Businesses, reeling from the aftermath of the Enron scandal, have faced increased scrutiny by federal and local government officials in the areas of corporate governance, transparency and accountability for the past five years. Recently, the same laser beam has been focused on non-profit organizations.
In their quest to make non-profit organizations more accountable to donors and to make sure they are worthy of their tax-exempt status, the Internal Revenue Service and Washington this year acted to require non-profit organizations to implement good governance policies and become more transparent and accountable in the way they conduct business. Below are three developments that non-profit organizations should be aware of:
IRS Releases
Good Governance Practices
Guided in part by the non-profit industry’s voluntary approach to policing itself via the Panel on the Nonprofit Sector (www.nonprofitpanel.org), the IRS in February released Good Governance Practices for 501(c)(3) Organizations. The IRS has been talking about governance for non-profit organizations for the last several years and released “best practices” informally on Feb. 2.
These are not regulations or laws and do not have statutory authority. However, they give an indication of the IRS’s position on governance practices. Non-profits would be wise to understand and implement these. The guidelines suggest that governing boards be comprised of people who are informed and active in overseeing a charity’s operations and finances and that the boards not be too small or too large (however, the IRS did not define the specific size). The guidelines also suggest that non-profit board members not be compensated, but only reimbursed for expenses.
In addition, the guidelines suggest that organizations review and consider adopting the following governance, transparency and accountability policies:
- Mission statement
- Code of Ethics
- Due Diligence
- Duty of Loyalty
- Transparency
- Fundraising Policy
- Financial Audits
- Compensation Practices
- Document Retention Policy
The IRS is more likely to look favorably toward organizations that adopt these guidelines when reviewing their tax-exempt status and during audits. In addition, these organizations will likely receive more public support. Non-profits also should keep them in mind when filing their new 990 forms (see next point).
These guidelines can be found at http://www.irs.gov/pub/irs-tege/good_ governance_practices.pdf.
Proposed Changes to Form 990
On June 14, the IRS released significant proposed changes to Form 990, the first changes of this magnitude in 25 years. These changes are open to comment until Sept. 14 and are scheduled to go into effect for tax year 2008 for returns filed in 2009.
Form 990 is not a tax return, but rather a report card — or informational return — that demonstrates to the IRS why a non-profit organization continues to operate in accordance with its tax-exempt status. The new forms are guided by three overarching principles: enhancing transparency; promoting compliance; and minimizing the burden on filing organizations (something questionable, considering all of the new regulations).
Perhaps the most significant part of the new 10-page core form is Part III, which requires governance information, including the composition of the board, management and reporting. The IRS is asking organizations very directly about their governance, transparency, practices and policies. This ties in with the new governance practices published in February. While those governance policies are only guidelines, these new 990 reporting requirements — when finalized — will be mandatory, indicating that the IRS is serious about those “guidelines.”
Every non-profit must complete the core Form 990. Others will be required to complete additional supplementary schedules, which focus on certain areas of interest to the public and IRS. For example, Schedule H is dedicated to hospital practices in the areas of community benefit, billing and collections, the use of management companies and joint ventures. Schedule J takes a close look at the compensation practices and amounts paid to officers, directors, trustees and key employees. Schedule L addresses lending arrangements between non-profits and key employees and officers.
More information can be found at www.irs.gov/charities/article/0,,id=171216,00.html.
Changes to the Charitable Solicitations Act
On May 14, Gov. Christine Gregoire signed revisions to The Charitable Solicitations Act, new legislation that increases requirements for accountability and transparency for non-profit organizations that solicit charitable contributions from the public in Wash-ington.
This was the result of a task force, led by Secretary of State Sam Reed, which looked at how to improve oversight of non-profits. There is a bias among some lawmakers and donors that some tax-exempt organizations are not accountable to their donors, misuse assets, have non-transparent compensation practices and are engaged in an environment of self-dealing.
Effective July 22, the new law covers financial reporting, registration, filing requirements and commercial fundraising, and enables the creation of a charitable organization education program. One of the most significant new rules requires that non-profits with more than $1 million in annual revenues submit a financial report, such as Form 990, that has been completed or reviewed by a third party and those with more than $3 million in annual revenue have an independent audit. It will be at least a year before organizations must comply with this new requirement.
Details can be found at www.secstate.wa.gov/charities.
All of these are significant changes that non-profit organizations must not only understand, but follow. By following increased rules and regulations for improved governance, accountability and transparency, many stakeholders will benefit — the organization, donors, employees, the board and the constituents served.
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Nolan Newman is a Seattle-based certified public accountant whose practice focuses on small businesses, owner-operated businesses and consulting for non-profit and healthcare organizations. He can be reached at 206-284-1383 or nnewman@ndhaccountants.com. More information is online at www.ndhaccountants.com.
