HEALTH INDUSTRY ONLINE - IRS Releases Draft of Good Governance Practices

The Internal Revenue Service ("IRS") has continued its focus on the tax-exempt sector with the release in February of their discussion draft of "Good Governance Practices for 501(c)(3) Organizations." This document lists governance practices recommended for adoption by organizations exempt from federal income tax under Internal Revenue Code ("Code") §501(c)(3) for the purpose of maintaining compliance with tax law. Given the heightened scrutiny tax-exempt healthcare organizations have been under from the federal legislature and the various IRS initiatives targeted at §501(c)(3) organizations (i.e., the Political Activity Compliance Initiative, Executive Compensation Compliance Project and Community Benefit Compliance Check), tax-exempt healthcare organizations should compare their current policies and procedures with the recommendations in this IRS discussion draft. This article will provide an executive overview of the IRS's recommended governance practices from this IRS document.

The IRS states in its discussion draft that governing boards of §501(c)(3) organizations should be representative of the community, be informed and actively oversee the organization's operations and finances. To this end, the IRS recommends a governing board size that is neither too small nor too large to be effective in this role of active oversight or community representation. The IRS goes on to recommend nine areas where it believes §501(c)(3) organizations can strengthen governance practices; however, it states implementation of any of these is not required for exemption.

The nine areas of recommended governance practices are as follows:

1. The Mission Statement

The organization's board of directors should adopt a clear written statement that explains why the organization exists, its goals, and what activities it will undertake, where, and for whom.

2. Code of Ethics and Whistleblower Policies

The board of directors should adopt a code of ethics to describe behaviors the organization wants to encourage and discourage. This code of ethics should serve as the primary medium for communicating the organization's commitment to legal compliance and ethical integrity to its personnel.

Additionally, the board should also implement a "whistleblower" policy to handle employee complaints and provide a confidential means for employees to report suspected financial impropriety or misuse of the organization's resources.

3. Due Diligence

The organization's directors have a duty of care that requires them to act in good faith, while exercising similar care as an ordinary prudent person in similar circumstances, and in a manner the director reasonably believes to be in the §501(c)(3) organization's best interests. To this end, directors should develop policies and procedures to ensure they:

are informed of the organization's activities and can determine if those activities promote the organization's purpose and achieve its goals;
are fully informed of the organization's financial status; and
receive full and accurate information necessary to make informed decisions.

4. Duty of Loyalty

The directors of a §501(c)(3) organization have a duty of loyalty which requires them to place the interest of the organization above any personal interest or the interests of any other person or entity. Accordingly, the board of directors should adopt a conflict of interest policy:

requiring directors and employees to act solely in the interest of the organization;
including written procedures for determining if a relationship, financial interest, or business affiliation results in a conflict of interest;
prescribing a course of action for when conflicts of interest are identified; and
disclosing annually, and in writing, any direct or indirect financial interests in entities doing business with the organization.

5. Transparency

Procedures should be adopted to make certain the organization's Form 990, annual reports, and financial statements are complete and accurate, posted on the public website, and are available to the public upon request.

6. Fundraising Policy

Policies should be adopted that guaranty fundraising activities are conducted in accordance with federal and state requirements and that materials used in solicitation are accurate, truthful, and candid. These policies should mandate use of only professional fundraisers that are registered with the state and should require oversight.

7. Financial Audits

The board of directors should adopt and operate the organization in accordance with an annual budget. Policies should be adopted to require board members regularly read current financial statements, and an independent auditor should conduct an annual financial audit.

8. Compensation Practices

Compensation for service on the board of directors should only be permitted when it is deemed appropriate by a committee of disinterested persons who have no financial stake in the determination. Policies should be instituted to ensure that compensation paid to officers and staff is reasonable. In the discussion draft the IRS notes that organizations have the ability to establish the "rebuttable presumption of reasonableness" of Code § 4958 and the regulations.

9. Document Retention

A policy should be adopted establishing standards for document integrity, retention, and destruction.

For a copy of the IRS "Good Governance Practices for 501(c)(3) Organizations," please see the IRS website.