IRS Introduces a Discussion Draft of Best Practices Guidelines
Page Content
The Internal Revenue Service has offered a discussion draft of new recommendations for governance standards for the boards of exempt organizations. It believes that a charity’s governing body should be composed of well-informed persons who are active in overseeing its operations and finances. This helps ensure the organization’s assets are properly used for its charitable purposes. A summary of the nine recommendations made by the IRS with some considerations follows. Many of these recommendations are similar to the requirements imposed on publicly traded corporations under federal legislation commonly known as the Sarbanes Oxley Act. This legislation was passed in 2002 to help ensure good corporate governance in response to Enron and other corporate and accounting scandals at the time. Since the Sarbanes Oxley Act does not generally apply to non profit corporations, the IRS recommendations are an attempt by the IRS to fill the gap and ensure good governance for non profits. IRS recommendations are as follows.
1. The board should adopt a mission statement to explain and popularize the charity’s purpose and guide its work.
Comment: We believe that this is a good idea to ensure both the board and the public understand the charity’s purpose and goal.
2. The board should consider adopting and regularly evaluating a code of ethics that describes the behavior it wants to encourage and discourage. The board should adopt a policy for handling employee complaints and establish procedures to allow improprieties to be reported in confidence.
Comment: Certain portions of the Sarbanes Oxley Act do apply to nonprofit corporations. It is illegal for any corporation, for or non profit, to punish a whistleblower, and penalties are imposed upon any corporation that punishes a whistleblower in retaliation. Thus to meet the requirements of Sarbanes Oxley, establishing procedures for confidential reporting of improprieties by employees is necessary.
3. The directors must exercise due diligence consistent with a duty of care that requires a director to act in good faith, with the care an ordinarily prudent person in a like position would exercise and in a manner reasonably believed to be in the charity’s best interest. Appropriate policies and procedures should be adopted to help ensure the duty of care is met.
Comment: North Carolina law generally provides that nonprofit directors must meet a duty of care. Thus, adopting policies that help ensure the duty of care is met will in turn ensure that the organization meets the standards of North Carolina law as well.
4. The directors of a charity owe it a duty of loyalty. The board should adopt and regularly evaluate an effective conflict of interest policy.
Comment: The IRS has suggested Form 1023 conflict of interest policy for new organizations attached to the instructions to its application for recognition of exempt status. We suggest that existing charitable organizations consider adopting this policy or one similar to it.
5. To guarantee transparency to the public, the board should adopt and monitor procedures to ensure the charity’s Form 990, annual reports and financial statements are complete and accurate and appropriately made available to the public.
Comment: We agree that this is critical for compliance with both federal and state requirements.
6. The board should adopt and monitor policies to ensure that fund-raising solicitations meet federal and state law requirements and that solicitation materials are accurate and candid.
Comment: North Carolina law generally requires charities that solicit contributions to register with the Secretary of State’s office. Thus, these policies will help to ensure state law is met as well.
7. The board should ensure that its resources are used to further charitable purposes by regularly receiving and reading up-to-date financial statements, auditor’s letters and finance and audit committee reports. Organizations with substantial assets or revenue should require an independent auditor to conduct an annual audit. The auditing firm should be changed periodically. Charities with lesser assets or revenue should have an independent CPA conduct an annual audit. Very small organizations may use volunteers.
Comment: The proposal that auditing firms be changed periodically has proven controversial. Whether auditor rotation is practical or necessary has been subject to question. The IRS has more recently said it believes the relevant consideration is whether the organization has taken steps to ensure the independence of its auditor.
8. Only reasonable compensation may be paid for services. Generally, service on the board should not be compensated except for reimbursement of direct expenses.
Comment: The Internal Revenue Code under Section 4958, Governing Intermediate Sanctions, allows for the establishment of a rebuttable presumption that compensation is reasonable. We recommend organizations meet the rebuttable presumption for compensation paid to officers and high-level employees.
9. A written policy establishing standards for document integrity, retention and destruction should be adopted. The policy should include guidelines for handling electronic files.
Comment: The Sarbanes Oxley Act makes it a crime for any person to alter, falsify or cover up a document to prevent its use in an official proceeding such as a federal investigation or bankruptcy proceeding. This provision applies to non profit organizations. Accordingly, to ensure that no documents are wrongly destroyed, non profits must monitor any document destruction.
Thus, we recommend that a written policy for document retention and destruction be established for any charity. Although the IRS does not have the authority to require organizations to adopt these recommendations, the discussion draft notes that any decision by the IRS to review a tax-exempt organization’s operations will be influenced by whether it has adopted these guidelines.
