The recently revised IRS annual reporting Form (990) for nonprofit organizations asks many new questions about organization policies and practices. This is part of the IRS's effort to encourage good governance by nonprofit organizations, promote their compliance with tax rules and make their activities more transparent to the IRS and the general public (keeping in mind that an organization's Form 990 is a matter of public record).
While the revised form is the one used by public charities to report their activities, we expect that similar inquiries will soon be a part of the Form 990PF (for private foundations) and other types of 990 forms. Thus, we are encouraging all of our nonprofit organization clients to be mindful of the new Form 990 changes and to consider what policies and procedures they should put into effect as a result. Required: Every nonprofit must have a mission statement that articulates its purpose and the reasons for its existence. While every nonprofit organization that has been granted tax exempt status by the IRS would have a written statement of purpose that complies with the law, in many cases that statement is so general that it should be more "finely tuned" into a clearly articulated mission statement. In the case of a public charity, in particular, the mission statement should inform the public about the organization's guiding principles, values and activities.
Required: Every nonprofit must have a mission statement that articulates its purpose and the reasons for its existence. While every nonprofit organization that has been granted tax exempt status by the IRS would have a written statement of purpose that complies with the law, in many cases that statement is so general that it should be more "finely tuned" into a clearly articulated mission statement. In the case of a public charity, in particular, the mission statement should inform the public about the organization's guiding principles, values and activities.
Recommended Policies: Although the only mandatory legal requirement for all nonprofit organizations is a mission statement, every nonprofit organization should consider implementing the following policies:
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Conflict of interest policy. This prohibits transactions between the organization and insiders without proper disclosure. This is recommended for all nonprofits, including the smallest of family foundations.
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Compensation review policy. Any organization with compensated employees should have a compensation review policy for any compensated directors, trustees, officers and key employees.
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Expense reimbursement policy. Similarly, any organization that reimburses for expenses should have a policy in place to ensure that all reimbursements are properly characterized and reported for income tax purposes.
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Record retention and destruction policy. Generally, the policy should be designed to (1) prevent accidental or innocent destruction of records, (2) facilitate an organization's operations by promoting efficiency and (3) strive to comply with the standards set out in Sarbanes-Oxley and other "best practices."
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Whistleblower policy. Organizations with employees, in particular, should have a policy to give "safe harbor" to individuals who want to report purported legal or ethical violations within the organization.
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Gift acceptance policy. If the organization accepts gifts from the public, a gift acceptance policy is recommended. Gifts of artwork and real estate, for example, deserve special attention.
Recommended Procedures:
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Contemporaneous meeting documentation. While a formal policy is not necessary, in all organizations, someone should be responsible for keeping written meeting minutes of the governing body and any committees.
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Directors' review of Form 990. The governing board should be provided with and review each year's Form 990.
Other Policies to Consider: Although the policies discussed below may be beyond the scope of a small family-run private foundation or small public charity, nonprofit organizations that receive government funds, send money abroad, provide services and/or engage in business with for-profit organizations should consider these policies as applicable:
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Policies governing chapters, affiliates and branches. If your organization is part of a group exemption or has multiple entities, this policy would address oversight governance of the activities of subordinate units to ensure that their operations are consistent with those of the larger organization.
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Policy for holding conservation easement. This policy should set forth the periodic monitoring, inspection and enforcement of the conservation easements held by the organization.
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Policy for tax-exempt bond beneficiaries. Policies should be put into place regarding the use of property financed with bond proceeds and the investment of these proceeds.
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Policies for hospitals. In order to comply with the new Schedule H of Form 990, hospitals should consider adopting different policies and procedures consistent with the inquiries made on new Schedule H (regarding, for example their charity care, bad debt, Medicare and collections, etc.).
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Joint Venture Policies. A joint venture policy should provide that any joint venture must grant the nonprofit sufficient authority over the joint venture's operations as to advance its exempt purposes.
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Foreign grant and activity policies. Because of the concern regarding inadvertent funding of terrorist activities, nonprofits are encouraged to adopt substantiation policies with respect to their awarding and monitoring of foreign grants to individuals and organizations, as well as directing non-U.S. activities.
All policies (and procedures) should be in writing, and their coverage, application and enforcement should be well documented. Each policy should include a provision that requires a periodic review to confirm the policy is enforced and effective and to determine whether any revisions are necessary. These periodic reviews should actually take place.
While an organization with good governance policies and procedures is more likely to be in compliance with the federal income tax laws, mere adoption of a policy, without more, is worse than no policy at all. Organizations should resist the urge to merely adopt each covered policy. A governing board should be sure to publicize these policies within the organization, to assign responsibilities for carrying out and enforcing them and to monitor the policies for appropriateness and effectiveness.
