Although no section of the Internal Revenue Code sets out specific requirements for how tax-exempt organizations are to be governed, the subject of good nonprofit corporate governance has become a strong focus of the IRS in recent years. The most obvious evidence of the IRS’ emphasis on good nonprofit corporate governance is the new Form 990. Formerly a fairly simple data reporting form, the new and much more extensive Form 990 includes 28 governance-related questions.
The IRS sees a natural relationship between governance and compliance with tax laws. “Where an organization has adopted good governance practices, we can reasonably expect that it poses less of a risk that it will misuse its tax-exempt status or its charitable assets than does an organization that has not adopted such principles,” said Sarah Ingram, the new IRS Commissioner of Tax Exempt and Government Entities in a recent speech.
The IRS emphasizes that there is no set formula for governance and that nonprofits should have flexibility in their organizational structures. There are some basic guidelines however, that the IRS encourages tax-exempt organizations to implement in order to increase transparency and accountability:
- Mission: Adopt a clearly articulated mission and have the board of directors regularly review it to ensure that the organization’s activities are guided by that mission.
- Governing Body: A charity’s board of directors must be active, informed, independent, and engaged to ensure charity’s success and its compliance with applicable tax law requirements.
- Conflicts of Interest: Adopt and regularly evaluate a written conflict of interest policy that (1) requires directors and staff to act solely in the interests of the charity without regard for personal interests, (2) includes written procedures for determining whether conflict of interest exists, and (3) prescribes a course of action in the event a conflict of interest is identified.
- Fundraising: Adopt and monitor fundraising policies to ensure that solicitations meet federal and state law requirements and are accurate, truthful, and candid.
- Governing Body Minutes and Records: Contemporaneously document minutes of the governing body and authorized subcommittee meetings or actions taken. For this purpose, contemporaneous means the document must be prepared by the later of (1) the next meeting of the governing body or committee, or (2) 60 days after the date of the meeting and reviewed and approved by the governing body or committee within a reasonable time thereafter.
- Document Retention and Destruction: Consider adopting a written policy establishing standards for document retention, integrity, and destruction that includes guidelines for handling electronic files, back-up procedures, archiving of documents, and regular check-ups of the reliability of the system.
- Code of Ethics: Consider adopting a written Code of Ethics to set out behavior that the board wants to encourage, as well as behavior that it wants to discourage, thereby communicating a strong culture of legal compliance and ethical integrity.
- Whistleblower Policy: Consider adopting a policy with procedures for handling employee complaints and procedures for employees to report in confidence any suspected financial impropriety or misuse of the charity’s resources.
- Form 990 and Form 1023: Provide the board of directors with copies of the Form 990 for review before it is filed and post a copy where publicly accessible, such as on the charity’s website. The Code requires a charity to make its Form 1023 exemption application, Form 990, and Form 990-T available for public inspection.
- Executive Compensation: A charity may not pay more than reasonable compensation for services rendered. Have persons who are knowledgeable in compensation matters and who have no financial interest at stake determine compensation.
- Investments: Charities participating in major investments in joint ventures, for-profit entities, or financial products should adopt written evaluation procedures in order to help safeguard the organization’s assets and protect its exempt status.
For more information on Good Corporate Governance, click here.