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 Issuessignificant guidance as to how the IRS takes governance issues into account in theexamination process; and we find the absence of guidelines in this area to be troubling.Governance Issues in Education and Outreach. In recent years, the IRS has beenactive in addressing governance issues as part of its education and outreach efforts.Although these initiatives do not have the force of law, the structure of thesepronouncements can and does signal IRS’s expectations regarding charitableorganization governance. We believe the IRS has an important role to play in this area.We note, however, that efforts to promote good governance are fraught with complexity.While we may all agree that governance matters, there is little or no empirical supportfor the proposition that requiring specific governance practices results in greatercompliance with the tax laws pertinent to exempt organizations. We are very mindful ofthe fact that even the most modest level of prescription from a regulatory body such asthe IRS regarding what constitutes “good governance” can undermine the fundamentaland wholly legitimate authority of the organization’s governing board and can suggest aone-size-fits-all approach that can place undue burdens on an organization, divert theorganization’s attention from meaningful governance to polices and procedures, and dodamage to the uniquely diverse and vibrant charitable sector in this country. Given thediversity of the sector and the varying, and often unpredictable, challenges facing anorganization, the organization’s governing board generally is in the best position todetermine what the most appropriate practices are for its organization.Why Treasury/IRS Should Proceed With Caution in Promoting NonprofitGovernance. The IRS should remain mindful of the following set of cautionaryconcerns:• Beware the law of unintended consequences.• The power to inquire is the power to punish.• Governance is an unfunded mandate.• One size does not fit all.• Conventional wisdom is not empirical evidence.• Good governance cannot be captured in a “punch list.”• Policies are not practices.• Bad policies can lead to bad practices.• The bully pulpit is a form of regulation.• Exempt organizations are governed by boards, not by the IRS.These concerns should be considered by the IRS in any instance in which the IRSinquiries or opines about matters of nonprofit governance. However, the inherent risksand the need for caution are not of equal sensitivity in all circumstances. Therefore, weoffer a framework and recommendations that take these concerns into account in ourconsideration of the appropriate role of the IRS with respect to nonprofit governance.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 4
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesRecommendations. We again acknowledge the IRS’s longstanding stake andlegitimate interest in governance issues as they relate directly to compliance with thelaws under its jurisdiction. But because of the concerns expressed above and thedearth of empirical evidence supporting the effectiveness of specific nonprofitgovernance measures, we believe the IRS should approach the governance area withcaution. We recommend that in each instance the IRS is considering involvement in aspecific governance issue it should consider the importance of the specific governancepractice to compliance with the laws under its jurisdiction and then balance that againstpotential countervailing considerations (e.g., will it elicit or promote a meaningfulresponse related to tax compliance and what harm might flow) in determining whetherto proceed. We believe the context in which the IRS is operating—in creating standardsfor exemption; on determination of exemption; on examination or in other complianceinitiatives; in 990 reporting; and in education and outreach—is relevant to this balancing.We conclude our report with 12 recommendations we hope the IRS will find useful as aframework in helping it navigate appropriately between its mandate to ensurecompliance with the tax laws and the broader and more aspirational goal of promotinggood governance in the sector. We recognize that in a number of instances the IRSalready follows or substantially follows these recommendations, but we include all 12 toensure a complete framework.(1) The IRS Should Continue to Work Collaboratively With The Tax-ExemptCommunity In Connection With Its Governance Initiatives.(2) Specific Governance Practices Should Be Mandated Only In Rare And LimitedCircumstances.(3) The Closer The Nexus To Tax Compliance, The More Appropriate TheGovernance Inquiry Or Recommendation.(4) The IRS Should Explain The Specific Relationship Between Tax Compliance AndEach Governance Practice About Which It Is Inquiring Or Which It Is Addressing.(5) Compliance Questions Or Commentary Are More Appropriate Than GovernanceQuestions Or Commentary.(6) Governance Inquiries Should Be Made And Comments Addressed In As NeutralA Manner As Possible Under the Circumstances.(7) Questions That Ask About Practices And Approaches Are Typically Better ThanQuestions That Ask About Policies.(8) The IRS Should Expressly Acknowledge When Governance Practices AboutWhich It Is Inquiring Or Which It Is Addressing Are Not Required.(9) The IRS Should Expressly Acknowledge That Governance Practices AboutWhich It Is Inquiring Or Which It Is Addressing May Be More Appropriate ForSome Types Of Organizations Than For Others And Respect The Role Of TheGoverning Body In Making Those Decisions.(10) Taking Into Account The Absence Of Certain Governance Practices InDetermining Whether To Audit Or Take Other Compliance Actions May BeAppropriate in Certain Instances.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 5
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