The IRS is watching how you manage 5 key areas.
Take the time now to get a new document from the Internal Revenue Service if you're a charity organization that wants to keep its tax-exempt status.
The guidelines, "Good Governance Practices for 501(c)(3) Organizations," were unveiled Feb. 2 by Marvin Friedlander of the IRS' Office of Rulings and Agreements.
"These proposed guidelines should prompt exempt organizations to consider a review of their current governance policies and practices," notes attorney Bernadette Broccolo, a partner in the Chicago office of McDermott, Will & Emery.
Basics: The proposed guidance is significant in that it expands the IRS' focus on nonprofit governance, cautions Broccolo. The following topics are among the key areas covered in the guidance: 1. Governing boards. Think twice if yours is on the large--or small--side, cautions Jack Siegel, president of Charity Governance Consulting in Chicago. To its credit, adds Siegel, the IRS guidance does not try to set a minimum or maximum number of directors. 2. Code of ethics and whistleblower policies. The code of ethics should include "an effective policy for handling employee complaints and establish procedures for employees to report in confidence about suspected financial impropriety or misuse of a charity's resources," according to the guidance.
3. Transparency. "By making full and accurate information about its mission, activities, and finances publicly available, a charity demonstrates transparency," says the guidance. The continued em-phasis on transparency of financial information and pricing is noteworthy for all, stresses Broccolo. 4. Financial audits. The recommendations in this section could be problematic, warns Siegel, especially for small not-for-profits. Why? The call for changing auditing firms goes much further than Sarbanes-Oxley, which calls for changes in audit partners every five years.
"There may only be one audit firm qualified to audit nonprofit financial statements," Siegel notes. 5. Compensation practices. "A successful charity pays no more than reasonable compensation for services rendered," says the new guidance. "Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service."
Take this section, which recommends compensation committees, with a grain of salt, says Siegel. "We like compensation committees, but they are not a legal requirement, nor necessarily a best practice."
Resource: The IRS recently launched a new Web-based version of its "Exempt Organizations Workshop," which addresses tax compliance issues commonly faced by small and mid-sized 501(c)(3) organizations, notes the National Association for Home Care & Hospice.
The free online workshop at
www.stayexempt. org focuses on topics including retaining exempt status; determining taxable income; how employees are treated for tax purposes; and required disclosures.
Note: The guidance isn't yet on the IRS Web site but is at
http://charitygovernance.blogs.com/.
