Arkansas – Arkansas Sen. Tom Cotton announced new legislation this week aimed at tightening federal oversight of fiscal sponsorship arrangements, arguing that certain organizations have exploited existing tax laws to channel money to groups that are not recognized as charitable organizations.
In a July 23 post on X, Cotton wrote, “The Palestinian Youth Movement and other radical groups have exploited loopholes in our tax code to their advantage. My bill would put a stop to this absurd practice.”
Cotton’s proposal, known as the Fiscal Sponsorship Transparency Act, seeks to increase transparency around fiscal sponsorships—a legal arrangement in which an established tax-exempt nonprofit accepts donations and provides administrative support for a project or organization that does not have its own tax-exempt status. While many nonprofit organizations use fiscal sponsorships for legitimate charitable purposes, Cotton argued that the current system lacks sufficient oversight and can be abused.
According to Cotton, some organizations have used these arrangements to receive tax-deductible donations before passing the funds to outside groups without meaningful control over how the money is ultimately spent. In announcing the legislation, he specifically cited the Palestinian Youth Movement as an example of what he described as a group taking advantage of those tax provisions.
“Far-left terrorist organizations shouldn’t be able to manipulate our tax code for their advantage,” Cotton said in a statement announcing the bill. He added that the legislation would require public disclosure of fiscal sponsorship arrangements, tax charities that fail to oversee where sponsored funds are spent, and eliminate tax deductions for donors making contributions through what he described as improper conduit arrangements.
The legislation would require charities to disclose fiscal sponsorship relationships on IRS Form 990 filings, impose an excise tax on organizations that merely pass funds to outside groups without exercising appropriate oversight, and deny charitable tax deductions for contributions made through those conduit arrangements.
Companion legislation was introduced in the House of Representatives by Rep. Lloyd Smucker of Pennsylvania. Smucker said the proposal is intended to improve transparency while preserving legitimate fiscal sponsorship arrangements used by charitable organizations.
The House Ways and Means Committee has already advanced Smucker’s version of the Fiscal Sponsorship Transparency Act after approving it during a committee markup. Committee leaders said the legislation was part of a broader package designed to increase transparency and accountability within the tax-exempt sector. Lawmakers noted that although fiscal sponsorship is widely used for lawful charitable work, the absence of consistent public reporting requirements has made it more difficult to identify potential abuses.
According to committee materials, the bill would require tax-exempt organizations to publicly report information about sponsored projects, including the names of sponsored entities, dates of the arrangement, funding amounts, and activities supported by those funds.
Cotton has previously called for increased scrutiny of the Palestinian Youth Movement. In 2025, he urged the Internal Revenue Service to investigate the group’s funding sources and whether it had improperly benefited from tax-exempt arrangements, arguing that organizations supporting terrorism should not receive advantages under the U.S. tax system.
The Fiscal Sponsorship Transparency Act has been referred to the Senate Finance Committee, while the House version continues moving through the legislative process after clearing the Ways and Means Committee. Both measures would need approval from Congress before being sent to the president for consideration.