 carry the new questions, though a faster rollout is possible. Either way, the 2026 return, due May 17, 2027 for calendar-year filers, is the year to get grant and sponsorship records in order.
Why are grants and fiscal sponsorships the target?
The current form reports government grants as a single line in Part VIII without naming the agency or showing whether the money was passed along. Fiscal sponsorship is less visible still: the sponsor reports the receipts as its own and the payouts as program expense, and the project’s name and leaders never appear. The IRS has long accepted that an exempt organization may fund a non-exempt group if it keeps control and discretion over the funds (Rev. Rul. 68-489, 1968-2 C.B. 210); a sponsor that merely forwards restricted money is a conduit and can lose its exemption. New Mexico acequia associations, arts collectives, and youth programs use sponsors constantly, usually under a two-page memorandum.
How does automatic revocation under § 6033(j) catch small nonprofits?
Organizations with gross receipts normally at or below $50,000 file the electronic 990-N notice under 26 U.S.C. § 6033(i); those under $200,000 in receipts and $500,000 in assets may use the 990-EZ; everyone else files the full return. Under § 6033(j), an organization that fails to file “for 3 consecutive years” loses its exemption by operation of law on the due date of the third missed filing. There is no hearing; the IRS simply posts the name on its Auto-Revocation List.
A volunteer fire association in Torrance County changes treasurers, the 990-N login leaves with the old one, and three Mays go by. Reinstatement under Rev. Proc. 2014-11 is available, often retroactively if the application is filed within 15 months, but the price is a new application, a user fee, and a state grant contract that may be terminated the day the revocation posts.
What do New Mexico charities owe the Attorney General’s registrar?
Under the Charitable Solicitations Act, NMSA 1978 § 57-22-1 et seq., a charitable organization that exists, operates, or solicits in New Mexico must register with the Attorney General (now the Department of Justice) unless exempt under § 57-22-4, mainly religious organizations and educational institutions with their booster groups. Section 57-22-6 requires an annual report within six months after fiscal year end, consisting of the federal return with Schedule A and attachments. For fiscal years beginning on or after January 1, 2024, an organization with total expenses above $750,000 must include an audit by an independent CPA; the old test was $500,000 of revenue. The late-filing penalty is only $100, but the registrar can suspend a registration, and once the Form 990 itemizes grants and sponsorships, that detail lands in the public file in Santa Fe too.
What should board members know about excess benefit under § 4958?
The “abuse” half of the IRS strategy is about money leaving a charity for insiders. Private inurement can cost the organization its exemption; the intermediate sanction under 26 U.S.C. § 4958 taxes the people instead. An excess benefit transaction is one in which the charity gives a disqualified person (an officer, director, substantial contributor, or their family or business) more value than it receives. The disqualified person owes 25 percent of the excess and must repay it; uncorrected, the tax becomes 200 percent. A manager who knowingly approved it personally owes 10 percent, capped at $20,000. The defense is procedural: approve the deal in advance on comparable data and document it in the minutes, which earns a rebuttable presumption of reasonableness under Treas. Reg. § 53.4958-6.
How does New Mexico gross receipts tax treat a 501(c)(3)?
This is the piece a pure exemption lawyer misses. New Mexico has no sales tax; it imposes gross receipts tax on the seller. Under NMSA 1978 § 7-9-29, receipts of an organization that has shown the Taxation and Revenue Department its 501(c)(3) determination are exempt, except receipts from an unrelated trade or business as defined in § 513 of the Internal Revenue Code, hospital receipts, and receipts from running a national laboratory or state research facility. A year-round merchandise operation unrelated to the mission is taxable at the full local rate and also belongs on a federal Form 990-T.
The exemption runs one way: when the charity buys, the vendor owes GRT and passes it through. For tangible personal property, the charity can hand the vendor a Type 9 nontaxable transaction certificate so the vendor can deduct the receipts under § 7-9-60. Type 9 does not cover services, leases, software licenses, or construction materials.
| Obligation | Authority | Trigger or deadline | Consequence |
|---|---|---|---|
| Annual federal return or 990-N | 26 U.S.C. § 6033 | 15th day of 5th month after year end | Daily penalty under § 6652(c) |
| Three missed years | 26 U.S.C. § 6033(j) | Due date of third missed filing | Automatic revocation |
| NM annual charitable report | NMSA 1978 § 57-22-6 | Six months after year end | $100 penalty, suspension |
| Independent audit with NM report | NMSA 1978 § 57-22-6 | Total expenses over $750,000 | Report incomplete |
| Excess benefit correction | 26 U.S.C. § 4958 | Before IRS assessment | 25 percent, then 200 percent |
| GRT on unrelated receipts | NMSA 1978 § 7-9-29 | Each CRS filing period | Tax, penalty, interest |
What does this look like for an Albuquerque youth sports nonprofit?
