For tax-exempt organizations, preparing a Form 990 tax return should be about more than simply punching in numbers and checking boxes – it’s also an opportunity to evaluate existing governance practices and consider how to improve them.
The Form 990 asks about a number governance practices and policies that, while not explicitly required by the Internal Revenue Code nor relevant to every organization, serve to provide organizations with essential safeguards for maintaining compliance and ensuring transparency and accountability.
Both to ensure that its Form 990 is accurate, and to assess and strengthen its governance moving forward, it is critical for a tax-exempt organization to begin to understand what those policies are, and why and when they matter.
The Form 990 asks whether the organization has provided a complete copy of the Form 990 to all members of its governing body before filing the form, and requires the organization to describe the process, if any, used to review the Form 990 on Schedule O. While this question does not directly ask about any specific policy, the best practice for ensuring that an organization’s governing body reviews a Form 990 before it is filed is to have a written policy or procedure in place.
If the Form 990 is provided to members of the governing body, but they do not actually review it, the Schedule O will have to indicate that no review was or will be conducted. A comprehensive policy should thus not only contain procedures for providing a copy of the Form 990 to members of the governing body before it is filed, but also rules and procedures for how it will be reviewed. This governing body review not only to ensures that the Form 990 is accurate, but also helps to ensure that the members of the governing body are meeting their fiduciary duties of care to the organization, which require them to act on a fully informed basis.
The Form 990 asks whether the organization had a written conflict of interest policy, and, if so, it asks whether (1) officers, directors, or trustees, and key employees were required to disclose annually interests that could give rise to conflicts, and whether (2) the organization regularly and consistently monitor and enforce compliance with the policy, and, if it did, the organization must describe its monitoring and enforcement of the policy on Schedule O.
The specific conflicts of interest that a conflict of interest policy should address are financial conflicts of interest. Such a conflict of interest arises when a person in a position of authority over an organization, such as an officer, director, or manager, can benefit financially from a decision she or he could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated. The general purpose of this policy is to provide procedures for ensuring that no individuals are using their position of influence with the organization to benefit their own financial interests at the expense of the organization.
A conflict of interest policy should thus define conflicts of interest, identify the classes of individuals within the organization covered by the policy, facilitate disclosure of information that can help identify conflicts of interest, and specify procedures to be followed in managing conflicts of interest.
Executive Compensation Policy
The Form 990 asks whether the process for determining compensation of the organization’s CEO, Executive Director, or top management official, and of other officers or key employees of the organization, included a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision. If it did, then the organization is also required to describe the process on Schedule O.
An executive compensation policy serves similar purposes as a conflict of interest policy, as both are intended to put procedures in place that prevent individuals in a position of influence from financially benefitting from that position at the expense of the organization. However, an executive compensation policy has the narrower focus of ensuring that compensation arrangements are reasonable, and should be specifically tailored to help an organization avoid having a compensation arrangement being deemed an excess benefit transaction.
An appropriate executive compensation policy will thus generally require that executive compensation be reviewed and approved by a governing body or compensation committee that is free of conflicts of interest, has relied on salary comparability data, and has adequately documented its decision.
The Form 990 asks whether an organization had a written document retention and destruction policy. A document retention and destruction policy identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization's documents and records. It should outline how long various organizational documents – such as financial records, tax and governance documents, and employment records – must be kept, in what format, and how they should be disposed of.
By providing clear guidelines to an organization and its agents, a document retention and destruction policy promotes operational efficiency, protects an organization’s tax exemption, facilitates compliance with federal and state laws, and guards against legal risks, including the liability for interfering with an investigation that could result from the preemptive destruction, or inappropriate disposal, of records.
The Form 990 asks whether an organization had a written whistleblower policy. A whistleblower is an individual who comes forward to report wrongdoing, and retaliation against a whistleblower is prohibited under Federal law and the laws of many states.
Whistleblowers are protected because of the important role they play in uncovering misconduct, and a whistleblower policy should therefore not only protect whistleblowers from retaliation but should also contain reporting procedures that are designed to encourage the reporting of misconduct. Specifically, a whistleblower policy should encourage staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specify that the organization will protect the individual from retaliation, and identify those staff or board members or outside parties to whom such information can be reported.
Form 990 generally requires an organization that invested in, contributed assets to, or participated in a joint venture or similar arrangement with a taxable entity during the year to answer whether it followed a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and take steps to safeguard the organization’s exempt status with respect to such arrangements.
For this purpose, a joint venture or similar arrangement means any joint ownership or contractual arrangement through which there is an agreement to jointly undertake a specific business enterprise, investment, or exempt-purpose activity without regard to (1) whether the organization controls the venture or arrangement, (2) the legal structure of the venture or arrangement, or (3) whether the venture or arrangement is treated as a partnership for federal income tax purposes, or as an association, or corporation for federal income tax purposes.
The primary purpose of a joint venture policy is to ensure that an organization’s participation in the joint venture or similar arrangement with a for-profit entity furthers the organization’s exempt purposes and does not more than incidentally benefit the private interests of that for-profit entity. A joint venture policy will thus generally require the venture or arrangement to be negotiated at arms’ length and include safeguards for protecting the organization’s exempt status.
Similarly, the Form 990 requires an organization that had local chapters, branches, or affiliates is to answer whether it had written policies and procedures governing the activities of such chapters, affiliates, and branches to ensure their operations were consistent with the organization’s exempt purposes.
For this purpose, a local chapter, branch or affiliate includes any local chapters, local branches, local lodges, or other similar local units or affiliates over which the organization had the legal authority to exercise direct or indirect supervision and control (whether or not in a group exemption), and local units that aren't separate legal entities under state law over which the organization had such authority.
Policies and procedures governing affiliates can be contained in separate policies or even included as required provisions in the affiliates’ articles of organization or bylaws, a manual provided to affiliates, a constitution, or similar documents. The idea is that an organization should have policies and procedures in place to ensure that the activities of any local units are consistent with the organization’s exempt purposes. In that regard, if the organization did not have such written policies and procedures, then it is required to explain on Schedule O how the organization ensures that the local unit's activities are consistent with the organization's tax-exempt purposes.
An organization that is required to file a Schedule M to the Form 990 to report noncash contributions is required to answer whether it has a gift acceptance policy that requires the review of any “nonstandard contributions.”
A “nonstandard contribution” is defined as the contribution of an item that (1) isn’t reasonably expected to be used to satisfy or further the organization’s exempt purposes (aside from the need of such organization for income or funds), (2) for which there is no ready market to which the organization can go to liquidate the contribution and convert it to cash, and (3) for which the value of the item is highly speculative or difficult to ascertain. The concept is that, where an item cannot be easily valued or sold, and also cannot be used to further an organization’s exempt purposes, an organization’s exempt purposes may be best served by simply not accepting the gift.
A gift acceptance policy thus ensures that an organization has procedures in place for preventing the acceptance of gifts that come with unnecessary risk or administrative burdens, or that will otherwise be detrimental to the organization’s accomplishment of its mission. In fact, a comprehensive gift acceptance policy should cover more than simply those contributions that fit the criteria of a nonstandard contribution, as not all organizations are equipped to manage and dispose of all types of personal and real property that have an ascertainable value and market.
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If your tax-exempt organization is interested in learning more about these policies or is seeking needs assistance with preparing them or the Form 990 return, please feel free to reach out to Marc Lane at 312/800-372-1040 or mlane@marcjlane.com in confidence.
Jeremy R. Kritt is an Associate Attorney with The Law Offices of Marc J. Lane, P. C.