Originally published January 2010
The IRS Tax Exempt and Government Entities Division (TE/GE Division) has posted to its Web site a check sheet that revenue agents will use in examinations of public charities to evaluate their governance practices.
In addition to serving as a guide sheet for agents auditing public charities, the governance check sheet will be used for IRS data collection purposes. As the IRS Web site explains, the governance check sheet is a tool to gather information: "[it] will be used by IRS' Exempt Organizations Examination agents to capture data about governance practices and the related internal controls of organizations being examined. The data will be included in a long-term study to gain a better understanding of the intersection between governance practices and tax compliance." While the policies and procedures that the form asks about are not generally required by law, the IRS maintains that good governance will result in tax compliance, and its revision of the IRS Form 990 and its more recent development of the governance check sheet are part of its persistent campaign to increase awareness and compliance.
Exempt organizations will find the check sheet a useful tool for self-review, and as a guide for evaluating their responses to questions on the newly revised IRS Form 990. Exempt organizations, even if not public charities and even if not required to file annual returns, will want to consider the information that the check sheet collects and consider whether additional policies should be adopted or practices modified accordingly.
The governance check sheet asks for follow-up on many, though not all, of the policy and governance-related inquiries raised on the newly revised IRS Form 990. Importantly, the check sheet collects more detail than requested on this annual return. The check sheet questions are designed to examine whether board practices are consistent with board policies and whether actual practices are consistent with the requirements set forth in the organization's governing documents. The summary of the check sheet below highlights some of the additional information requested:
Governing Body And Management. This section of questions assesses whether the organization's written mission statement reflects both a Section 501(c)(3) purpose and the organization's current activities; it also assesses whether the bylaws set forth specific information about board and officer composition, duties, qualifications and voting rights; and it inquires about frequency of board meetings and about the dissemination and accessibility of the organization's governing documents.
Compensation. This section examines procedures for approving compensation, assessing whether the organization relies on comparability data (and whether it consistently does so for making compensation determinations) and whether the organization documents its compensation determinations contemporaneously.
Organizational Control. This section quantifies and classifies business and family relationships among officers, directors, trustees and key employees; it also requires agents to determine whether the effective control of the organization rests with a single or only a select few individuals.
Conflict Of Interest. This section asks whether the board has a written conflict of interest policy, and if so, whether the policy addresses recusals and requires annual written disclosures of conflicts; it also requires agents to determine whether the policy was adhered to (and with what regularity) when actual or potential conflicts were disclosed.
Financial Oversight. This section asks whether systems or procedures are in place to ensure assets are used properly and consistently with the organization's mission; it asks how often written financial reports were presented to the board and how often the board discussed such reports; it also asks whether the board or a designated committee reviewed (and did not simply receive) the IRS Form 990 prior to filing; and it asks whether an independent accountant report or management letter was reviewed and discussed by the board or designated committee, and, if there was a management letter, whether the organization adopted some, all or none of the recommendations contained in the letter.
Document Retention. This section asks if the organization has a written policy for document retention and destruction and if so, how often it adheres to the policy; it also asks whether the board documents its board meetings contemporaneously (and if so, how regularly) and whether the documentation is retained; and it asks whether the agent's examination was hindered by the lack of necessary documentation (either due to the fact that documents were lost or destroyed prematurely, as a result of the organization's failure to cooperate with the IRS agent's requests, or due to the fact that documents were never created or maintained).
The governance check sheet can be obtained at http://www.irs.gov/pub/irs-tege/governance_check_sheet.pdf (note that in addition to the fill-in response questions, many are multiple choice questions). See also the accompanying instructions for completing the check sheet at http://www.irs.gov/pub/irs-tege/governance_guide_sheet.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
