Does the IRS care about Governance? They don’t have authority, but they do have interest!

As stated in the instructions for the form 990, “Even though the information on policies and procedures requested in Section B generally isn’t required under the code, the IRS considers such policies and procedures to generally improve tax compliance. The absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, inurement, operation for non-exempt purposes, or other activities inconsistent with exempt status.”

In other words: the IRS is asking these questions to determine if the board is truly “in charge” by exercising its governance duties of care, loyalty and obedience, which are the best protections against bad stuff happening – like improper ways board members or staff might be receiving compensation or using the assets of the organization (in IRS terms, inurement), or making money outside the mission you received tax exemption to work on (“operations for non-exempt purposes” in IRS speak).

If you are missing too many key policies and practices – for example, you don’t keep minutes, lack a conflict of interest policy, and have paid people who also have a vote on the board – it can raise yellow or red flags that may lead to further inquiry.

Page 6, Part VI deals with governance, management and disclosure

Section A seeks to determine if there are any relationships with other entities that might diminish the independence of people involved, like family ties or business relationships.  Has the board given control to members to elect the board? Is there another organization that could make governance decisions normally handled by a board?  (“Parent” organizations such as hospital or higher education entities might face this challenge.)  Is there documentation of board decisions in question 8 – did you track what the board decided, usually through corporate minutes?

Section B delves into important policies that reflect governance is happening.

  • If chapters or branches of the organization exist, do they operate under policies set by the board?
  • Did the board see the 990 before it was submitted, and what process was used to review and discuss it (Live discussion at a meeting? Email discussion?)
  • Is there a policy and process to identify and deal with conflicts of interest? How are individual conflicts (potential or actual) made known to the board?
  • Do you have policies dealing with whistleblowers calling out illegal or unethical behaviors?
  • Is your document retention policy in place, in case the state or IRS come knocking?
  • Before setting compensation for the Executive Director and other key staff, what research did you do to ensure you aren’t out of line with comparable organizations?
  • Were you part of an arrangement with a for-profit business (rare, but it happens), such as in a joint venture?

Section C reflects the requirement to make your 990 form available to the public, and other ways you can be transparent to donors and community members.  Because the 990 is a public document, it’s important to be aware of the story that it tells about you. Foundations and other donors use this valuable source of information to make decisions – so be sure it’s accurate and compelling (to the extent that a tax form can be compelling!).

For other ways to use the 990 as a governance improvement document, see this helpful post: https://www.blumshapiro.com/insights/using-form-990-for-organizational-improvements/

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