In another step to its continued focus on corporate governance, the IRS recently released a Governance Check Sheet and guidance to its agents for conducting an examination of a tax exempt organization’s governance practice.

The focus on governance began a few years ago when the IRS revise the Form 990. The revision to the Form 990 were based to a large extent that good governance is critical for all tax-exempt organizations. The underlying assumption of the IRS is that good governance practices will result in less misuse by an organization of its tax-exempt status and charitable assets. Interestingly, no provision in the Internal Revenue Code authorizes either the IRS or Treasury to regulate governance of tax-exempt entities.

Nevertheless, IRS Commissioner for Tax Exempt and Government Entities, Sarah Hall, stated last year advocated that:

  • An organization should clearly understand and publicly express its mission. (An organization can jeopardize its exempt status by changing its mission.)  
  • The organization’s board should be engaged, informed and independent.  
  • The board should have real responsibility and authority, including implementing the rules against inurement and self-dealing.
  • The organization should ensure proper use and safeguarding of assets.  
  • The organization should implement policies and practices that address executive compensation, protect against conflicts of interest and support independent financial reviews.  
  • Relationships and decision making should be transparent—board decisions should be reflected in minutes, and whistleblowers should be protected.  
  • The organization’s Form 990 should be complete, accurate and prepared in good faith.  
  • The organization should develop a system of internal controls that is appropriate to the organization itself.  

Recent actions by the IRS effectuate the positions advocated by Commissioner Hall. The check sheet that Exempt Organizations (EO) Revenue Agents will utilize in conducting examinations of I.R.C. 501(c)(3) organizations are another wake-up call for all tax-exempt organizations. The release of the Governance Check Sheet and guidance should be enough of a wake-up call, if the revised Form 990 was not enough of one. All organizations must be cognizant of the continued attention the IRS will be placing on an organization’s corporate governance.  

The Governance Check Sheet and guidance indicate that the IRS EO Agents will be examining:  

  1. Governing Body and Management – the written mission statement of the organization reflecting a 501(c)(3) purpose and current activities; its governing board’s composition, duties and qualifications; and the frequency of meetings of the board.  
  2. Compensation – The compensation plan, including the procedures followed to determine compensation arrangements for all officers, directors, trustees and key employees, comparability data used, and contemporaneous documentation. In particular, the guidance instructs agents to examine whether any compensation arrangement was determined in advance by an authorized body of individuals free from conflict of interest.
  3. Organizational Control – whether any of the organization’s voting board members have either a business and family relationships with any other voting or non-voting board members officers, directors, trustees or key employees; and whether effective control of the organization rests with a single or select few individuals.
  4. Conflict of Interest – the organization’s written conflict of interest policy, including whether the policy addresses recusals and requires annual written disclosures of conflicts; and whether the policy was adhered to when actual or potential conflicts were disclosed.
  5. Financial Oversight – the organization’s systems or procedures are in place to ensure assets are used properly and consistently with the organization’s mission; whether written financial reports are provided to the board and discussion of such reports takes place; whether the board reviews IRS Form 990; and whether the organization uses an independent accountant, whether the board reviews the accountant’s report, and whether a management letter was prepared.
  6. Document Retention – the organization’s written policy for document retention and destruction; and contemporaneous documentation of board meetings.

It is important to note that the Governance Check Sheet require IRS agents to seek more information than is being sought in the Form 990.

Now is the time to take a hard look at your organization’s governance practices. The IRS will be taking a look, and every opportunity should be taken to ensure that everything is in order.