Fiscal sponsorship is an incredible tool for enabling grassroots initiatives and new nonprofits to launch quickly under the umbrella of a 501(c)(3). But with this opportunity comes significant responsibility: fiscal sponsors are legally and financially accountable for the projects they support. When compliance missteps occur, the consequences can be severe, ranging from IRS penalties and loss of tax-exempt status to reputational damage that erodes donor trust.
To safeguard their organizations and the projects they sponsor, fiscal sponsors must take compliance seriously and proactively address the risks that most often trip up even well-intentioned nonprofits.
Why Compliance Matters for Fiscal Sponsors
Fiscal sponsors aren’t just administrators, they are stewards of public trust. They must ensure that funds are used for charitable purposes, reporting is accurate, and sponsored projects adhere to IRS rules. Any lapse in oversight, no matter how small, can ripple across the entire organization.
Failure to comply doesn’t just invite fines or audits, it can undermine the credibility of the sponsor and jeopardize the tax-deductible status of donations. That’s why strong compliance systems aren’t optional; they’re essential for sustaining operations and building long-term donor confidence.
The Most Common IRS Pitfalls for Fiscal Sponsors
Even the most diligent organizations face recurring compliance challenges. Among the most common are:
- Co-mingling of funds: Without clear fund segregation, donor dollars meant for one project may be unintentionally spent on another, violating donor intent.
- Improper receipting: Missing or inaccurate donation receipts can trigger IRS scrutiny and frustrate donors seeking tax documentation.
- Restricted vs. unrestricted funds: Misuse of restricted funds—whether intentional or accidental—is a major compliance violation that can result in legal consequences.
- Poor documentation: Incomplete or inconsistent records make audits painful and undermine transparency.
- Late or incomplete reporting: Missing 990 deadlines or submitting inaccurate reports is one of the fastest ways to attract regulatory penalties.
How Fiscal Sponsors Can Prevent Compliance Issues
The good news? Most pitfalls are preventable with the right systems in place. Best practices include:
- Dedicated sub-accounts for each sponsored project, preventing fund co-mingling.
- Automating donor acknowledgments to ensure every gift receives a proper receipt.
- Mandatory receipts and expense coding for all disbursements, creating a clean audit trail.
- Real-time fund visibility so both sponsors and project leaders always know the financial picture.
- Seamless accounting and banking integration to maintain consistent, accurate records.
Sponsors who invest in these practices not only reduce compliance risk but also streamline operations, freeing up time for mission-driven work.
How Technology Makes Compliance Easier
Manual compliance processes are error-prone and resource-intensive. Tracking funds in spreadsheets, manually generating receipts, or piecing together audit documentation leaves too much room for mistakes—and creates stress during IRS reviews.
That’s why fiscal sponsors are increasingly turning to purpose-built technology to enforce compliance standards and simplify day-to-day management.
Tools like Mazlo eliminate the risks of traditional methods by embedding compliance into every transaction. Features include:
- Transaction coding that ensures every expense is properly categorized.
- Budgeting tools to help projects manage their funds responsibly.
- Audit-ready reporting that keeps books IRS-compliant at all times.
- A built-in compliance trail that documents every transaction and decision.
With Mazlo, fiscal sponsors can move from reactive compliance to proactive oversight.
Building Donor Trust Through Compliance
Donors expect their contributions to be handled with care, and they want transparency into how funds are used. Strong compliance not only meets IRS requirements but also builds donor trust. When sponsors can show clear, reliable records, they reinforce accountability and strengthen donor relationships.
Moreover, robust compliance practices make fiscal sponsors more attractive to both new projects and funding partners. By demonstrating financial integrity, sponsors position themselves as trusted allies in the nonprofit ecosystem.
Mazlo Makes Compliance Easy
Compliance doesn’t have to be a burden. With Mazlo, fiscal sponsors gain built-in guardrails that reduce risk, IRS-audit-ready books that eliminate stress, and automation that lightens the administrative load.
Ready to simplify compliance and protect your fiscal sponsorship program?
👉 Book a demo with Mazlo today