HEALTH INDUSTRY ONLINE - IRS Recommends Governance Practices

The IRS remains focused on governance practices of tax-exempt organizations. In April 2008, Steve Miller, Commissioner, Tax-Exempt & Governmental Entities of the IRS, addressed a seminar on exempt organizations. The Commissioner stated the IRS is focusing on governance because it believes a well-governed organization is more likely to comply with the tax law. Discussing what the IRS has done in the past year to encourage good governance, he noted the governance section of the revised Form 990, effective for 2008, and the educational piece on its web site describing recommended governance practices for exempt organizations. The Commissioner advised exempt organizations to establish the policies, procedures, and committees recommended by the IRS, as well as ensure that these self regulatory measures are actually being followed.

The IRS placed the recommended governance practices and policies for exempt organizations on its web site in February of 2008. In its introduction to these recommendations, the IRS states tax law does not generally mandate particular governance structures, policies or practices. However, the IRS asks specific questions about governance practices in the tax-exemption application process and the new Form 990 requests specific information regarding many of the IRS-specific recommendations.

These governance recommendations are generally directed to organizations described in Internal Revenue Code (“Code”) Section 501(c)(3) that are “public charities”; however, the IRS advises that “private foundations” and organizations exempt under other Code sections also consider these recommendations. The IRS recommended governance practices and policies are summarized and listed below:

•  Mission: The IRS encourages establishment and regular review of a mission. The mission may be described in Form 990, Part I, Line 1, and must be described in Form 990, Part III, Line 1.

•  Organizational Documents: The IRS requires organizational documents and these are required to be submitted with exemption applications. Form 990, Part VI, Section A, Line 4 requires the reporting of significant changes to organizational documents.

•  Governing Body: The governing body should be composed of persons who are informed and active in overseeing operations and finances. It should include independent members and not be dominated by employees or others who are not independent due to business or family relationships. Governing body members should be selected with the entity’s needs in mind, i.e., accounting, finance, compensation, ethics. Form 990, Part VI, Section A, Lines 1, 2, 3, and 7 request information about the governing body.

• Governance & Management Policies:

°  Executive Compensation: Compensation must be reasonable and should be set by those knowledgeable in compensation matters who have no financial interest in the determination. The IRS recommends organizations establish the “rebuttable presumption of reasonableness” (which shifts the burden to the IRS to prove an arrangement is not reasonable) of the Intermediate Sanctions regulations consisting of: (1) Compensation being approved in advance by a body composed of persons who do not have a conflict of interest with respect to the arrangement; (2) The body obtained and relied upon appropriate comparability data prior to making the determination; and (3) The body documented the basis for its determination concurrently with making its determination. The IRS will look to the independence of a compensation consultant providing data and the quality of the data. Form 990, Part VI, Section B, Line 15 asks questions of the process used to set compensation of top management, officers, and key employees.

°  Conflicts of Interest: Board members have a duty of loyalty which requires avoiding conflicts of interest detrimental to the organization. The IRS encourages adopting and regularly evaluating a conflict of interest policy that includes: (1) Procedures for determining whether a relationship, financial interest or business affiliation results in a conflict of interest; and (2) Prescribes a course of action for when a conflict is identified. The IRS encourages board members, officers and others covered by the conflict of interest policy to disclose in writing, on a periodic basis any known financial interest in any business that transacts business with the organization. Form 990, Pat VI, Section B, Line 12 asks whether the organization has a conflict of interest policy and whether it regularly and consistently monitors and enforces compliance with it.

°  Investments: The IRS recommends adoption of policies and procedures requiring evaluation of participation in investments and to take steps to safeguard assets and exempt status if they could be affected by the investment. Form 990, Part VI, Section B, Line 16 asks whether the entity has adopted procedures and policies regarding participation in a joint venture or similar arrangement with a taxable entity. Form 990, Schedule D asks detailed information about certain investments.

°  Fundraising: IRS encourages adoption and monitoring of policies to ensure fundraising complies with federal and state law and that solicitations are truthful. Fundraising costs should be reasonable. Form 990, Schedules G and M request information on fundraising.

°  Governing Body Minutes & Records: The IRS encourages governing bodies and committees to ensure minutes and actions taken by written action or outside of meetings are contemporaneously documented. Form 990, Part VI, Line 8 asks whether the entity contemporaneously documents meetings or written actions.

°  Document Retention & Destruction: The IRS recommends adopting a policy establishing standards for document integrity, retention and destruction covering backup procedures, archiving of documents and regular checkups. Form 990, Part VI, Section B, Line 14 asks whether a written document retention and destruction policy has been adopted.

°  Ethics & Whistleblower Policy: IRS recommends adopting a code of ethics and a whistleblower policy. The policy should establish procedures for employees to report in confidence any suspected financial impropriety or misuse of resources. Form 990, Part VI, Section B, Lines 5 and 13 asks whether the entity became aware of a material diversion of its assets and whether it has a whistleblower policy.

• Financial Statements & Form 990 Reporting:

°  Board Members: IRS encourages board members to ensure financial resources are used for exempt purposes and are properly accounted for by receiving and reviewing up-to-date financial statements and any auditor’s letters or finance and audit committee reports.

°  Financial Statements: The IRS recommends organizations with substantial assets or revenue obtain an independent audit and take steps to ensure the continuing independence of any auditor. The IRS does not mention auditor rotation. Form 990, Part XI, Line 2 asks whether financial statements were audited.

°  Form 990: Form 990, Part VI, Section A, Line 10 asks whether the organization provides a copy of Form 990 to its board and requires the organization to explain any process of review by its board members or management.

• Transparency & Accountability: The Code requires charities (which generally include all tax-exempt healthcare organizations) make their Forms 1023, Forms 990 and Forms 990-T open for public inspection. The IRS recommends adoption and monitoring of procedures to ensure public documents, as well annual reports and financial statements are posted on the web and are made available upon request. Form 990, Part VI, Section C, Lines 18 and 19 ask whether and how an organization makes its Form 1023, Form 990, Form 990-T, governing documents, conflict of interest policy and financial statements available to the public.

To view the full text of the IRS-recommended governance policies and practices from which the above information was taken please go to:
www.irs.gov/pub/irs-tege/governance_practices.pdf