Why the IRS is Interested in Governance

Governance, as defined by Webster’s dictionary, comes from the noun word, government. Government, in it’s purest form, is a political function of policy making, distinguished from the administration of policy decisions.

Since the summer of 2004, tax-exempt entities have experienced continued pressure from regulatory and legislative agencies. Consider the following important dates:

1. Spring 2005 – Panel on the Nonprofit Sector issues interim report on charitable reform measures.
2. June 2006 – IRS releases new Form 1023 with new governance questions.
3. August 2006 – Pension Protection Act of 2006 signed into law.
4. February 2007 – IRS publishes a discussion draft of good governance policies
5. Fall 2007 – Commissioner of Exempt Organizations begins giving speeches on governance issues.
6. December 2007 – Redesigned 990 released.
7. December 2008 – Form 990 (core form and related schedules) finalyzed.
8. 2009 – IRS pledges to release a checklist for its agents to use during audits to determine how governance relates to tax compliance.

Why is the IRS interested in governance? The first and prominent answer, according to Steven T. Miller, IRS Comission, Tax Exempt and Government Entities,  a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems. Governance practices influence whether an organization is operated to further exempt purposes, and whether the organization serves public, rather than private, interests.  Good or bad governance dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fundraising practices, or whether it allows others to take unfair advantage.

According to Miller, the IRS has a signicant interest in Governance and has a role to play in this area. With the new Form 990, the IRS will be given selected governance policies and information for the entities required to file the informational return.

For more information on Commissioner Miller’s speech to Tax Exempt Organizations on November 20, 2008, see remarks.

 How does your organization monitor the effectiveness of governance? Post a comment.