Over the past few years, the IRS has become increasingly interested in monitoring the governance practices of tax-exempt organizations, particularly public charities. This interest has been shown through public statements of IRS officials, the addition of questions about board makeup and policies to the Form 990, an explanation of why the IRS considers governance important, and the development of training materials on governance for IRS personnel. Not all members of the exempt organizations community agree that the IRS should focus on governance. However, the IRS rationale is that a well-governed organization is a tax-compliant organization.
The IRS has now developed and released a governance issues checklist (the Governance Check Sheet) to be completed in each audit of an exempt organization. The checklist provides a very specific roadmap for exempt organizations to compare their practices and policies with what the IRS wants to see and to make adjustments where necessary.
The Governance Check Sheet is a two page document (IRS Form 14114), which is to be used by IRS exempt organization revenue agents in their examination of public charities. The Check Sheet provides questions to be considered by the agent concerning six specific aspects of the organization’s corporate governance structure: (a) “Governing Body and Governance Topics;” (b) “Compensation;” (c) “Organizational Control;” (d) “Conflict of Interest;” (e) “Financial Oversight;” and (f) “Document Retention.” The Check Sheet is designed to be completed by the agent on-line, with drop-down menus of possible responses and very little opportunity for narrative or description.
In addition to the governance questions included in the revised Form 990, the Check Sheet addresses the following points:
· certain organizational document issues (e.g., whether they include an articulation of a charitable purpose, and information about the composition, duties, qualifications and voting rights of board members);
· whether board members have received copies of the organization’s articles and bylaws;
· whether the organization’s articles and bylaws are available to the public, and if so, whether they are generally available or only on request;
· the frequency of board meetings as compared to bylaw requirements;
· whether there is a single individual or small group of individuals to whom the board typically defers;
· the frequency with which the conflicts of interest policy is actually adhered to (e.g., how often have conflicted members actually recused themselves from the corresponding decision making process?);
· the extent to which board members are provided with information concerning the organization’s financial condition and discusses those reports and related financial activities; and
· whether the Revenue Agent’s examination was hindered by a lack of necessary documentation.
Ultimately, the Check Sheet data will be included in a long-term study the IRS is undertaking to set forth a greaterunderstanding of the connection between charities’ tax compliance and corporate governance practices.
At this point, the IRS is not expected to make poor governance practices alone an exemption level issue, but it is conceivable that evidence of problematic governance may contribute to the consideration of penalties where evidence of more severe organizational abuse exists.