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 IssuesNoting that charities are already required to make Form 1023, Form 990, andForm 990-T available for public inspection, the 2008 Governance Paperencourages charities to go further by posting these materials, as well as “annualreports and financial statements,” on their public websites. Form 990 askswhether and how an organization makes Forms 1023, 990, and 990-T, governingdocuments, conflicts policy, and financial statements available to the public.February 7, 2007, IRS’ Good Governance Practices Discussion DraftOn February 7, 2007, the IRS released a discussion draft (the “Draft”) of possible goodgovernance practices for charitable organizations. 247 The Draft begins with generalintroductory language about governing boards and then lists nine recommendations thatthe IRS “strongly recommends” organizations review and consider adopting. 248 TheDraft specifically states that, “[w]hile adopting a particular practice is not a requirementfor exemption, an organization that adopts some or all of these practices is more likelyto be successful in pursuing its exempt purposes and earning public support.” Inaddition, “any decision by the Service to conduct a review of operations subsequent toexemption . . . will be influenced by whether an organization has voluntarily adoptedgood governance practices.” 249Governing BoardsThe introductory language of the Draft states that governing boards of charitableorganizations “should be” composed of “persons who are informed and active inoverseeing a charity’s operations and finances.” In particular, very small or verylarge governing boards “may be problematic.” 250Recommendation 1: Mission StatementThe Draft recommends that a charitable organization adopt a mission statement.A mission statement should “explain and popularize the charity’s purpose andserve as a guide to the organization’s work.” It should show “why the charityexists, what it hopes to accomplish, and what activities it will undertake, where,and for whom.” 251Recommendation 2: Code of Ethics and Whistleblower PoliciesThe Draft recommends that a charitable organization adopt a code of ethics anda whistleblower policy (that is, establish procedures for employees to report in247IRS, Good Governance Practices for 501(c)(3) Organizations, which was at http://www.irs.gov/pub/irstege/good_governance_practices.pdf.The IRS removed this document from its website in February 2008 when it postedGovernance and Related Topics—501(c) Organizations, supra note 22.248Id.249Id.250Id.251Id. at 2.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 104
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesconfidence suspected financial impropriety or misuse of the charity’s resources).“The code of ethics should be a principal means of communicating to allpersonnel a strong culture of legal compliance and ethical integrity.” 252Recommendation 3: Due DiligenceThe Draft states that a director of a charitable organization “must exercise duediligence consistent with a duty of care that requires a director to act: In goodfaith; With the care an ordinarily prudent person in a like position would exerciseunder similar circumstances; In a manner the director reasonably believes to bein the charity’s best interests.” 253 To this end, the Draft recommends that acharitable organization adopt policies and procedures that help directors meettheir duty of care. Such policies and procedures should ensure that eachdirector: “Is familiar with the charity’s activities and knows whether thoseactivities promote the charity’s mission and achieve its goals; Is fully informedabout the charity’s financial status; and Has full and accurate information to makeinformed decisions.” 254Recommendation 4: Duty of LoyaltyThe Draft states that a director of a charitable organization owes a duty of loyaltyto the organization that requires the director to act in the interest of the charityrather than in the personal interest of the director or some other person ororganization. To this end, the Draft recommends that a charitable organizationadopt a conflict of interest policy that: “Requires directors and staff to act solely inthe interests of the charity without regard for personal interests; Includes writtenprocedures for determining whether a relationship, financial interest, or businessaffiliation results in a conflict of interest; and Prescribes a certain course of actionin the event a conflict of interest is identified.” 255 The Draft refers to Appendix Aof the Form 1023 instructions as a sample conflict of interest policy.Recommendation 5: TransparencyThe Draft recommends that a charitable organization adopt and monitorprocedures to ensure that the charity’s Form 990, annual reports, and financialstatements are complete and accurate, are posted on the organization’s publicwebsite, and are made available to the public upon request. 256Recommendation 6: Fundraising Policy252Id. at 3.253Id. at 4.254Id. at 4.255Id. at 5.256Id. at 6.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 105
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