IRS Issues Draft of Good Governance Practices for 501(c)(3) Organizations

IRS Issues Draft of Good Governance Practices for 501(c)(3) Organizations

News story posted in Governance on 8 February 2007| 4 comments
audience: National Publication | last updated: 18 May 2011
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Summary

The Internal Revenue Service has released a draft that suggests that 501(c)(3) organizations review and consider helping ensure that directors understand their roles and responsibilities and actively promote good governance practices.
Full Text:

Date:

Feb. 2, 2007

Good Governance Practices for
501(c)(3) Organizations

The Internal Revenue Service believes that governing boards should be composed of persons who are informed and active in overseeing a charity's operations and finances. If a governing board tolerates a climate of secrecy or neglect, charitable assets are more likely to be used to advance an impermissible private interest. Successful governing boards include individuals not only knowledgeable and passionate about the organization's programs, but also those with expertise in critical areas involving accounting, finance, compensation and ethics.

Organizations with very small or very large governing boards may be problematic: Small boards generally do not represent a public interest and large boards may be less attentive to oversight duties. If an organization's governing board is very large, it may want to establish an executive committee with delegated responsibilities or establish advisory committees.

The Internal Revenue Service suggests that organizations review and consider the following to help ensure that directors understand their roles and responsibilities and actively promote good governance practices. While adopting a particular practice is not a requirement for exemption, we believe that an organization that adopts some or all of these practices is more likely to be successful in pursuing its exempt purposes and earning public support.

Mission Statement

Code of Ethics

Due Diligence

Transparency

Fundraising Policy

Financial Audits

Compensation Practices

Document Retention Policy

1. Mission Statement

A clearly articulated mission statement that is adopted by an organization's board of directors will explain and popularize the charity's purpose and serve as a guide to the organization's work. A well-written mission statement shows why the charity exists, what it hopes to accomplish, and what activities it will undertake, where, and for whom.

2. Code of Ethics and Whistleblower Policies

The public expects a charity to abide by ethical standards that promote the public good. The board of directors bears the ultimate responsibility for setting ethical standards and ensuring they permeate the organization and inform its practices. To that end, the board should consider adopting and regularly evaluating a code of ethics that describes behavior it wants to encourage and behavior it wants to discourage. The code of ethics should be a principal means of communicating to all personnel a strong culture of legal compliance and ethical integrity.

The board of directors should adopt an effective policy for handling employee complaints and establish procedures for employees to report in confidence suspected financial impropriety or misuse of the charity's resources. Such policies are sometimes referred to as whistleblower policies.

3. Due Diligence

The directors of a charity must exercise due diligence consistent with a duty of care that requires a director to act:

  • In good faith;
  • With the care an ordinarily prudent person in a like position would exercise under similar circumstances;
  • In a manner the director reasonably believes to be in the charity's best interests.

Directors should see to it that policies and procedures are in place to help them meet their duty of care. Such policies and procedures should ensure that each director:

  • Is familiar with the charity's activities and knows whether those activities promote the charity's mission and achieve its goals;
  • Is fully informed about the charity's financial status; and
  • Has full and accurate information to make informed decisions.

4. Duty of Loyalty

The directors of a charity owe it a duty of loyalty. The duty of loyalty requires a director to act in the interest of the charity rather than in the personal interest of the director or some other person or organization. In particular, the duty of loyalty requires a director to avoid conflicts of interest that are detrimental to the charity. To that end, the board of directors should adopt and regularly evaluate an effective conflict of interest policy that:

  • Requires directors and staff to act solely in the interests of the charity without regard for personal interests;
  • Includes written procedures for determining whether a relationship, financial interest, or business affiliation results in a conflict of interest; and
  • Prescribes a certain course of action in the event a conflict of interact is identified.
Directors and staff should be required to disclose annually in writing any known financial interest that the individual, or a member of the individual's family, has in any business entity that transacts business with the charity. Instructions to Form 1023 contain a sample conflict of interest policy.

5. Transparency

By making full and accurate information about its mission, activities, and finances publicly available, a charity demonstrates transparency. The board of directors should adopt and monitor procedures to ensure that the charity's Form 990, annual reports, and financial statements are complete and accurate, are posted on the organization's public website, and are made available to the public upon request.

6. Fundraising Policy

Charitable fundraising is an important source of financial support for many charities. Success at fundraising requires care and honesty. The board of directors should adopt and monitor policies to ensure that fundraising solicitations meet federal end state law requirements and solicitation materials are accurate, truthful, and candid. Charities should keep their fundraising costs reasonable. In selecting paid fundraisers, a charity should use those that are registered with the state and that can provide good references. Performance of professional fundraisers should be continuously monitored.

7. Financial Audits

Directors must be good stewards of a charity's financial resources, A charity should operate in accordance with an annual budget approved by the board of directors. The board should ensure that financial resources are used to further charitable purpose by regularly receiving and reading up-to-date financial statements including Form 990, auditor's letters, and finance and audit committee reports.

If the charity has substantial assets or annual revenue, its board of directors should ensure that an independent auditor conduct an annual audit. The board can establish an independent audit committee to select and oversee the independent auditor. The auditing firm should be changed periodically (e.g, every five years) to ensure a fresh look at the financial statements.

For a charity with lesser assets or annual revenue, the board should ensure that an independent certified public accountant conduct an annual audit.

Substitute practices for very small organizations would include volunteers who would review financial information and practices. Trading volunteers between similarly-situated organizations who would perform these tasks would also help maintain financial integrity without being too costly.

8. Compensation Practices

A successful charity pays no more than reasonable compensation for services rendered. Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service. Director compensation should be allowed only when determined appropriate by a committee composed of persons who are not compensated by the charity and have no financial interest in the determination.

Charities may pay reasonable compensation for services provided by officers and staff. In determining reasonable compensation, a charity may wish to rely on the rebuttable presumption test of section 4958 of the internal Revenue Code and Treasury Regulation section 53.4958-6.

9. Document Retention Policy

An effective charity will adopt a written policy establishing standards for document integrity, retention, and destruction. The document retention policy should include guidelines for handling electronic files. The policy should cover backup procedures, archiving of documents, and regular check-ups of the reliability of the system. For more information see IRS Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt Organizations available on the IRS website.

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IRS charity Board of Directors guidelines

They mention only hiring a fundraiser who is registered with the state. Does anyone know of such a registry in Maryland?

Good governance for Non-Profits - IRS suggestions

Fairly basic from a California nonprofit perspective. A requirement that the auditor must be changed periodically (e.g., every five years) might be a prudent idea to consider, but making it mandatory might be questionable. The code of ethics is prudent. Nonprofits also should review their anonymous complaint and anti-retaliation policies and procedures. The Calfiornia Nonprofit Integrity Act already requires audit committees for nonprofits that receive $2,000,000 or more in annual revenue. The IRS proposal does not specify the size of the nonprofit, but would base the audit committee requirement on assets in addition to revenue. Dave Tate, CPA, Esq. http://davidtate.us

Good governance for Non-Profits - IRS suggestions

A good reminder of good practices by non-profit boards.....Nothing profound or controversial....A very good hand out for the next Board Meeting.

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