The Internal Revenue Service has offered a discussion draft of new recommendations for governance standards for the boards of exempt organizations. It believes that a charity’s governing body should be composed of well-informed persons who are active in overseeing its operations and finances. This helps ensure the organization’s assets are properly used for its charitable purposes. A summary of the nine recommendations made by the IRS with some considerations follows. Many of these recommendations are similar to the requirements imposed on publicly traded corporations under federal legislation commonly known as the Sarbanes Oxley Act. This legislation was passed in 2002 to help ensure good corporate governance in response to Enron and other corporate and accounting scandals at the time. Since the Sarbanes Oxley Act does not generally apply to non profit corporations, the IRS recommendations are an attempt by the IRS to fill the gap and ensure good governance for non profits. IRS recommendations are as follows.
1. The board should adopt a mission statement to explain and popularize the charity’s purpose and guide its work.
Comment: We believe that this is a good idea to ensure both the board and the public understand the charity’s purpose and goal.
2. The board should consider adopting and regularly evaluating a code of ethics that describes the behavior it wants to encourage and discourage. The board should adopt a policy for handling employee complaints and establish procedures to allow improprieties to be reported in confidence.
Comment: Certain portions of the Sarbanes Oxley Act do apply to nonprofit corporations. It is illegal for any corporation, for or non profit, to punish a whistleblower, and penalties are imposed upon any corporation that punishes a whistleblower in retaliation. Thus to meet the requirements of Sarbanes Oxley, establishing procedures for confidential reporting of improprieties by employees is necessary.
3. The directors must exercise due diligence consistent with a duty of care that requires a director to act in good faith, with the care an ordinarily prudent person in a like position would exercise and in a manner reasonably believed to be in the charity’s best interest. Appropriate policies and procedures should be adopted to help ensure the duty of care is met.
Comment: North Carolina law generally provides that nonprofit directors must meet a duty of care. Thus, adopting policies that help ensure the duty of care is met will in turn ensure that the organization meets the standards of North Carolina law as well.
4. The directors of a charity owe it a duty of loyalty. The board should adopt and regularly evaluate an effective conflict of interest policy.
Comment: The IRS has suggested Form 1023 conflict of interest policy for new organizations attached to the instructions to its application for recognition of exempt status. We suggest that existing charitable organizations consider adopting this policy or one similar to it.
5. To guarantee transparency to the public, the board should adopt and monitor procedures to ensure the charity’s Form 990, annual reports and financial statements are complete and accurate and appropriately made available to the public.
Comment: We agree that this is critical for compliance with both federal and state requirements.
6. The board should adopt and monitor policies to ensure that fund-raising solicitations meet federal and state law requirements and that solicitation materials are accurate and candid.
Comment: North Carolina law generally requires charities that solicit contributions to register with the Secretary of State’s office. Thus, these policies will help to ensure state law is met as well.
7. The board should ensure that its resources are used to further charitable purposes by regularly receiving and reading up-to-date financial statements, auditor’s letters and finance and audit committee reports. Organizations with substantial assets or revenue should require an independent auditor to conduct an annual audit. The auditing firm should be changed periodically. Charities with lesser assets or revenue should have an independent CPA conduct an annual audit. Very small organizations may use volunteers.
Comment: The proposal that auditing firms be changed periodically has proven controversial. Whether auditor rotation is practical or necessary has been subject to question. The IRS has more recently said it believes the relevant consideration is whether the organization has taken steps to ensure the independence of its auditor.
8. Only reasonable compensation may be paid for services. Generally, service on the board should not be compensated except for reimbursement of direct expenses.
Comment: The Internal Revenue Code under Section 4958, Governing Intermediate Sanctions, allows for the establishment of a rebuttable presumption that compensation is reasonable. We recommend organizations meet the rebuttable presumption for compensation paid to officers and high-level employees.
9. A written policy establishing standards for document integrity, retention and destruction should be adopted. The policy should include guidelines for handling electronic files.
Comment: The Sarbanes Oxley Act makes it a crime for any person to alter, falsify or cover up a document to prevent its use in an official proceeding such as a federal investigation or bankruptcy proceeding. This provision applies to non profit organizations. Accordingly, to ensure that no documents are wrongly destroyed, non profits must monitor any document destruction.
Thus, we recommend that a written policy for document retention and destruction be established for any charity. Although the IRS does not have the authority to require organizations to adopt these recommendations, the discussion draft notes that any decision by the IRS to review a tax-exempt organization’s operations will be influenced by whether it has adopted these guidelines.
Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601