Advisory Committee on Tax Exempt and Government Entities (ACT ...

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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesvaluation or other safeguards. In cases such as these, although we areconcerned about over-reaching, we think it is appropriate for the examining agentor other IRS personnel to encourage, but not require, improved governancepractices related to specific deficiencies of the organization. The examiningagent or other IRS personnel should, however, make it clear to the organizationthat it is encouraging, but not requiring, improved governance practices.(3) The Closer The Nexus To Tax Compliance, The More Appropriate TheGovernance Inquiry Or Recommendation. In our view, the involvement of theIRS in governance issues is most appropriate when those issues are directlyrelated to compliance with existing tax laws. Correspondingly, that involvementis more problematic, and potentially inappropriate, the further a governanceinquiry or recommendation strays from compliance with the tax laws. Theweaker that nexus, the less justification the IRS has to seek to usurp the centralresponsibility and autonomy of governing bodies to exercise business judgmentin administering their organization’s affairs, including their governance choices, toseek primacy over other regulatory and non-regulatory sources of authority thathave expertise on these issues, and to endanger the unique, diverse, vibrant andflexible charitable sector in this country.(4) The IRS Should Explain The Specific Relationship Between TaxCompliance And Each Governance Practice About Which It Is Inquiring OrWhich It Is Addressing. Related to our recommendation that a governmentinquiry is more appropriate when it has a closer nexus to tax compliance is ourrecommendation that the IRS should in all situations actually articulate therelationship between the governance practice and tax rules. We believe thishelps the IRS to assure there is a sufficiently strong relationship betweengovernance and tax compliance, educates the sector as to the goal of thegovernance practice, and creates the appropriate message that the IRS is firstand foremost an agency focused on tax compliance. The IRS does this, forexample, in the Form 1023 determination context when it asks whether theapplicant organization has a conflict of interest policy. 145 On the other hand, thecurrent draft instructions for the governance questions in Part VI of the coreredesigned draft Form 990 make no effort to relate the specific questions to thetax rules, including in connection with the questions relating to conflict of interestor other policies about which it inquires in Section B. The “Governance andRelated Topics – 501(c)(3) Organizations” addition to the Life Cycle isinconsistent in explaining the specific relationship between each recommendedgovernance practice and the tax rules. 146145See supra note 115..146Governance and Related Topics – 501(c)(3) Organizations, supra note 22. For example, it does not relate mission, board size,conflict of interest, investments, fundraising, minutes, financial statements, or providing the Form 990 to the governing body andmanagement to tax compliance, but does, at least to some extent, relate organizational documents, a governing board that does nottolerate a climate of secrecy or neglect, board composition, and executive compensation to tax compliance.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 50
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issues(5) Compliance Questions Or Commentary Are More Appropriate ThanGovernance Questions Or Commentary. A corollary to the recommendationthat a governance inquiry or comment is more appropriate when it has a closernexus to tax compliance is our observation that compliance inquiries, whichinherently relate to tax compliance, are more appropriate than governancequestions, where we believe the IRS should be more circumscribed. Althoughwe acknowledge that the line between them can be blurred, in the usual case, weconsider a question that asks for data or other information that is central to ajudgment about tax compliance or that asks whether specific tax rules wereviolated or complied with to be compliance questions; whereas we generallyconsider questions that ask about practices, procedures, and policies that are notrequired under the tax laws to be governance questions. Examples ofcompliance questions include: whether the organization engaged in, or becomeaware that it had engaged in, an excess benefit transaction with a disqualifiedperson during the reporting year; whether the organization was a party to aprohibited tax shelter transaction during the year; whether the organizationprovided goods or services in exchange for any contribution of $75 or more and,if so, whether the organization notified the donor of the value of the goods orservices provided; whether the organization engaged in direct or indirect politicalcampaign activities on behalf of or in opposition to candidates for public office;and whether the organization complied with backup withholding rules forreportable payments to vendors and reportable gaming (gambling) winnings toprize winners. On the other hand, examples of governance questions on theredesigned Form 990 for tax years beginning in 2008 include: whether theorganization has a written conflict of interest policy, whistleblower policy,document retention and destruction policy, gift acceptance policy, and jointventure policy; whether the organization contemporaneously documented themeetings or written actions undertaken by its governing body and eachcommittee with authority to act on behalf of the governing body; whether a copyof the Form 990 was provided to the organization’s governing body before it wasfiled; whether the process for determining compensation for the organization’sCEO, other officers, and key employees include a review and approval byindependent persons, comparability data, and contemporaneous substantiationof the deliberation and decision; and a description of whether, and if so how, theorganization makes its governing documents, conflict of interest policy, andfinancial statements available to the public. 147(6) Governance Inquiries Should Be Made and Comments Addressed In AsNeutral A Manner As Possible Under the Circumstances. The manner inwhich the IRS poses questions and delivers information is critical. The IRS’smerely asking about a specific governance practice is inherently prescriptive,with the ability not only to impact behavior in a manner that can be harmful to the147Occasionally a question is a mixed compliance and governance question, such as requiring an organization to check eachmethod (own website, another’s website, upon request) by which it makes its Forms 1023/1024, 990, and 990-T (in the case of asection 501(c)(3) organization) available for public inspection.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 51
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