A committee of nonprofit experts that advises the Internal Revenue Service is urging the tax agency to be cautious in its stepped-up efforts to promote good governance by charities.
Such efforts “are fraught with complexity,” said the Advisory Committee on Tax Exempt and Government Entities in a 112-page report.
The IRS’s new version of its Form 990 informational tax return, the primary document charities file each year, includes a series of questions about nonprofit organizations’ governance policies and practices, even though the federal tax code does not explicitly set out specific governance standards for the revenue service to enforce.
Effective governance practices among the country’s 1.1 million charities “will vary depending on numerous factors, including size, sophistication, location, available resources, and activities,” the committee said.
“Moreover, while we may all agree that governance matters, it is not at all clear that requiring specific governance practices results in greater compliance with the tax laws,” the committee continued. “In fact, superior board governance may have much more to do with the values, active engagement, and accountability of those in charge than with the adoption of procedures and policies.”
The committee said it acknowledged “the IRS’s long-standing stake and legitimate interest in governance issues as they relate directly to compliance with the laws under its jurisdiction.”
But, the committee said, “the IRS is a powerful force that can drive behavior merely by asking about specific governance practices. Charities can feel pressured to adopt the specific practices, even where it is inadvisable in their situation because they believe the IRS or others will consider them poorly governed if they fail to do so.”
This, the committee added, “then can effectively usurp the judgment of governing boards in determining what governance practices make sense in their specific context, place undue burdens on organizations, divert their attention to proxies for governance instead of actual governance, and adversely impact the unique, diverse, vibrant, and flexible charitable sector in this country. Accordingly, we believe the IRS should approach this area with caution.”
The advisory committee provided 12 recommendations to the IRS that it said would help the tax agency “as it seeks to balance the desirability of promoting good governance against the potential deleterious consequences to the [nonprofit] sector.”
Among the recommendations:“Specific governance practices should be mandated only in rare and limited circumstances.” “The IRS should explain the specific relationship between tax compliance and each governance practice about which it is inquiring or which it is addressing.” “Governance inquiries should be made, and comments addressed, in as neutral a manner as possible under the circumstances.”
In a speech in April to charity tax lawyers, Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said the revenue service had good reason to place new questions on governance on the revised Form 990.
“We are not interlopers trying to regulate an area that is beyond our sphere,” Mr. Miller said.
The effects of good or bad nonprofit governance cut across virtually everything we see and do in our work,” Mr. Miller said. “It impacts whether the organization is operated to further exempt purposes and public, rather than private, interests. It dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fund raising practices, or allows others to take unfair advantage.”
He added: “The question is no longer whether the IRS has a role to play in this area, but rather what that role will be.”