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Nonprofit Governance: What the IRS is looking for

Recent updates to governing laws of corporations such as the Sarbanes-Oxley act (est. 2002) and updates to the IRS form 990 have given precedent to the roles and responsibilities of governing a nonprofit corporation. So, do you want to stay compliant? Of course you do! Let’s take a look at what you need to know. According to IRS form 4221-PC":

“Although the Internal Revenue Code does not require charities to have governance and management policies, the Internal Revenue Service will review an organization’s application for exemption and annual information returns to determine whether the organization has implemented policies relating to executive compensation, conflicts of interest, investments, fundraising, documenting governance decisions, document retention and destruction, and whistleblower claims.”

Another form published on the IRS website also states a similar sentiment:

“And while the tax law generally does not mandate particular management structures, operational policies, or administrative practices, it is important that each charity be thoughtful about the governance practices that are most appropriate for that charity in assuring sound operations and compliance with the tax law. “

So, to recap…the IRS doesn’t generally require governance policies…but the IRS will review whether you have implemented them. In that case, let’s call them “suggestions”. And I don’t know about you, but if the IRS is suggesting that I comply with something, I’m generally going to heed that advice. Let’s take a look at these “suggestions.”

IRS Governance “Suggestions”

When filing your annual 990 to the IRS, for organizations that are required to do so (to check if your organization is required view this), part VI of form 990 will ask a series of questions related to governance and policies. For most, they are single Yes/No questions, but some will require additional details:

  • Maintain minutes of all board meetings (and committee meetings for committees that are authorized to act on behalf of the board, such as an executive committee).

  • Annually review a written policy and complete a questionnaire about conflicts of interest and document in minutes of board meetings when the policy is invoked.

  • Approve the compensation of officers, directors, trustees, key employees, and document how the board determined that the compensation is appropriate, and not excessive.

  • Each member of the board shall review a copy of the IRS Form 990 before it is submitted to the IRS.

  • Disclose to the public the nonprofit’s three most recently filed annual returns with the IRS, as well as its application for tax-exemption and related correspondence and attachments.

  • Adopt a whistleblower protection policy.

  • Adopt a with a document retention/destruction policy. To view a full list of documents to retain, turn to IRS form 4221-PC.

  • Adopt a gift acceptance policy to govern the receipt of "non-cash" gifts, such as gifts-in-kind, and unusual gifts (land, vehicles, artwork etc.).

  • Regarding Joint ventures: If the organization has participated in a joint venture, disclose whether the organization took steps to avoid prohibited private benefit.

  • Report significant changes to their organizational documents (articles of incorporation, by laws, etc) and mission since the prior Form 990 was filed.

  • A charity with substantial assets or revenue should consider obtaining an audit of its financial statements by an independent auditor.

The purpose of these questions from the IRS is to ensure that your organization is transparent and accountable to your constituents and ultimately is worthy of a tax-exempt status. So, how does your organization stack up to this list?

Want to learn more about governance or get help to bring your organization up to speed? Contact me today!

Clark Nonprofit Consulting LLC publishes this website and our blogs for educational purposes only in order to provide general information regarding business-related topics relevant to nonprofit organizations. The website and blogs are not intended as legal or tax advice on any matter. You should not act or refrain from acting because of information found here without first seeking appropriate legal, tax or other professional advice from someone who is familiar with your particular circumstances. We make no representations, endorsements or warranties, express or implied, regarding any information that appears on this website, in our blogs or on any third-party site linked to this website.

Matt Clark