The IRS has recently redesigned the Form 990 to increase nonprofit transparency and compliance. To that end, the Form 990 asks questions about a tax-exempt organization's internal policies regarding conflicts of interest, whistleblowers, document retention and destruction, compensation for top management and key employees, joint ventures with taxable entities and gift acceptance as described below.
The IRS clearly views adoption of the policies by nonprofits as a best practice and has strongly recommended that nonprofits adopts such policies. Nonprofits who are not able to claim that they have adopted such policies by the end of their fiscal year (December 31 for many organizations) are subject to scrutiny and perhaps increased risk of an IRS audit. If you do not have one of the following policies or if your policies need to be updated, please contact us.
Conflict of Interest Policy: A conflict of interest exists when a person in a position of authority over the organization could benefit financially from a decision that it is within his or her authority to make. A conflict of interest policy should define conflicts of interest, identify those individuals or classes covered by the policy and specify the policies to be followed when a conflict arises. To conform with Form 990, the policy should require annual disclosures of interests that may lead to a conflict and should enforce the policy by providing mechanisms for monitoring for and dealing with conflicts. In fact, Form 990 asks the tax-exempt organization to describe how the organization "regularly and consistently monitors and enforces compliance with the policy."
Whistleblower Policy: This policy should encourage staff and volunteers to report illegal practices or violations of the organization's written policies by protecting an individual from retaliation. Further, this policy should identify a system for reporting violations, and identify to whom violations can be reported.
Document Retention Policy: This policy should specify the record retention responsibilities of the organization's employees and volunteers, including how documents are to be maintained and destroyed.
Compensation Policy: Organizations should have a process to determine appropriate compensation to directors, officers and top management. The process should include review by a governing body, review of compensation of similar positions at similar organizations and documentation of deliberations regarding compensation. If an organization provides first-class or charter travel, travel for companions, tax indemnifications, discretionary spending accounts, housing allowances, payments for business use of personal residences, health club dues or any personal services (e.g. maid or chauffeur), the policy should be approved by the Board, state a compelling and credible business purpose and require substantiation of the expenses incurred.
Joint Venture Policy: A joint venture includes any joint ownership or contractual arrangement with a taxable entity to undertake a specific business enterprise, investment or exempt-purpose activity regardless of whether the organization controls the venture, the legal structure of the venture or whether the venture is taxed as a partnership, association or corporation. The policy should outline joint venture negotiation procedures that will protect the organization's tax exempt status.
Gift Acceptance Policy: This policy should provide policies over the acceptance of any "non-standard" contribution. A non-standard contribution is one that is not expected to further the organization's tax-exempt purpose, for which there is no ready market to convert the asset to cash and the value of the asset is difficult to ascertain.
In addition, Schedule J to the Core Form of the Form 990 ask for more detail about compensation packages of high level management and key employees including first-class or charter travel, travel for companions, tax indemnifications, discretionary spending accounts, housing allowances, payments for business use of personal residences, health club dues or any personal services (e.g. maid or chauffeur) to its employees. Nonprofit organizations that provide the foregoing benefits are at a higher risk of an audit. For this and other reasons, many organizations do not provide these benefits. The IRS does not ban these payments; however if provided, these benefits should be pursuant to a well reasoned written policy and with the advice of tax counsel. Again, if you do not have a written policy covering these forms of compensation, please contact us.
Finally, depending on the activities of your organization, you may also need to adopt written policies covering U.S. grant procedures, foreign grant procedures, governing chapters, affiliates and branches, and conservation easements which are also referenced in the Form 990. There are also a series of written policies directed to hospitals and tax-exempt bond insurers.