As evidenced by recent speeches of IRS officials and other activities within the Service, the IRS has increased its focus on governance issues for tax-exempt organizations, promoting its view that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance.
In June, Sarah Hall Ingram, the newly-appointed IRS Commissioner of the Tax Exempt and Government Entities Division (“TE/GE”), addressed a program on nonprofit governance at Georgetown University Law Center. Ingram spoke in terms of governance as key organizational and operating principles, derived from the requirements for tax exemption. She noted that the principles with which the IRS is most concerned are embedded in Part VI of the newly-designed Form 990.
The principles Ingram noted are:
- The organization clearly understands and publicly expresses its mission;
- The governing board should be engaged, informed and independent;
- Policies and practices should result in the proper use and safeguarding of assets; and
- Operation of the organization should be transparent, e.g., board decisions reflected in the minutes, protection of whistleblowers and accurate Forms 990.
In 2007, the Independent Sector’s “Principles for Good Governance and Ethical Practice,” as Ingram noted, recommended that tax-exempt organizations adhere to similar principles. The move toward self-regulation of the sector was likely brought on by scandals and unfavorable publicity that exposed improper use of charitable assets by insiders in recent years. However, some tax-exempt experts have questioned whether it is appropriate for the IRS to assert its considerable influence over exempt organizations, on issues relating to governance.
Ingram made it clear throughout her remarks that the IRS wants to ensure that organizations have adequate systems, safeguards and controls in place to manage against the risk of non-compliance. She cited support for such involvement from members of the Senate Finance Committee and state charity officials. Ingram also pointed to provisions in the Code, such as the Section 4958 excess benefit tax and Section 4955, tax on political expenditures of 501(c)(3) organizations, as well as the provisions regarding self-dealing, jeopardy investments and taxable expenditures applicable to private foundations, as evidence that Congress intended to hold managers accountable for certain acts. While recognizing the great variety in organizations – in size, purpose and the nature of its leadership – Ingram noted that the involvement of the IRS must be reasonable and balanced.
Ingram considers that if an organization adopts good governance practices during its formation and demonstrates adherence to such practices through its application, the IRS can expect that the organization is less likely to mismanage its tax-exempt funds.
Ingram set forth three goals for TE/GE over the next five years. The first goal, of providing uniform and measured training about governance to its determination and examination agents, is underway. The training was proposed after the Advisory Committee on Tax Exempt and Government Entities discovered that a variety of governance standards were being applied inconsistently. Determination specialists were requiring organizations to adopt certain policies or conform to various benchmarks of board independence. Examiners varied as to what was acceptable for an organization to avoid revocation of exempt status. Ingram announced that the training program, which began in April, will be on-going. As a second goal, when the training is completed, the IRS will then systematically review its determination and examination agents to assess the range and frequency of issues regarding governance and the effect of the training.
The training materials are now on the IRS Web site, and include many of the topics discussed by Ingram, such as the organization’s mission, management policies, financial statements, transparency and accountability. In general, the training materials make the point that it is not the job of the IRS to determine an organization’s governance structure, policies or practices, but rather to assess whether an organization has complied with the tax laws. However, the specific details of the training do “encourage” organizations to follow certain practices, such as considering term limits for board members. The materials indicate that “next steps” for TE/GE include additional training and a long-term study using an examination checksheet regarding governance topics, to explore the link between good or bad governance and compliance with tax laws.
Ingram’s third goal is to engage in a dialog with the tax-exempt sector about the governance of special categories of exempt organizations, such as private foundations or member organizations, to assess the needs of those organizations.
Finally, the redesign of IRS Form 990 has resulted in Part VI, which includes questions regarding governance policies, size and independence of the board, and compensation. The IRS has included a “Frequently Asked Questions and Tips,” for Part VI of the 990, on its Web site.
Resources on the IRS Web site:
- Remarks of Sarah Hall Ingram, TE/GE Commissioner, at Georgetown University Law Center, CLE Program: http://www.irs.gov/charities/article/0,,id=175235,00.html
- Governance Guide: www.irs.gov/pub/irs-tege/governance_practices.pdf
- IRS Training Materials – Governance: http://www.irs.gov/charities/article/0,,id=208454,00.html
- Form 990, Part VI, “Frequently Asked Questions and Tips:” www.irs.gov/charities/article/0,,id=208553,00.html.
Blank Rome is, and will be, monitoring governance issues as they relate to tax-exempt organizations. If you have any questions regarding these issues, please contact one of the Blank Rome attorneys specializing in Tax Exempt Organizations Practice.
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