Monday, March 1, 2010

Governance Practices Assessment

Monday, March 1, 2010
Public charities BEWARE! IRS audits are becoming more intrusive. Although the IRS doesn’t mandate the governance practices it’s inquiring about on Part VI of the Federal Form 990, it is focusing on the answers to those questions. The IRS recently created the Governance Check Sheet (Form 14114) that its examining agents will use to capture data about the governance practices and related internal controls of your public charity. The IRS claims they are gathering this data in an attempt to gain a better understanding of the relationship between governance practices and tax compliance. Hmmm . . . The IRS believes that prudent governance practices lead to better tax compliance. Perhaps this explains the motive behind the numerous governance questions in Part VI of the Federal Form 990?

The Governance Check Sheet will explore the following areas:
• Governing Body and Management – includes questions about the public charity’s
  • Mission statement
  • By-laws and articles, and
  • Board members and board meetings
• Compensation – includes questions about
  • Compensation arrangements for trustees, directors, officers, and key employees,
  • Compensation determinations, and
  • Comparability data considered
• Organizational Control – includes questions about the public charity’s
  • Family and business relationships, and
  • “Effective control” of the organization
• Conflict of Interest – includes questions about the public charity’s
  • Conflict of interest policy
• Financial Oversight – includes questions about the public charity’s
  • Use of its assets
  • Financial reports provided to/discussed with board members
  • Board’s review of the Federal Form 990 before filing
  • Independent accountant’s report
  •  Management letter
• Document Retention – includes questions about the public charity’s
  • Document retention and destruction policy
  • Minutes of board meetings
So what can public charities do to prepare themselves? They can perform a governance practices self-assessment! This assessment should be performed even if the public charity currently files the Federal Form 990-EZ. Beginning in 2010, an organization exempt from income tax under IRC Sec. 501(a), which includes organizations described in Sec. 501(c)(3), must file Federal Form 990 if it has either gross receipts of $200,000 or total assets of $500,000 at the end of the tax year. The Governance Check Sheet is available here.

Are you a new organization that is applying for recognition as a tax-exempt organization? Then you should consider the questions in this Governance Check Sheet when you complete the application for recognition of exemption. And, whether you’re an existing tax-exempt or an organization applying for tax-exempt status, be sure to maintain documentation to support your answers. Revenue agents are being asked whether their examinations were “hindered by a lack of necessary documentation” (question #26 of the check sheet).
Feel free to contact us if you have any questions or need assistance with any of these matters. But don’t wait – it’s better to have the answers before the IRS asks the questions!!



Excellent Article. The Non-Profit where I work just had the book-keeper walk away with over 60K:-( We are not happy campers!

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