Nonprofits applying for 501(c)(3) tax-exempt status are facing a significant, and growing, roadblock: delays in receiving IRS determination letters. These letters serve as the official confirmation of an organization’s tax-exempt status and are essential for a range of operational needs, including the ability to qualify for most grants and accept tax-deductible donations. Without a letter of determination, new nonprofits face substantial challenges: grants may be withheld and donors may hesitate to contribute.
The source of this slowdown is not a mystery. The IRS is undergoing a wave of internal downsizing, particularly in its Appeals and Processing divisions. With fewer personnel to handle the steady stream of exemption applications, delays have become the new norm. Unfortunately, the consequences for nonprofits are immediate and far-reaching: operational momentum stalls, program timelines slip, and fundraising efforts become hampered by a lack of official status.
Fortunately, there is a practical, mission-aligned solution that nonprofits can pursue in the meantime: fiscal sponsorship. Rather than waiting nine to twelve months for a determination letter, projects can align themselves under the umbrella of an existing 501(c)(3) organization that already holds IRS tax-exempt status. This approach allows the organization to operate as a program within the sponsor’s legal framework, effectively bypassing the IRS bottleneck while still engaging in tax-deductible, charitable work.
Fiscal sponsorship can be a game-changer. By entering into an agreement with a sponsor, the organization gains immediate access to charitable opportunities, including grants and tax-deductible donations. They can also benefit from administrative support and oversight, which ensures compliance with legal and financial requirements. For many new initiatives, this support helps build organizational capacity during an early, critical, stage. Whether you’re looking to start a new charitable endeavor and save on upfront costs typically associated with incorporation and filing for IRS recognition, an organization hesitant to file, or waiting for your letter of determination, fiscal sponsorship can be a great solution. Learn more about fiscal sponsorship in our blog titled "What is Fiscal Sponsorship, and How Does It Work?"
Of course, fiscal sponsorship is not without trade-offs. Projects operating under a sponsor must recognize that they are not fully independent - legal control over the funds and compliance oversight of activities remains with the sponsor. In most cases, sponsors will charge an administrative fee, usually between 5–15% of funds raised, in exchange for this support and undertaking of liability. Additionally, it’s essential for the sponsored project’s mission to align closely with the sponsor’s own charitable purpose. Misalignment can create tension or even IRS scrutiny, particularly if funds are misused or the relationship lacks clarity.
To make the most of a fiscal sponsorship arrangement, projects should ensure they are choosing the right model; most commonly, a “Model A” structure, where the project operates as an internal program of the sponsor. A clear, written agreement should outline responsibilities, financial reporting practices, fees, and governance expectations. Transparency and regular communication are key to building a healthy, productive relationship. It’s also wise to build in an exit strategy, so that once the IRS determination letter finally arrives or the project reaches a stage of maturity, a smooth transition to independent nonprofit status can take place.
Some fiscally sponsored projects elect to stay within fiscal sponsorship while having their independently 501c3 status. Fiscal sponsorship can provide valuable infrastructure, compliance oversight, and administrative support that would otherwise require significant staff, expertise, and financial investment to replicate. The sponsor typically manages bookkeeping, tax filings, HR, and state-by-state charitable solicitation registrations, which can be burdensome for a small or newly formed nonprofit. Staying sponsored allows the project to focus on mission-driven work while benefiting from the sponsor’s established systems, reputation, and relationships. In some cases, projects may also prefer the flexibility of fiscal sponsorship if they anticipate scaling, restructuring, or merging with other initiatives, since the sponsor can provide continuity and reduce risk.
The IRS backlog presents a frustrating and disruptive challenge for emerging organizations, particularly those seeking to respond to urgent community needs. But fiscal sponsorship offers a path forward—one that allows important work to continue, relationships with funders to flourish, and infrastructure to take shape, all without waiting for IRS red tape to unwind. For many, it is not just a stopgap—it’s a strategic launchpad.