TaxNewsFlash-Exempt Organizations

June 12, 2008
No. 2008-49

IRS Advisory Committee on Tax-Exempt and Government Entities Addresses Appropriate Role of IRS with Respect to Good Governance Issues

Members of the IRS Advisory Committee on Tax-Exempt and Government Entities (ACT) recently met with the IRS to discuss a variety of issues facing tax-exempt organizations—including the appropriate role of the IRS with respect to tax-exempt organization “good governance” issues. The ACT provided a written report with a list of recommendations, including that the IRS needs to “approach the governance area with caution.”

Background

The ACT members are drawn from tax-exempt and government entities and focus on year-long projects with specific topics.

One of the topics examined in the ACT’s June 11 report was the role of the IRS and Treasury Department in determining good governance best practices for tax-exempt organizations.

Summary

Noting that the IRS has broad power to inquire about matters of governance in the context of applications for recognition of tax-exempt status, information reporting, and audits, the ACT found that the “greatest possibilities for harm arise at the outer edge of the IRS’s delineated interests.” While the IRS has many opportunities to promote better behavior among nonprofit boards, the:

…absence of a guiding and constraining framework creates the potential that the IRS may inadvertently undermine the effectiveness of its own efforts without careful consideration of the premises and likely impact of its inquiries and pronouncements. In focusing its broad discretion on nonprofit governance, a set of concerns should guide the IRS in selecting the issues, adopting positions, and communicating those views in individual inquiries or public declarations.

The ACT found that the IRS and Treasury need to proceed “with caution” in promoting nonprofit governance. The ACT noted among the unintended consequences of the IRS policies in this area could be:

Discouraging volunteer board members from service—especially with smaller organizations—because of the burdens of extensive governance reforms

Adding costs with respect to adopting certain practices

Using organizations’ resources for governance compliance rather than exempt purposes

Leading organizations to check off a box without actually improving their governance, either by adopting flawed policies or by adopting policies that are not effectively implemented

Requiring entities to adhere to governance practices that might be at the same time too simple for large organizations and unduly burdensome for small organizations—and that the IRS needs to consider the extraordinary diversity of the sector, how its message may be received, and whether it may have counterproductive effects

The ACT observed that good governance cannot be captured in a “punch list.”

Recommendations

The ACT report’s recommendations include:

The IRS should continue to work collaboratively with the tax-exempt community with respect to governance initiatives

Specific governance practices should be mandated only in rare and limited circumstances

The closer the nexus to tax compliance, the more appropriate the governance inquiry or recommendation (and vice versa)

The IRS should explain the specific relationship between tax compliance and each governance practice about which it is inquiring or which it is addressing

Compliance questions or commentary are more appropriate than governance questions or commentary

Governance inquiries should be made and comments addressed in as neutral a manner as possible under the circumstances

Questions that ask about practices and approaches are typically better than questions that ask about policies

The IRS should expressly acknowledge when governance practices about which it is inquiring or which it is addressing are not required

The IRS should expressly acknowledge that governance practices about which it is inquiring or which it is addressing may be more appropriate for some types of organizations than for others and respect the role of the governing body in making those decisions

Taking into account the absence of certain governance practices in determining whether to audit or take other compliance actions may be appropriate in certain circumstances

Consistency and fair treatment are critical

Education, implemented thoughtfully, is more appropriate than pressuring change

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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