Let’s be clear: Not-for-profit governance practices are not mandated by tax law.
In fact, according to Steven T. Miller, the IRS’ Commissioner for Tax Exempt and Government Entities, “I suspect some will continue to say that the IRS is inserting itself into something best left to others, or that it lacks authority here.”
But, according to Miller, “we have satisfied ourselves that we have jurisdiction to play a role in this area, and that it is proper and important for us to do so. Poor governance leads to wasted assets, inefficient use of assets, and loss of public trust in the sector. For us to ignore these realities would be shirking our responsibility.”
As a result, “the question is no longer whether the IRS has a role to play” in governance,” according to Mr. Miller. If you’ve seen the newly revised IRS Form 990―a public document with an entire section devoted to governance disclosures―it obviously does.
The centerpiece of the IRS’ effort to date has been the governance section of the newly revised Form 990. Again quoting Miller: ”This section asks about the composition and independence of the governing body, about governance policies and procedures, and how and whether governance and financial information is made available to the public.” However, there are also important policy-related disclosures on other parts of the form and supporting schedules.
The question now is how the IRS’ evolving role in governance, including the disclosures mandated on Form 990, will impact your not-for-profit organization.
Are your governance policies and practices ready for public disclosure?
Because Form 990 is a public document, it is important to prepare your organization for the new disclosures by examining its underlying policies and practices. How might the disclosures impact donors, regulators, and the general public. Does the new form highlight policies and practices that may cause your organization to be viewed in a less-than-favorable light? If so, what underlying governance structures or policies and practices should you change?
As you begin the process, consider the manner in which your organization has addressed the topics listed below.
Governing Board
The composition of the board has been, and will continue to be, a key focus for the IRS. According to Miller, independent board members are important because they increase the likelihood that decisions will be made for the best interests of the organization and for the community it serves.”
As a result, the new Form 990 asks a number of board-related questions: Are members of your board independent? How are they elected? Are their decisions subject to approval by members, stockholders or other persons? As a part of your 990 review process, do board members see the completed form before it is filed? Are the board’s meetings contemporaneously documented?
Policies
Conflict of Interest
Do you have a written conflict of interest policy? Do you regularly and consistently monitor and enforce compliance? Can you describe the manner in which it is monitored and enforced? Are officers, directors or trustees, and key employees required to annually disclose any interests that could give rise to conflicts?
Document Retention
Do you have written policy regarding document retention and destruction?
Whistleblower
Do you have (or need) a written whistleblower policy?
Gift Acceptance
Do you have a written gift acceptance policy? Does it require review of any nonstandard contributions? Do you hire or use third parties or related organizations to solicit, process, or sell noncash contributions?
Public Disclosure
Do you make your Form 990 available through your website, another organization’s website, or upon request? Do you make your governing documents, conflict of interest policy, and financial statements available to the public?
Compensation
Do you have written compensation policies?
Financial Controls
The IRS has announced its intent to expand the focus on procedures and controls that safeguard assets. Key among these is the presence and operation of internal financial controls. For example, consider the following:
Are your organization’s financial statements compiled, review, or audited by an independent accountant? If so, do you have a committee that assumes responsibility for selection of the accountant and oversight of the compilation, review, or audit process?
Did your organization invest in, contribute assets to, or participate in a joint venture or similar arrangement with a taxable entity during the year? If yes, do you have a written policy that requires you to evaluate your participation in the arrangement under applicable Federal tax law, and take steps to safeguard your exempt status?
Does your compensation policy include an independent review, comparability data, and contemporaneous substantiation of deliberations and decisions regarding compensation determinations? How many individuals receive more than $100,000 in reportable compensation? Is the sum of reportable compensation and other compensation from your organization and related organizations greater than $150,000 for any of the following: officers, directors, trustees, key employees, highest compensated individuals, contractors.
Do you use any of the following in establishing compensation for your CEO/Executive Director: compensation committee, independent consultant, written employment contract, compensation study, requirement for board or compensation committee approval? Do you require substantiation prior to reimbursing or allowing expenses incurred by all officers, directors, trustees, and management?
Did any of your officers, directors, trustees, key employees, highest compensated employees, or contractors receive or accrue compensation from any unrelated organization for services rendered to your organization?
For More Information
To assist you in evaluating your organization’s governance practices, the IRS has published a document entitled Governance and Related Topics – 501(c)(3) Organizations.
The document is organized around six major topics: Mission, Organizational Documents, Governing Body, Governance and Management Policies, Financial Statements and Form 990 Reporting, and Transparency and Accountability.
