What “Good Governance” Means for
Tax-Exempt Entities
At a recent conference at the Georgetown Law Center, recently-appointed Internal Revenue Service (IRS) TE/GE Commissioner Sarah Hall Ingram made a policy address in which she confirmed the IRS' commitment to exercising oversight of the governance practices of tax-exempt, nonprofit organizations.
The main points of Commissioner Ingram's presentation are as follows:
What IRS Perceives as "Good Governance"
Commissioner Ingram stressed that the IRS is not interested in supplanting the business judgment of a tax-exempt organization's officers or directors. To her, "good governance" refers to a series of key organizational and operational principles that the IRS has pronounced previously and that are based in the Internal Revenue Code. These include four key principles: (1) the organization should clearly and publicly express its mission; (2) the organization's board should be engaged, informed, and independent; (3) there should be in place policies and procedures intended to safeguard corporate assets (e.g., those addressing executive compensation, conflicts of interest, and independent financial review); and (4) board decision-making should be transparent, as demonstrated in contemporaneous board minutes, document retention, whistleblower protection, and the accurate, good-faith completion of the Form 990. Commissioner Ingram does not envision good governance as a "vast scheme of rules," but rather a "compact set of guiding principles." To her, there is no one-size-fits-all set of internal governance controls—but that all exempt organizations should adopt sufficient controls to minimize the risk of occurrences that would violate tax-exemption standards.
IRS Promotion of Good Governance
Commissioner Ingram identified four specific steps that the IRS is taking to help promote principles of good governance: (1) asking agents to complete a checklist at the conclusion of an examination addressing certain of the organization's governance practices and internal controls; (2) emphasizing the importance of transparency and accountability in maintaining public confidence in the integrity of exempt organizations (e.g., Part VI to the Form 990); (3) encouraging applicants for tax-exempt status to incorporate governance principles within their organizational documents; and (4) addressing specific instances of failed governance (e.g., the IRS reviews of the credit counseling industry and mortgage-assistance organizations). The Benefits of Good Governance: Following her predecessor, Steven Miller, Commissioner Ingram clearly embraces the concept that good governance is an effective tool for managing the risk of non-compliance, i.e., a well-governed organization is more likely to be a tax-compliant organization.
Guiding Administrative Principles
As it relates to corporate governance, Commissioner Ingram's tenure will be guided by the following key principles: (1) respect for the diversity of the tax-exempt sector and restraint to avoid overburdening this diversity under a mountain of rules; (2) assumption by the IRS of a "clear, unambiguous role... in governance" of tax exempt organizations using its education, outreach, and enforcement tools to accomplish this role; (3) transparency, accountability, and disclosure as important organizational tenants for tax-exempt organizations; (4) the obligation of exempt organizations to be organized and operated for an exempt purpose and the obligation of the IRS to consider how an organization is governed in determining exempt status of the organization; (5) acceptance that an organization's adoption of "a set of organizational or operational practices" does not serve to delegate the exercise of business judgment to the IRS; (6) openness to empirical evidence that a particular governance practice thought to be valuable is, instead, not valuable; and (7) recognition that Congress has never given exempt organizations and their leadership free reign but instead requires institutional safeguards against the bad practices of such organizations.
Going Forward
The IRS is planning a number of actions to review compliance with the governance principles espoused by Commissioner Ingram. One important step is to provide uniform and measured governance training to agents involved in determinations of exempt status and examination of exempt organization tax returns. The IRS will use materials developed by the nonprofit sector itself (e.g., the Panel on the Nonprofit Sector's recommended governance best practices). In addition, IRS plans to systematically review governance-related conditions that exempt-organization agents suggest to organizations undergoing examination and to applicants for tax-exempt status to ensure that they are consistent with this training. The training materials used by the IRS will be made public in a few weeks.
