CLIENT ALERT, January 2010
The IRS division of Tax Exempt/Government Entities is presently drafting its five year strategic plan to meet its perennial twin goals of improving voluntary compliance and increasing enforcement of the revenue laws. The new strategic plan will be released in the Spring of 2010. What the tax exempt community should expect from the new plan, among other things, is a continued focus on universities and hospitals and an increased commitment of resources to address misuse of tax exempt organizations.
Critical to the IRS’ enforcement efforts will be its focus on exempt organization governance. The IRS states it is, “dedicated to ensuring that charities operate exclusively for charitable purposes and use their assets to accomplish charitable ends. Good governance is important to increase the likelihood that organizations will comply with the tax law, protect their charitable assets and, thereby, best serve their charitable beneficiaries.” To that end, on December 3, 2009, the IRS issued check sheets for its examiners to use when auditing or conducting compliance checks of exempt organizations. The check sheet 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.
The governance check sheet asks, for instance, whether the governing board members each have current copies of the Bylaws and Articles of the organization and whether the frequency of the board meetings comply with the Bylaws. The agent is also asked to delineate all the familial and business relationships between board members, key personnel, officers and trustees. In that regard, inquiries will also be made as to the use of, and adherence to, a written conflict of interest policy.
On the financial side, the check sheet also addresses compensation arrangements. The agent is directed to inquire as to how compensation of key employees, officers, directors and trustees is determined. The agent will delve further into the type of comparability data relied upon to determine compensation. To address the board’s role as financial stewards, the agent will inquire as to the frequency and detail of financial reports reviewed by the board, whether the ENTIRE board reviewed the Form 990 before it was filed, and whether management reports from outside auditors are vetted and reviewed by the board.
If the IRS agent’s audit and review is hindered in any way by lack of necessary documentation, this will not bode well for the organization. The agent will investigate two primary reasons for inadequate documentation: 1) lack of attention to detail and sloppiness, which translates into “bad governance” which, in turn, warrants further auditing due to the increased likelihood of tax noncompliance; and 2) whether the organization is trying to hide something, which translates into “misuse of exempt assets” and yet another reason for the agent to audit further.
Accordingly, the organization should use this check sheet as a guide for generating and retaining documents which will substantiate its governance activities. The organization should have a written documentation retention policy that identifies the type of documents to be maintained, how and where they will be maintained, and when they can be destroyed. Our office recommends that documents be retained for at least six (6) years, the maximum period of limitations for filed tax returns (unless the returns are deemed fraudulent).
Links to the new IRS governance check sheet, and the guide sheet for completing the governance audit, are below. If you have any questions about your organization’s compliance with its governance obligations, please contact Wendy Pearson at wpearson@bbllaw.com.
Check Sheet
Guide Sheet
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