Beginning on page 6 (part VI) of the 990 asks questions regarding governance, management and disclosure. Section A deals with the governing body and management; Section B about specific operating and management policies; and Section C delves into disclosures. It is the most controversial portion of the Form since it deals with questions that do not appear to have any relevance to the compliance task that is the primary responsibility of the IRS.

Section A – The Governing Body and Management

Section A starts off by asking how many board members the organization has. There is no magic number here although it is generally accepted that the minimum number is three although the Better Business Bureau Wise Giving Alliance sets the minimum at five. In 2004 the Senate Finance Committee prepared a discussion draft (it never went beyond the discussion draft stage) and indicated that there should be no more than 15 board members. While there was widespread criticism of such a universal requirement, the concept of having too many board members to be effective is recognized as a real danger. If an organization has so many board members that individual directors reasonably believe that they do not have the opportunity to meaningfully participate in discussions, deliberations, and decision-making, then the organization has too many directors.

This section also asks how many of the board members are independent and whether any officer, director or key employee has a family or business relationship with any other officer, director or key employee. The IRS also wants to know if the organization delegated control over management duties normally performed by the board to anyone else. There are also questions that ask if the organization has members or stockholders and if those people have the power to elect members of the governing body and if they approve of the governance decisions of that body.

The IRS is trying to determine how effectively the organization is being managed at the top and by reading the questions, you can easily determine which (yes or no) is the better answer. If your organization must answer with the opposite of what appears to be the best answer, you may want to discuss this with your accountant or attorney to determine what risks your organization may be subject to.

When your organization was first organized and it applied to the IRS for recognition of its tax-exempt status, one of the most important documents supplied to the IRS was your organization’s by-laws and other organizing documents. If these documents have changed during the past year, the IRS wants to know specifically what changes were made.

Another question asks if the organization became aware during the year of a significant diversion of organization assets – i.e., a theft or embezzlement. I am aware of an organization that had to answer “yes” to this question and subsequent to filing the return, had received a visit from the IRS. The reason for the visit was that the IRS wanted to see what changes and improvements had been made in the organization’s policies and procedures to deter such an occurrence in the future.

The last questions in this section asks if the organization has contemporaneously documented the board meetings held and the actions undertaken as a result of those meetings. Board minutes as well as the minutes from sub-committees of the board are very important records which document the governance process as evidenced by these questions.

Section B – Policies

In this section the emphasis is on the organization’s operating policies and whether those policies are formalized and in writing. In addition to asking yes/no questions as to the existence of certain policies there are many instances where the IRS requests additional information to be presented in Schedule O (Supplemental Information to Form 990 or 990-EZ) of the form. For example, the IRS wants to know if all members of the Board reviewed the form 990 prior to when it was filed; whether the organization has a conflict of interest policy and if the process for determining CEO compensation included a review and approval by independent person. They also want to know if it included an examination of comparability data and if the process was documented in meeting minutes. In addition to these yes/no questions the organization must describe the process in detail in Schedule O.

Section B also asks if the organization has local chapters or branches; whether it has a whistleblower policy and a document retention and destruction policy; and if the organization participated in a joint venture with a taxable entity. Although there is no requirement in the Internal Revenue Code or any state law regarding the existence of such policies, the existence of these questions infers what the IRS considers best practices. If your organization cannot answer “yes” to these questions, contact us and we will assist you in creating these policies and procedures.

Section C – Disclosure

Section C focuses on how you comply with the public availability of the organization’s form 990 and whether your organization makes other documents available to the public. Although the IRS asks if your organization’s governing documents (i.e., by-laws), conflict of interest policy and financial statements are available to the public, this is one question where we believe that a “no” answer is as acceptable as a “yes” answer. We have seen many organizations respond “no” to this question and indicate in Schedule O that they do not believe any useful purpose would be served by the public disclosure of these documents.

What is the purpose of all these questions? In 2009 after this new Form 990 was first published, the head of the IRS Tax-Exempt Division indicated in a speech that the IRS believed that organizations that had a more robust governance structure coupled with strong policies and procedures was more likely to comply with various IRS rules and regulations and better perform their tax-exempt mission. We can conclude from these remarks that the IRS will be using this portion of the form 990 to decide which organizations may need more active compliance monitoring and perhaps a periodic visit from the IRS in the future.

Let us know if you would like us to review your organization’s Form 990 and evaluate the risk of increasing visibility to the IRS.

Read our Form 990 blog series.