Governance Issues for Tax-Exempt Organizations

Governance Issues for Tax-Exempt Organizations

1st in a Series

In recent years the Internal Revenue Service (“IRS”) has become increasingly interested in the governance practices of tax-exempt organizations. The IRS Exempt Organizations group (“EO”) has released the following three major publications with respect to governance:

1. New Federal Form 990, Part VI, Governance, December of 2007; effective beginning with 2008 Forms 990,
2. IRS Not-for-Profit Governance Best Practices document, February 2008; and
3. Federal Form 14114, Governance Check Sheet, December 2009.

The IRS EO believes, as stated by Lois Lerner, IRS Director of EO, on April 19, 2012, that “a well-governed organization is more likely to be a tax-compliant organization”. This is evidenced in the addition of the governance section which was added to the revised Federal Form 990. This section of the form is comprised of 20 questions. These questions are divided into three areas: (1) governing body and management, (2) organizational policies and (3) disclosure items. This section addresses governance issues and policies that are not requirements for tax exemption; however, reinforces the fact that the IRS is extremely interested in the governance practices of tax-exempt organizations; Sarbanes-Oxley to the not for-profit industry.

The IRS Not-for-Profit Governance Best Practices document outlines its recommendations for best practices in certain areas. The document is divided into the following six areas: (1) Mission, (2) Organizational Documents, (3) Governing Body, (4) Governance and Management Policies, (5) Financial Statements and Form 990 Reporting and (6) Transparency and Accountability.

Federal Form 14114, Governance Check Sheet, released in December of 2009, is comprised of 28 questions, organized into the following eight major sections, which parallel many of the new Form 990, Part VI, major governance IRS areas of concern. These are consistent with the governance topics and practices recommended by the IRS within its Not-for-Profit Governance Best Practices document outlined above. These sections include:

1. Exempt Organization Information
2. Governing Body and Management
3. Compensation
4. Organizational Control
5. Conflict of Interest
6. Financial Oversight
7. Document Retention
8. Disposition

The IRS has stated that the check sheet information will ultimately be used as part of a long-term study to gain greater awareness of the relationship between charities’ tax compliance and effective governance practices. The check sheet will now be used and completed by all EO Revenue Agents in the examination of an Internal Revenue Code (“IRC”) §501(c)(3) public charity. Lerner also stated, in a speech given at the Georgetown Law Center, that “the governance check sheet was used on every IRC §501(c)(3) examination done by IRS last year”.

Given the IRS EO focus on the governance practices of tax-exempt organizations, we recommend that each organization complete the Form 14114 annually as part of its tax compliance plan. Future tax tips in this series will address sections two through seven of Form 14114 outlined above.

Copies of the IRS Form 990; IRS Not-for-Profit Governance Best Practices document and Federal Form 14114, Governance Check Sheet, can each be accessed at the healthcare services section of our Firm’s website.

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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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