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The IRS & Corporate Governance

By Susan Carey Dempsey on December 13, 2009No Comment

At a recent conference on tax exempt organizations, Steven T. Miller, Commissioner of Tax Exempt and Government Entities at the IRS, shed some light on the matter.

–> Practice Tip: Organizations should take the time now to become familiar with the form 990 section on corporate governance. The new Part VI requires reporting on corporate governance, management and disclosure within the core of the new form 990. The new 990 covers tax year 2008, but there is a phase-in period for smaller organizations (see the chart below.)

Commissioner Miller explained that one goal of the IRS and the new reporting regime is to “let the sun shine on governance practices” in order to “let the public see how your organization is run.” According to Commissioner Miller, “poor governance within tax-exempt organizations inevitably leads to … waste or [a] careless use of charitable assets [and] to a misuse of the tax expenditure foregone taxes the Congress entrusts” to the nonprofit sector. Yet, he acknowledged, as the IRS has in the past, that no section of the Internal Revenue Code establishes specific requirements for how a non-profit is to be governed, and that indeed, the word “governance” does not even appear in section 501 of the Code at all. However, corporate governance is in fact relevant to the IRS because it is often governance that contributes to whether an organization is fulfilling the specific legal requirements of a 501c organization.

The Commissioner offered the following rationale to help explain the IRS’ interest in becoming more active in the corporate governance area. One, a well-governed organization is more likely to be compliant with tax law, while poorly governed organizations can lead to trouble and problems for the organization. Two, governance policies influence whether organizations are operated to further tax-exempt purposes, and whether organizations serve public rather than private interests. Three, corporate governance policies influence whether organizations’ executives are compensated fairly or excessively, and whether they make fair decisions on other important decisions such as fundraising.

–> Practice Tip: Consider the independence of your Board of Directors. Part VI, Section A, Question 1, asks for the number of independent directors that make up the composition of the Board of Directors.

Given the multitude of corporate governance best practices that commentators have put forth, Commissioner Miller attempted to articulate which have the attention and focus of the IRS. He emphasized that the composition and independence of the board of directors is very important, stating that the “gold standard” for organizations is “to have an active, independent and engaged board of directors overseeing the organization.” In addition to an independent board, the Commissioner also explained that the need for procedures to safeguard financial assets is key. Organizations should have internal financial controls in place, as well as procedures that call for the board to review major decisions to make sure that the expenditures are indeed serving a legitimate, tax-exempt purpose in line with the organization’s mission.

Commissioner Miller said that the IRS is working to educate the nonprofit sector about the importance of corporate governance standards and best practices. He also indicated that the Service’s effort to educate new organizations may occur during the tax-exempt application (determination letter) process. The Service is developing tax preparation software which will enable applicants to complete 1023 applications utilizing the new software. The software will include suggestions and educational material about relevant governance issues.

–> Practice Tip: Consider having the Board of Directors or your organization’s audit committee review your organization’s form 990 prior to submitting it to the IRS. Part VI, Section A, Question 10, asks organizations to describe the process used for reviewing the form 990 in Schedule O.

The Commissioner also explained that a new question on the form 990 which asks whether the board has reviewed the form 990 is intended to encourage organizations to consider the board’s role in the form 990 process. How particular organizations will review the 990 will vary depending on the size and nature of the organization. Nonprofit organizations, coalitions, trade associations and charities and issue advocacy groups are encouraged to plan ahead and prepare to be able to complete the new form 990 which goes into effect this year covering tax year 2008.

New Form 990: Phase-In Periods

Finally, Commissioner Miller said that the Service is encouraged by the dialogue in the nonprofit community as it prepares for the upcoming tax return filing season. The IRS has provided the chart below indicating the filing requirements for tax-exempt organizations during the phase-in period.

2008 Tax Year
(Filed in 2009 or 2010)
Form to File
Gross receipts normally = $25,000 990-N
Gross receipts > $25,000 and < $ 1 million, and Total assets < $2.5 million 990-EZ or 990
Gross receipts = $1 million, or Total assets = $2.5 million 990
2009 Tax Year
(Filed in 2010 or 2011)
Form to File
Gross receipts normally = $25,000 990-N
Gross receipts > $25,000 and < $500,000, and Total assets < $1.25 million 990-EZ or 990
Gross receipts = $500,000, or Total assets = $1.25 million 990

2010 Tax Year and later
(Filed in 2011 and later)
Form to File
Gross receipts normally = $50,000 990-N
Gross receipts > $50,000 and < $200,000, and Total assets < $500,000 990-EZ or 990
Gross receipts = $200,000, or Total assets = $500,000 990

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