Friday, March 09, 2007

IRS on Good Governance of Charities

On February 2, 2007, the Internal Revenue Service shared with the public a "preliminary staff discussion draft" of "possible good governance practices" for charitable organizations, as described on its website here:

The informal draft reflects various ideas that have been advanced by others both within and outside the exempt sector who have studied nonprofit governance. A copy of the discussion draft is attached.

Because good governance practices may promote compliance with tax law, the IRS will continue to review recent self-regulation proposals advanced by others. A consensus of good governance practices may emerge from the various proposals.
The short discussion draft, entitled "Good Governance Practices for 501(c)(3) Organizations", is found here (PDF format, 4 pages). The document was reposted by the National Association of College and University Attorneys (also in PDF format) here, and also by many law firms (many in Philadelphia).

The introduction indicates the Service's general views on the governance of charitable organizations:

The Internal Revenue Service believes that governing boards should be composed of persons who are informed and active in overseeing a charity’s operations and finances.

If a governing board tolerates a climate of secrecy or neglect, charitable assets are more likely to be used to advance an impermissible private interest. Successful governing boards include individuals not only knowledgeable and passionate about the organization’s programs, but also those with expertise in critical areas involving accounting, finance, compensation, and ethics.

Organizations with very small or very large governing boards may be problematic: Small boards generally do not represent a public interest and large boards may be less attentive to oversight duties. If an organization’s governing board is very large, it may want to establish an executive committee with delegated responsibilities or establish advisory committees.

The Internal Revenue Service suggests that organizations review and consider the following to help ensure that directors understand their roles and responsibilities and actively promote good governance practices. While adopting a particular practice is not a requirement for exemption, we believe that an organization that adopts some or all of these practices is more likely to be successful in pursuing its exempt purposes and
earning public support.
The four-page discussion draft addresses these areas of policy & operation of charitable organizations, and recommends compliance for "good governance":
  • Mission Statement
  • Code of Ethics
  • Due Diligence
  • Duty of Loyalty
  • Transparency
  • Fundraising Policy
  • Financial Audits
  • Compensation Practices
  • Document Retention Policy
Further background about the discussion draft was provided in an article entitled "IRS Official Unveils Best Practices For Exempt Groups, Gives Program Update", published on February 5, 2007, by BNA, and made available online here by the Alliance for Advancing Nonprofit Health Care.

The article noted the remarks made on February 5, 2007, by Marvin R. Friedlander (who is
the chief of the Exempt Organizations Technical Branch, Office of Rulings and Agreements, at the IRS in Washington) at the Joint Annual Meeting of the Gulf Coast, Great Lakes and Mid-Atlantic Areas TE/GE Council, held in Washington.
An Internal Revenue Service official Feb. 2 outlined the agency's "Good Governance Practices for 501(c)(3) Organizations," telling a gathering of exempt organization attorneys and accountants that the guidelines can help tax-exempt health care organizations and other charitable entities maintain regulatory compliance and public support.

IRS lacks the authority to impose governance standards for exempt organization boards, IRS's Marvin R. Friedlander said. However, he told the gathering that the nine guideline recommendations are designed to help ensure that directors of exempt organizations "understand their roles and responsibilities and actively promote good governance practices." * * *

Despite the limits on IRS's formal powers, Friedlander said, the service would use its oversight authority and regular reviews of exempt organizations and their filings by the Tax Exempt/Government Entity Review of Operations Unit, to assess whether the governance measures were being adopted on a voluntary basis. "In the end, an organization's good governance practices should keep regulators happy and help tell a good story to the public," he added. * * *
On February 2, 2007, t
he Planned Giving Design Center had posted information about the IRS discussion draft here, and also reproduced its text in full. Some comments were posted by readers, including this suggestion:
A good reminder of good practices by non-profit boards.....Nothing profound or controversial....A very good hand out for the next Board Meeting.
Notice of the discussion draft was also posted by Delaware Valley Grantmakers, a membership association for grantmakers that serves the Greater Philadelphia area and neighboring regions. It posted the IRS discussion draft on its webpage dedicated to "Knowledge Resources for Grantmakers: Good Governance", along with other excellent resources applicable to grantmakers -- and also to their charitable grant applicants/recipients -- regarding charitable governance & conduct.

So, even in its current, very basic "preliminary staff discussion draft" form, the points made by the IRS are important to note. Board members of charitable organizations and fiduciaries of charitable trusts would do well to
develop appropriate policies and follow these basic principles.