The IRS believes that good governance is an indicator of proper tax compliance, and uses your responses on your Form 990, Page 6, Section B to evaluate a not-for-profit’s risk of noncompliance. These questions are also receiving increasing scrutiny from savvy donors and granting organizations that want more information about how your organization is governed. If your responses are incomplete to these questions, then the board should investigate the reasons why, so that you can present your organization in the best light.
Here is a line-by-line discussion of the policies and best practices questions on your tax return that are most appropriate in assuring tax compliance.
Line 11a – Copy of Form 990 to Governing Body
Answer “yes” if all members of the governing body receive a complete copy prior to filing.
An organization must answer “no” if any information was redacted from the copy provided to the governing body. For example, if the governing body is only provided with the public disclosure copy, the organization must answer “no.”
Line 11b – Description of Organization’s Review of Form 990
An organization should describe the review process on Schedule O. If there is no review process, an explanation should be included on Schedule O. Not having a review process is an IRS red flag.
Line 12a – Conflict of Interest Policy
Answer “yes” if the organization had a written conflict of interest policy as of the end of the tax year.
According to the IRS, a conflict-of-interest policy:
- defines conflicts of interest
- identifies the classes of individuals within the organization covered by the policy
- facilitates disclosure of information that can help identify conflicts of interest
- specifies procedures to be followed in managing conflicts of interest
A conflict of interest can occur when an officer, director, or trustee’s obligation to further the organization’s charitable purpose is at odds with their own financial interests. Should a conflict exist, a conflict-of-interest policy helps advise the governing body what procedures to follow.
Line 12b – Disclosure of Interests
Answer “yes” if officers, directors or trustees, and key employees are required to disclose annually interests that could give rise to conflicts.
Line 12c – Enforcement of Conflicts Policy
Answer “yes” if the organization monitors and enforces its conflict-of-interest policy. An organization’s monitoring procedures should be described on Schedule O.
Line 13 – Whistleblower Policy
Answer “yes” if the organization has a whistleblower policy.
According to the IRS, a whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.
Line 14 – Document Retention Policy
Answer “yes” if the organization has a document retention and destruction policy. The policy should identify record retention responsibilities of staff, volunteers, and the governing body.
Line 15a – Process for Determining Compensation
Answer “yes” if the compensation process for the CEO, Executive Director, or top management official included a review and approval by the governing body or compensation committee, use of data for comparable positions at similar organizations, and documentation of decisions.
Line 15b – Process for Determining Compensation
Answer “yes” if the compensation process for other officers or key employees included the same elements as line 15a. If the answer was “yes” on line 15a or 15b, the compensation process should be described on Schedule O.
Form 990 is a public document and you want to present your organization in the best light. Savvy donors and granting organizations expect a well-managed organization to have these policies and procedures in place and answer “yes” to these best practice questions. And, “no” answers are potential IRS red flags and could make your organization a target for examination.
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About the author:
Jacob Dehne, CPA, Tax Manager
Jacob joined Jacobson Jarvis in August of 2018 after moving from Bismarck, North Dakota. He provides accurate tax preparation for individuals, businesses, fiduciaries, and not-for-profit organizations. He has five plus years of public accounting experience and is pursuing his CPA license. Jacob graduated from the University of North Dakota in 2016 and played Division I golf.