Nonprofit Governance Defined

The current position taken by the IRS on nonprofit governance is best reflected in the reporting requirements of the Form 990 and from the Governance and Related Topics – 501(c)(3) Organizations found on the IRS website and summarized below:

Mission - A clearly articulated mission, adopted by the board of directors, serves to explain and popularize the charity’s purpose and guide its work. The IRS recommends that organizations write mission statements and review and update them on a periodic basis.

Organizational Documents – State law advises the type of organizational document and its content.  These documents provide the framework for the organization’s governance and management.  The IRS requires the submission of organizational documents and bylaws, if adopted, with an application for exemption under section 501(c)(3), and will review these documents to ensure that the applicant is organized exclusively for exempt purposes and that the applicant’s proposed or actual activities are consistent with those documents.  The IRS requires that significant changes to the organizational documents be reported on Form 990.

Governing Body – The IRS encourages an active and engaged board believing that it is important to the success of a charity and to its compliance with applicable tax law requirements.   Successful governing boards are appropriate in size; include individuals that are not only knowledgeable and engaged, but selected with the organization’s needs in mind.

Governance and Management Policies – Although the IRS does not require organizations to have governance and management policies, the IRS will review an organization’s application for exemption and annual information returns to determine whether the organization has implemented policies related to the following:

• Executive compensation – A vital role of the governing board is reviewing and approving the compensation of key employees.  The authorized body should consider establishing a compensation policy for key employees that includes approval by independent persons who review comparability data, adequately document the basis for its decision. 
• Conflicts of interest -  The IRS encourages organization’s board of directors to adopt and regularly evaluate a written conflict of interest policy to address potential conflicts of interest involving their directors, trustees, officers, and other employees and prescribe a course of action in the event a conflict of interest is identified. 
• Investments – The IRS recommends organizations adopt written policies and procedures to protect the assets of the organization and ensure that compensation to investment advisors be reasonable.  
• Fundraising – Fundraising should be done in compliance with federal and state laws, and fundraising costs should be reasonable. 
• Governing body minutes and records – The governing board and any authorized sub-committees should document in meeting minutes all actions taken.
• Document retention policy – The IRS encourages organizations to adopt a written policy to inform staff as to what documents should be maintained and for how long. 
• Ethics and whistleblower policies – Adoption and enforcement of effective ethics and whistleblower policies is encouraged of the governing board.  The organization’s governing body bears the ultimate responsibility for setting ethical standards and ensuring they permeate the organization.

Financial Statements and Form 990 Reporting – The IRS encourages organizations to have audited financial statements and to form an independent audit committee to select and oversee the independence and competence of auditors.  The governing board, in full or in part, should also review and approve Form 990 before it is filed.

Transparency and Accountability – A charity encourages transparency and accountability to the public by making full and accurate information about its mission, activities, finances, and governance publicly available.

For further questions, please contact one of our nonprofit team members.