Recent IRS Guidance for Tax Exempt Organizations

Last week the IRS posted a helpful collection of links called the ABC's for Exempt Organizations on its website. Here one can find guidance on issues relating to the federal taxation and exemption of new and small nonprofit organizations, including necessary forms and publications, and information regarding employment taxes and retirement accounts, and also links to IRS online workshops and courses.

The IRS also published the Remarks of Steven Miller (pdf), Commissioner of Tax Exempt and Government Entities (TE/GE), made at the Western Conference of Tax Exempt Organizations in Los Angeles on November 20. Much of Commissioner Miller's discussion was focused on the New Form 990, which many exempt organizations will begin filing for the years 2008 and following. In particular, Commissioner Miller addressed the IRS's new emphasis on the governance of nonprofit organizations, which has not been an area the IRS has had much say over until recently. Mr. Miller concluded his remarks with these thoughts:

One may argue the states can address the issue of governance. Or that the sector can articulate and somehow ensure the application of principles of good governance and the adoption of best practices. It is clearly true that both the states and the sector can and must play important roles in promoting good governance. Indeed I think they have the principal role to play in keeping the tax exempt sector strong and healthy. Now more than ever you have an important opportunity to lead in discussions about the future of governance in your organization.

But the Internal Revenue Service has a robust role as well. I believe that the need for good governance, and its magnifying glass, transparency, has actually increased in the wake of the economic downturn. There are always a few who use the worst of times, and others’ desperate situations, to misuse exempt organizations and line their own pockets.

Thus, it is clear that the IRS has set its sights on this area and has no intention of backing away from it. Every exempt organization needs to begin a comprehensive review its structures, policies and procedures in order to begin working towards compliance in this area.

Lisa notes: Although the Form 990 appears to indicate a "right" and "wrong" answer, there is no one correct form of governance, nor is there a legal requirement that certain policies be in writing. Therefore, it is important for an organization to evaluate, with its legal counsel, whether any changes to either its structure or its operations are appropriate and, if so, what these changes should be, and how they should be implemented. Changes should NOT be made, simply so that the organization "fits" into what the IRS seems to imply is best. And, it cannot be emphasized enough, that IT IS BETTER NOT TO ADOPT A POLICY, THAN TO HAVE A POLICY THAT IS NOT FOLLOWED.