If you are an Executive Director or a member on the board for a local nonprofit, odds are if I were to ask the question on how you’re organization performed this past year, or what your charity does, you would be able to go into detail for days. However, if I were to ask about your organization’s governance and policies, would I get a deer in the headlights type stare? While knowing how your organization is performing and whether it is meeting its exempt purpose is very important, so is having and following good governance practices and policies. If you ignore these issues, questioning can arise under the watchful eye of the IRS.

Each year when your organization fills out its Form 990 that goes to the IRS, there is a series of questions on the form that address various governance practices and related policies. Although some of these questions are generally not required to be answered under the Internal Revenue Code, the IRS considers such policies and procedures to improve tax compliance. Their stance is that without the appropriate policies and procedures in place the susceptibility for excess benefit transactions, operation for nonexempt purposes, and activities that are inconsistent with an organization’s exempt status are greater. While this might not always be true for all nonprofits, I would generally have to agree that with the appropriate governance practices and policies in place an organization can stay more in line with their defined purpose.

The following are some of the governance items and policies to keep in mind, and what the IRS considers to be important as well.

• The composition of your governing board, its voting members, those who are not independent, and any relationships (family or business) amongst those members.
• Who controls the organization and can that person(s) enforce decisions upon the other members of the board or elect other members of the board?
• Are the organization’s meetings documented as well as those of its related committees?
• Is a copy of the Form 990 distributed to all its members before it is filed and what is the review process?
• Are a conflict of interest policy, whistleblower policy, and document retention/destruction policy in place? If so is compliance with these polices monitored frequently?
• Are any of the board members compensated?
• How is the compensation of the Executive Director, CEO, key employees or other management officials determined and how much is their compensation?

All of the above examples are questions that can be found on Form 990 in some round about way and for certain areas such as the compensation questions, the IRS particularly might look at an individual of the organization that is making over $100,000. Not to say that this is unreasonable in anyway but it is important to have the proper documentation and policies in place to satisfy the IRS that this level of compensation is reasonable.

In conclusion, the IRS has found a statistically significant correlation between following good governance practices and proper tax compliance. A written mission statement, procedures that ensure use of the organization’s assets are consistent with its exempt purpose, review of Form 990 by the whole governing board, and other policies and procedures help to keep the organization on track. It is also important to remember that noncompliance with a written policy can be more harmful than not having a policy at all. Whether a particular policy, procedure, or governance practice is adopted is ultimately in the hands of the organization and many times it depends on its size, type, and culture. Accordingly it is important to consider what is most appropriate for your organization in assuring sound operations and compliance with tax law. If you have any questions on you organization’s governance and policies feel free to contact the staff at Willis & Jurasek.