Take a hypothetical Albuquerque youth soccer organization with a $600,000 budget for calendar year 2026: $310,000 in registration fees, $140,000 from a New Mexico Department of Health youth activity grant, $90,000 in donations, and $60,000 collected as fiscal sponsor for a South Valley skateboarding collective with no exemption of its own. Expenses are $585,000. Over $200,000 in receipts, it files the full Form 990 by May 17, 2027, and under the redesign should expect to name the state agency separately and to disclose the sponsorship: the collective’s name, the $60,000 in, the $52,000 out, and the soccer board’s approval of each payment. Expenses of $585,000 sit under the $750,000 audit line, so the Department of Justice report due June 30, 2027 needs no audit; if 2027 expenses cross $750,000, an audit becomes mandatory and should be budgeted now.
Two more issues: the executive director is the founder’s spouse at $95,000, which calls for comparable data and an independent vote, and $28,000 of branded gear sold online year-round is likely unrelated business income for the Form 990-T and the CRS return.
What should a New Mexico board do before the 2026 filing season?
Confirm on the IRS Tax Exempt Organization Search that the last three returns were accepted. Build a grant register listing each government funder, award number, amount received, and amount spent. Confirm every sponsorship agreement gives the sponsor full control over the funds and keeps project leaders off the bank account. Review related-party compensation against comparable data and record the vote. Reconcile GRT so that unrelated receipts are reported, Type 9 certificates sit only with tangible-property vendors, and the 990-T matches the CRS return. Then calendar the federal and state due dates and assign each to a named person.
Frequently Asked Questions
When will the new Form 990 questions about government grants and fiscal sponsorship take effect?
The IRS said in late August 2026 that the revised form will be ready by the next tax year, but no draft or instructions had been published as of mid-September 2026. Returns for tax years beginning in 2027 are the likeliest first targets.
Does a small New Mexico nonprofit that files the 990-N postcard need to worry about the redesign?
The 990-N asks only for identifying information and a confirmation that receipts are normally $50,000 or less, so the new detailed questions will land on the 990-EZ and full 990. The bigger risk for postcard filers is missing three years in a row, which revokes exemption automatically under § 6033(j).
What happens if our New Mexico charity's tax exemption is automatically revoked?
Exemption ends on the due date of the third missed return and the name is posted on the IRS Auto-Revocation List. Donations after that date are not deductible and grant contracts that require 501(c)(3) status can be terminated. Reinstatement requires a new application under Rev. Proc. 2014-11.
Does a New Mexico 501(c)(3) have to file an audit with the Attorney General every year?
Only if total expenses exceed $750,000, for fiscal years beginning on or after January 1, 2024. Below that line the annual report to the Department of Justice is the federal return with Schedule A, due within six months after fiscal year end.
Can a New Mexico nonprofit use its GRT exemption when it buys services?
No. The exemption under NMSA 1978 § 7-9-29 covers the nonprofit’s own receipts, not its purchases. A 501(c)(3) can give vendors a Type 9 nontaxable transaction certificate for tangible personal property only; services, leases, software licenses, and construction materials do not qualify.
Can board members be personally liable for an excess benefit transaction?
Yes. Under 26 U.S.C. § 4958 a manager who knowingly approves an excess benefit transaction owes 10 percent of the excess, capped at $20,000 per transaction, assessed against the individual. Advance approval on comparable data, recorded in the minutes, is the protection.
How North Star Law Firm Can Help
North Star Law Firm advises New Mexico nonprofits and their boards on federal exemption compliance, Form 990 and 990-T reporting, excess benefit exposure, reinstatement after automatic revocation, and gross receipts tax questions. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court, and works with New Mexico-licensed counsel on Charitable Solicitations Act registration and state-court matters. The firm’s tax law practice covers exemption planning, its gross receipts tax practice handles TRD audits and NTTC questions, and its IRS audit defense practice responds when an examination letter arrives. Read the firm’s New Mexico gross receipts tax audit guide, then contact North Star Law Firm for a compliance review before the 2026 returns are due.