Tax Services – 990 and Governance in Nonprofit Organizations

Though not a new requirement, the 990 form highlights governance issues for nonprofit boards of directors

By James M. Haynes, CPA

Since 2008, the Internal Revenue Service has highlighted good governance practices of tax-exempt organizations on the Form 990. This form is a filing requirement for nonprofits, nonexempt charitable trusts, and section 527 political organizations. It asks questions regarding the governing body and management structure and policies of the entity, in addition to financial information.

These questions have caused some consternation among boards of directors – but not for the reasons one might suspect. Nonprofit organizations do not pay tax on profits, and fluctuations in income and expenses don’t change that fact. (We’ll cover unrelated business income in another article. The IRS is quite interested in that.)

The IRS is interested in ensuring that board members adhere to their fiduciary responsibilities, because there have been abusive actions or undue influence by board members on the operations of organizations – and some high profile ones.

Stewardship, or lack of it, by the board makes a very big difference in the organization’s good functioning. Board members make decisions that directly affect the well-being of the organization’s key stakeholders, including donors, program participants and beneficiaries and the public.

Fiduciary Duties

The fiduciary responsibilities of a nonprofit’s board members include:

  1.  Avoiding conflicts of interests;
  2. Acting in the interest of the organization rather than in the interest of board members;
  3. Providing oversight to assure that the organization’s business is transacted legally;
  4. Making decisions to protect the assets of the nonprofit organization.

The governance questions on the 990 point to accepted best practices that help board members fulfill their duties. Are policies in place? Does the board review the 990 before it is filed (by doing so certifying that the board is aware of the financial condition of the organization)? Is there a procedure to review the CEO/Executive director? Did the organization make any significant changes to its governing documents? Did the organization have a written conflict of interest policy, etc.?

Better Safe than Sorry

These questions often determine whether a nonprofit group successfully accomplishes its mission within IRS rules, and within the law. Whether a board can answer yes or no to the questions can help it determine weaknesses in the governance structure. If policies and procedures are not in place, board members should work to document and implement them.

And while no one expects problems in a nonprofit organization, it is better from a best practices perspective to implement governance policies and procedures. That requires board members and officers to demonstrate a full understanding of the policies and to be updated as necessary on any changes.

If there are financial problems or other potentially harmful activities occurring within the organization, board members must know. If the organization does not appropriately complete its mission or fails financially because the board did not follow appropriate governance procedures, Errors & Omissions insurance (also called Directors & Officers insurance) may not cover potential damages – including liability for debts incurred by the organization. Board member should know whether the group has an E & O policy in effect, and its limits.

The message of the Form 990 to board members should be that it is their responsibility to understand good governance practices. After all, as a board, you’re signing statements that say you do, and your fiduciary responsibilities demand it.

Next Steps

So what’s a good board member to do? First, review the organization’s Form 990. Review the governance questions. If the group does not have these policies in place, or if they’ve never been distributed, find out more. Next, use common sense – if an action of an organization feels wrong, it might be. Finally, get help from organizations like the local United Way, Chamber of Commerce or Community Foundation or business association.

Pulakos CPAs has assisted multiple nonprofit entities in implementing effective governance programs, and putting appropriate policies in place, helping ensure board members and officers are up to date and following these practices.

Additional resources:

http://www.councilofnonprofits.org/resources/resources-topic/boards-governance/irs-form-990-governance-guidance

http://www.councilofnonprofits.org/conflict-of-interest

http://blogs.law.harvard.edu/corpgov/2012/04/15/nonprofit-corporate-governance-the-boards-role/