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 IssuesThe Draft recommends that a charitable organization adopt and monitor policiesto ensure that fundraising solicitations meet federal and state law requirementsand that solicitation materials are accurate, truthful, and candid. 257 In addition,fundraising costs should be “reasonable” and paid fundraisers should be usedonly if registered with the state.Recommendation 7: Financial AuditsThe Draft recommends that the directors of a charitable organization with“substantial assets or annual revenue” should ensure that an independent auditorconduct an annual audit. In addition, the auditing firm should be changed“periodically”; the Draft mentions a five year period as illustrative. For a charitywith “lesser assets or annual revenue”, the Draft recommends that the directorsshould ensure that an independent certified public accountant conduct an annualaudit. For “very small organizations”, the Draft suggests using volunteers toreview financial information and practices. These volunteers could be tradedbetween similarly situated organizations to maintain financial integrity. 258Recommendation 8: Compensation PracticesThe Draft states that charities generally should not compensate persons forservice on the board of directors except to reimburse direct expenses of service.A director should be compensated only when the compensation is determinedappropriate by a committee composed of persons uncompensated by the charityand who have no financial interest in the determination. 259Recommendation 9: Document Retention PolicyThe Draft recommends that a charitable organization adopt a written policyestablishing the standards for document retention and destruction. 260 The policyshould include guidelines for handling electronic files and cover backupprocedures, archiving of documents, and regular tests of system reliability. TheDraft mentions IRS Publication 4221, “Compliance Guide for 501(c)(3) Tax-Exempt Organizations,” as a source of more information.November 2002, Anti-Terrorist Financing GuidelinesIn November 2002, the Treasury Department released “U.S. Department of theTreasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-BasedCharities” (“Voluntary Guidelines”). 261 The Voluntary Guidelines were expressly not257Id. at 7.258Id. at 8.259Id. at 9.260Id. at 10.261At http://www.treasury.gov/offices/enforcement/key-issues/protecting/docs/guidelines_charities.pdf; 39 EXEMPT ORG. TAX REV.120, January 2003.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 106
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesbinding and created no safe harbors. In addition to suggesting various financial andoperational due diligence procedures, Treasury also offered governance guidelines thatwent significantly beyond anything contained in federal laws governing nonprofitorganizations. 262 After several meetings and exchanges of correspondence withrepresentatives of the charitable sector, 263 many of whom did not find the VoluntaryGuidelines to be as helpful as Treasury had hoped, Treasury twice revised theVoluntary Guidelines, most recently in September 2006. 264 These subsequent versionsof the Voluntary Guidelines contained significantly less material on governance than theinitial release. However, the final version of the Voluntary Guidelines continues toemphasize the importance of an active, engaged, and independent governing body for acharity’s ability to comply with the law and prevent the diversion of its assets fromcharitable purposes.December 19, 2007, Redesigned Form 990On December 19, 2007, the IRS released a redesigned Form 990, effective for taxyears 2008 and beyond. 265 Part VI of the form requests information regarding thegoverning body and management of the filing organization, as well as the organization’sgovernance policies. This Part states that it requests “information about policies notrequired by the Internal Revenue Code.”June 14, 2007, Background Paper on Redesigned Draft From 990On June 14, 2007, the IRS released a discussion draft of a redesigned Form 990 and abackground paper discussing the changes. 266 Discussing the new section requiringdisclosure of certain governance practices, the background paper states: “Goodgovernance and accountability practices provide safeguards that the organizations’assets will be used consistently with its exempt purposes, a critical tax complianceconsideration, especially with respect to organizations that are subject to private benefit,excess benefit, and private inurement prohibitions. In our view and experience, a wellmanaged organization is likely to be a tax compliant organization.” 267April 23 and 24, 2008, Speeches by Steven T. Miller262Voluntary Guidelines as released in November 2002. These governance provisions appeared to be adapted from voluntarystandards published by organizations such as the Better Business Bureau.263Many in the charitable sector were concerned that the Voluntary Guidelines not only went beyond the requirements of law butalso would, if followed, expose humanitarian aid workers to serious risk of bodily harm. Representatives of umbrella groups such asthe Council on Foundations and Independent Sector, international grantmaking and humanitarian charities, private practitioners, andacademics formed a Treasury Guidelines Working Group which met with Treasury representatives on several occasions to expresstheir concerns. This group developed an alternative document, Principles of International Charity (available for downloading atwww.usig.org/publications.asp#legal), reflecting the efforts that charities themselves have made to protect their assets fromdiversion from charitable purposes.264See http://www.treasury.gov/offices/enforcement/key-issues/protecting/charities-intro.shtml.265IRS Form 990 Redesign for Tax Year 2008, http://www.irs.gov/pub/irs-tege/f990rcore.pdf.266IRS, “Background Paper Redesigned Draft Form 990,” http://www.irs.gov/pub/irs-tege/form_990_cover_sheet.pdf.267Id. at 3.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 107
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