TaxNewsFlash-Exempt Organizations

March 4, 2008
No. 2008-17
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New IRS Guidance on Governance Policies and Practices for Section 501(c)(3) Organizations

The IRS recently posted to its Web site a document describing governance policies and practices that the IRS believes charitable organizations ought to consider adopting. According to the IRS document:

  • Well-governed charities are more likely to comply with the tax law.
  • The IRS requests information regarding governance both on the application for tax exemption and on the annual information return.
  • The tax law does not generally mandate particular management structures, policies or practices, and that some recommended practices may be more appropriate than others, depending on an organization’s specific situation.

The document—Governance and Related Topics – 501(c)(3) Organizations—is available electronically on the IRS Web site: http://www.irs.gov/pub/irs-tege/governance_practices.pdf

Overview

The document discusses the IRS’s perspective on governance policies and practices in the following areas:

  • Mission
  • Organizational Documents
  • Governing Body
  • Governance and Management Policies, including:

    • Executive Compensation
    • Conflicts of Interest
    • Investments
    • Fundraising
    • Governing body minutes and records
    • Document retention and destruction
    • Ethics and whistleblower policy
  • Financial statements and Form 990 Reporting
  • Transparency and Accountability

Background

The new governance document is part of an ongoing effort by the IRS to advise the tax-exempt sector on "good governance" practices. In February 2007, the IRS posted on its Web site a "discussion draft" outlining nine good governance practices for charitable organizations. See TaxNewsFlash-Exempt Organizations 2007-19. The February 2007 discussion draft stated that the IRS “strongly recommends” that organizations adopt these practices.

After receiving significant public comments, however, in November 2007 the IRS appeared to back off, posting on its Web site a statement that the draft was a "preliminary staff discussion draft" containing "suggested discussion topics among those to be considered in the nonprofit governance dialogue.” The statement acknowledged that there are no bright lines in many areas and that governance practices must be tailored to the situations of particular organizations. See TaxNewsFlash-Exempt Organizations 2007-136.

The discussion draft initially posted in February 2007 has been removed from the IRS Web site.

KPMG Observation

While the February 2007 discussion draft stated that an organization “should” adopt certain governance practices and policies, the new document generally “encourages” organizations to adopt certain policies and practices, and discusses different ways organizations may address some governance issues, acknowledging that such policies and practices generally are not required by law. In addition, the new document relates its discussion of policies and procedures to specific questions on the new (tax year 2008) Form 990.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com
 

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