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 Issues(8) The IRS Should Expressly Acknowledge When Governance PracticesAbout Which It Is Inquiring Or Which It Is Addressing Are Not Required.The IRS should expressly acknowledge where practices are not required. In thisregard, we commend the IRS for including in the caption of the Governance,Management and Disclosure section (Part VI) of the redesigned core Form 990the express statement that “Sections A, B, and C request information aboutpolicies not required by the Internal Revenue Code.” However, there aregovernance questions on other portions of that Form 990 that did not include asimilar disclaimer. 151 In other IRS governance initiatives the IRS often, but notalways, includes an express statement that recommended policies and the likeare not required. 152(9) The IRS Should Expressly Acknowledge that Governance Practices AboutWhich It Is Inquiring Or Which It Is Addressing May Be More AppropriateFor Some Types Of Organizations Than For Others And Respect The RoleOf The Governing Body In Making Those Decisions.The tax-exempt sector is hugely diverse in terms of size, sophistication, location,resources and activities. What may work for one organization, may not work foranother, or may be outweighed by countervailing considerations. The IRSshould acknowledge that it is entirely appropriate for a governing body to choosefrom among a wide variety of suitable governance practices permitted understate law based on the distinctive aspects of the organization. In someinstances, particularly with small organizations, that will entail a cost-benefitanalysis. 153 Encouraging an organization’s governing body to consider whattypes of governance practices are best for its organization is in our view typicallythe more appropriate message and is supportive of the fundamental and whollylegitimate authority of the organization’s governing board. 154(10)Taking Into Account The Absence Of Certain Governance Practices InDetermining Whether To Audit Or Take Other Compliance Actions May BeAppropriate in Certain Circumstances. We would consider it appropriate forthe IRS to make the absence of certain governance procedures a factor thatincreases the likelihood of audit if they are relevant to specific inurement or151See supra note 123.152See supra note 115 regarding the IRS express statements that the conflict of interest policy included with the Form 1023 is notrequired. In connection with its Governance and Related Topics – 501(c)(3) Organizations, supra note 22, the IRS states in thePreface that “the tax law generally does not mandate particular management structures, operational policies, or administrativepractices. . . .” This statement is not, in our view, explicit enough to obviate the need to state with respect to each recommendedpractice that it is not required. The IRS specifies that certain practices are not required, such as governance and managementpolicies, but not with respect to other matters such as board size, board independence, board composition, fundraising costs, audits,and transparency with respect to fundraising expenses, conflict of interest policy, and financial statements.153See, for example, supra notes 136-38 and accompanying text.154For example, see GuideStar’s comments about the draft redesigned Form 990, supra note 121. The Governance and RelatedTopics – 501(c)(3) Organizations, supra note 22, states: “Depending on an organization’s specific situation, some of therecommended policies and practices will be more appropriate than others.” Id. at Preface. In connection with the recommendationthat organizations adopt a conflict of interest policy, the IRS does suggest that the governing board tailor the policy to theorganization’s needs. See supra note 151.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 54
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesprivate benefit concerns identified in connection with a particular organization’soperations or proposed operations and if those concerns are not otherwiseaddressed by the organization. This could include, depending upon the specificoperational concerns, the absence of a conflicts of interest policy, independentboard, or review of insider transactions by independent persons, failure to usecomparability data, or contemporaneously documenting the review. Where theissue arises on determination, the IRS could if it chose slate the organization foran early audit or other compliance initiative where the IRS can evaluate whetherthe organization is meeting the operational test based on its actual track record.We believe this is a preferable approach to requiring or “jawboning” specificgovernance practices in the determination phase, although we are concernedthat this will cause charities to adopt unproven practices that may not makesense in their context. In any event, we believe it should be limited to situationswhere there are real and specific operational issues that are identified in thecontext of a particular organization and where the organization has not takenother steps to address the concerns.(11)Consistency and Fair Treatment are Critical. Based on our interviews andpersonal experiences, we are concerned that well-meaning determinationspecialists, auditing agents, and other IRS personnel may sometimes beinappropriately requiring organizations to adopt specific governance practices.While organizations represented by sophisticated lawyers and accountants arelikely to know they can successfully challenge such demands (although they toomay succumb to the path of least resistance), that is less apt to be the case forsmaller organizations, which are more prone to be representing themselves or tohave a volunteer lawyer or accountant assisting who is not necessarilyexperienced in exempt organization matters. Thus, we have concerns aboutconsistency and potentially disparate treatment, or the perception of unfairness,in connection with both the determination and the audit/compliance processes.Accordingly, we encourage the IRS to consider how to best assure consistencyand guard against disparate treatment. In cases involving whether to conditionexemption or continued exemption on the adoption of specific governancepractices, and the conditions to be imposed, the matters might be reviewed byone office within the IRS based on specific guidelines, with records summarizingpast practices and a mandate to strive for consistency. For example, it is notclear to us whether there is a requirement that new organizations seekingdeterminations under section 501(c)(3) have a conflicts policy, whether a policy isonly required based on specific facts and circumstances (and, if so, what theyare), or whether there is more randomness to the requirement, based on thedetermination specialist. Similarly, on audit or in the context of anothercompliance initiative, we do not know if there are standards as to whatgovernance practices may be required and under what circumstances.Important aspects of ensuring consistency and fair treatment are transparencyand training of IRS personnel. The application of governance principles in thedetermination process and on audit/compliance initiatives need to be clear andtransparent both to charitable organizations and to determination specialists,ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 55
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