The IRS has repeatedly articulated its position that tax-exempt organizations that employ good governance practices are more likely to comply with tax laws and to protect their charitable assets. The new governance section of the revised Form 990 (Part VI) is evidence of the importance of good governance to the IRS.
In this regard, the IRS has begun a long-term study that will focus on the connection between governance practices employed by tax-exempt organizations and tax compliance. In December 2009, the IRS released a checklist that IRS Exempt Organizations examination agents will use to record data about the governance practices and internal controls of organizations being studied. The checklist largely tracks questions on the revised Form 990. Information collected on the checklist includes:
- The number of times annually that the Board of Directors met during the year;
- Whether the number of meetings actually held is consistent with the meeting requirements set forth in the organization’s Bylaws;
- Whether compensation arrangements for officers, directors, trustees, and key employees are approved, in advance, by an authorized body composed of individuals without a conflict of interest with respect to the compensation arrangement;
- Whether the organization’s authorized body relies on comparability data in establishing compensation;
- Whether the organization contemporaneously documents the basis for its compensation determinations (e.g., do the organization’s meeting minutes reflect compensation decisions);
- Whether effective control of the organization rests with a single individual or a select few individuals;
- Whether the organization has a conflict of interest policy. If yes, whether it addresses: (i) recusals and (ii) annual written disclosures of conflicts of interest;
- Whether the organization adheres to its conflict of interest policy;
- Whether the organization has established procedures to ensure that its assets are used properly and in a manner that is consistent with the organization’s mission; Whether the organization’s Form 990 was reviewed by the full board or a designated committee prior to filing;
- Whether the organization has a written document retention policy. If so, whether it was adhered to; and
- How often the organization contemporaneously documents its meetings, and whether the organization retains this documentation.
The start of a new year is the perfect time for all tax-exempt organizations to examine their current governance practices. As a starting point, you may want to reflect on the responses that your organization would provide to the items listed above.
A copy of the complete checklist can be obtained on the IRS web-site: www.irs.gov.