Governance and the IRS

The IRS is interested in how tax-exempt organizations govern themselves. Why? Accountability and tax compliance. The theory is that a well-governed organization is more likely to comply with tax laws, safeguard its assets, and carry out its charitable mission than an organization with lax controls.

Background
In 2007, the IRS published Good Governance Practices for 501(c)(3) Organizations, voluntary guidelines designed to help not-for-profits increase accountability, improve transparency, achieve regulatory compliance, and maintain their tax-exempt status. Then, in the lead-up to and launch of the redesigned Form 990 (Return of Organization Exempt from Income Tax), the IRS released a flood of resource materials including FAQs, videos, filing tips, and articles on governance and other topics. And recently, the IRS made public the governance training materials that have been created for agents and other IRS personnel who work in the tax-exempt sector. All are available on the IRS Web site.

What Is the IRS Looking For?
The training materials provide valuable insight into what might be on an IRS auditor’s checklist. Here are the highlights.

  • Mission: A tax-exempt organization’s mission should clearly explain what the charity is all about and serve as a constant guide for its activities and actions. The mission should be adopted by the board and reviewed on a regular basis.
  • Organizational Documents: Regardless of how a not-for-profit is organized (corporation, trust, unincorporated association, or other), it is required to have organizational documents that provide the framework for governance and management policies.
  • Governing Body: An organization’s board should represent the organization’s needs and the broad public interest. It should include independent members. Attention should be paid to the size of the board to ensure its effectiveness.
  • Governance and Management Policies: Not-for-profits should have written policies regarding executive compensation, conflicts of interest, investments, fundraising, documentation of governance decisions (specifically of board and committee meetings and actions), document retention and destruction, and ethics and whistleblower activities.
  • Financial Statements and Form 990: Directors (or a board-authorized committee) are responsible for handling the organization’s financial and other resources and for meeting state and federal audit requirements (if any). Financial resources should be used to further charitable purposes. Although not a requirement, some organizations provide the board with copies of Form 990 for review and/or approval.
  • Transparency and Accountability: Tax-exempt organizations must make their applications for tax-exempt status (Form 1023) available to the public, as well as Form 990 and Form 990-T.

Another Side
It’s worth noting that the IRS’s foray into promoting not-for-profit governance has raised some issues. In fact, in a 2008 report, the Advisory Committee on Tax Exempt and Government Entities recommended that the IRS proceed with caution, noting a number of concerns regarding the appropriate role of the IRS with respect to governance matters.

The committee cautioned that the IRS could drive behavior simply by asking about specific governance practices, causing organizations to adopt practices that are not suited to them. The report did, however, acknowledge the IRS’s legitimate interest in governance issues as they relate to compliance with the laws under its jurisdiction.