Governance: Governing Body and Management
2nd in a Series
As a follow-up to our initial tax tip in this series entitled “Governance Issues for Tax-Exempt Organizations”, which was released on April 25, 2012, WithumSmith+Brown has compiled a list of what we believe to be “best practices” with respect to each topic included in the Federal Form 14114, Governance Check Sheet. This tax tip will focus on Form 14114, Part 2, Governing Body and Management.
MISSION STATEMENT
Part 2 begins with question number seven which addresses whether or not the organization has a written mission statement that articulates its current Internal Revenue Code §501(c)(3) charitable purposes. All tax-exempt organizations should create, and have its board of directors adopt, a mission statement that accurately reflects the charitable purposes, programs and activities performed by the organization on a daily basis. This mission statement should be reviewed by the board on at least an annual basis. A mission statement should explain why the organization exists, what it hopes to accomplish and the charitable activities that it undertakes.
Part I of Form 990, Return of Organization Exempt from Income Tax, asks tax-exempt organizations to describe their mission statement and to expand upon it further in Part III. With the economic challenges tax-exempt organizations are facing in today’s world they have a tendency to stray away from their mission in order to accomplish certain financial objectives. By reviewing the mission on a regular basis, the true charitable purposes of the organization are reinforced and are more likely to be accomplished. Organizations need to be aware that they need to operate consistently with their tax-exempt purpose as outlined in their Federal Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, for which the Internal Revenue Service (“IRS”) granted tax-exempt status originally. In the event a tax-exempt organization engages in activities not in accordance with its Form 1023, notification should be provided to the IRS to ensure that tax-exempt status will not be jeopardized.
BYLAWS
Questions eight and nine address aspects with respect to an organization’s bylaws. Bylaws should provide a framework for the organization’s governance and management activities and responsibilities. The governance check sheet specifically asks if the bylaws address the composition, duties, qualifications and voting rights of the board of directors. Additionally, the IRS wants to know whether or not the most recent bylaws of the tax-exempt organization are being provided, not only to the organization’s board of directors, but also to the general public, both online and by specific request. The bylaws should address the role of the board of directors and that they should oversee the activities of the organization in such a manner as will assure effective and ethical management. The IRS would like the organization’s bylaws and mission statement to be available for public inspection to maintain transparency and accountability.
VOTING MEMBERS
Questions ten through twelve address the number of voting board members and meeting requirements including how often a quorum of voting members of the board met during the year. It is recommended that the number of members on an organization’s governing board be representative of the organization’s community and of average size in order to sufficiently represent the public’s interest in an efficient manner. The organization should evaluate and train the board members to improve their understanding of internal financial statements, budgets and other processes. Question twelve pulls this section together by asking whether the board abided by the bylaws and fulfilled the meeting requirements during the year. The purpose of these questions is to assess if the frequency of the board meetings is adequate given the business of the organization and/or whether or not the full board meets with the frequency as prescribed in the bylaws.
For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
Practice Leader
973.898.9494 ? [email protected]
Questions or comments?
E-mail us at [email protected]
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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