The Internal Revenue Service has released a “guide sheet” and a “checklist” to help its agents as they gather data about the governance practices and related internal controls of charities they are auditing.
“The data collected will be included in a long-term study to gain a better understanding of the intersection between governance practices and tax compliance,” the IRS said.
Michael W. Peregrine, a lawyer in Chicago who advises nonprofit organizations, says the materials released by the IRS “demonstrate that, to the IRS, charity governance is a serious matter.”
The IRS’s interest in charities’ governance practices has been controversial. The federal tax code does not explicitly set out governance standards for the IRS to enforce, but the tax agency has shown increasing interest in keeping an eye on the governance practices of organizations.
The IRS’s revised Form 990 informational tax return, the primary document that charities file each year, includes a series of questions about organizations’ governance policies and practices.
The IRS explains on its Web site that “good governance is important to increase the likelihood that organizations will comply with the tax law, protect their charitable assets, and, thereby, best serve their charitable beneficiaries.”
Some charities and legal experts praise the IRS for its interest in governance matters; others say the revenue service is overstepping its legal authority.
Mr. Peregrine says the materials show that “the IRS is expanding on the governance issues it considers of interest. These questions go beyond those covered in the 990 and other statements of recommended governance practices.”
“To me,” Mr. Peregrine continues, the IRS materials reflect “some real practical observations, gained likely from exams, of where nonprofit governance can veer ‘off the track’: inability to obtain a quorum for meetings, control centralized in one or two individuals, failure to exercise strong financial oversight, poor conflicts practices, and failure to address the recommendations of the independent auditor.”
Mr. Peregrine says that, from a practical perspective, the IRS materials are “a useful tool for the general counsel and governance committee leadership of charities, from which they can monitor the effectiveness of existing governance practices.”
He adds that he “would not be surprised if state attorneys general and their related charity officers also took advantage of this IRS checklist to support state-based reviews and investigations of nonprofit governance.”
