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 IssuesTopic 3: Governing BodyThe 2008 Governance Paper addresses this matter in more detail than the Draft.It emphasizes what it believes is the connection between “an active and engagedboard” and a charity’s “compliance with applicable tax law requirements.” TheIRS notes what it believes are the risks of very small and very large boards.“Irrespective of size, a governing board should include independent membersand should not be dominated by employees or others who are not, by their verynature, independent individuals because of family or business relationships. TheInternal Revenue Service reviews the board composition of charities to determinewhether the board represents a broad public interest, and to identify the potentialfor insider transactions that could result in misuse of charitable assets.” Thissection of the 2008 Governance Paper also encourages organizations withchapters, branches, or affiliates to put policies and procedures in place to ensurethat their activities are consistent with the parent’s purposes.Topic 4: Governance and Management PoliciesThis topic brings together seven areas of concern, five of which were addressedas separate recommendations in the Draft.A. Executive compensation. Acknowledging that the Code does notrequire charities to follow any particular procedures, the 2008 GovernancePaper nonetheless encourages charities “to rely on the rebuttablepresumption test of section 4958 of the Code and Treasury Regulationsection 53.4958-6 when determining compensation of its executives.” Theindependence of any compensation consultant, and the quality of the dataon which the charity relies, are both of concern. Noting that it has seen“significant errors or omissions” in compensation reporting, the IRS warnsthat “executive compensation continues to be a focus point in ourexamination program.”B. Conflicts of interest. This section opens forthrightly by stating: “Thedirectors of a charity owe it a duty of loyalty” and encourages boards toadopt and implement a written conflict of interest policy. It alsoencourages charities to require periodic written disclosures of financialinterests “that [any] individual [covered by the conflicts policy], or amember of the individual’s family, has in any business entity that transactsbusiness with the charity.”C. Investments. Noting that charities are engaging in more complicatedand sophisticated investments, the 2008 Governance Paper encouragescharities “to adopt written policies and procedures requiring the charity toevaluate its participation in these investments and to take steps tosafeguard the organization’s assets and exempt status if they could beaffected by the investment arrangement.” It also reminds charities thatADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 102
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesForm 990 asks questions about joint ventures and other complexinvestments.D. Fundraising. The 2008 Governance Paper encourages charities to“adopt and monitor” policies to ensure compliance with state and federallaws on charitable solicitation and to see that their fundraising materialsare “accurate, truthful, and candid.” It also encourages charities to keepcosts reasonable and to provide information to the public on theirfundraising costs and practices.E. Governing body minutes and records. Noting that Form 990 askswhether organizations keep contemporaneous records of board andcommittee actions, the 2008 Governance Paper encourages charities tomaintain such records.F. Document retention and destruction. The 2008 Governance Paperreminds charities that the Code requires a charity “to keep books andrecords that are relevant to its tax exemption and its filings with theInternal Revenue Service” and reminds them that Form 990 now askswhether filers have a written document retention and destruction policy.The Paper identifies the issues that such a policy should cover.G. Ethics and whistleblower policy. The 2008 Governance Paperencourages boards to adopt a code of ethics as a way of promoting aculture of legal compliance. It also encourages boards to adopt andimplement whistleblower policies to enable employees “to report inconfidence any suspected financial impropriety or misuse of the charity’sresources.” It notes that Form 990 asks whether filing organizationsbecame aware of any material diversion of assets and whether they havea written whistleblower policy.Topic 5: Financial Statements and Form 990 ReportingThe 2008 Governance Paper acknowledges that although state law or non-taxfederal law may require a charity to have audited financial statements, federal taxlaw does not impose such a requirement. However, charities “with substantialassets or revenue should consider” engaging an independent auditor to preparean audit of its financial statements and establishing an independent auditcommittee to oversee the process. With regard to Form 990, the 2008Governance Paper notes that although the Code does not require it, “someorganizations provide copies of the IRS Form 990 to its governing body and otherinternal governance or management officials,” either before or after it is filed.The Paper reminds charities that Form 990 asks whether the charity provides acopy of Form 990 to its governing body and to explain how directors ormanagement review it.Topic 6: Transparency and AccountabilityADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 103
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