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In December 2009, on the heels of the first substantial revisions to IRS Form 990 since the Shah ruled Iran and Kramer v. Kramer ruled the box office (1979 for those who may not have placed the references), the IRS issued its so-called “Governance Check Sheet” to be used by Revenue Agents when auditing organizations that are exempt under Section 501(c)(3) of the Internal Revenue Code. While the Governance Check Sheet is, by its own terms, to be used only for audits of Section 501(c)(3) organizations, its adoption has reaffirmed the heightened scrutiny that the IRS has placed on the corporate governance practices being used by all tax-exempt organizations.

The Governance Check Sheet requires Revenue Agents to look for such things as:

● Whether an organization’s mission statement articulates its current charitable purposes;

● Whether the organization’s Bylaws set forth the duties, voting rights, composition, and qualifications of the members of the Board of Directors and Officers;

● Whether the organization has a written conflict-of-interest policy, and, if so, does such policy address recusals, and require annual written disclosures of conflicts, and is the policy actually adhered to by the organization during the year or years being audited;

● Whether the organization has a document retention policy; and

● Whether the organization has certain financial oversight systems and procedures in place, including whether Form 990 was presented to and reviewed by the full Board of Directors prior to filing.

Not coincidentally, the Governance Check Sheet tracks many of the new questions included in Part VI of Form 990, which questions apply to all exempt organizations required to file Form 990. The following are just a few of the questions that your trade association will now be required to answer:

● Was a copy of the organization’s Form 990 provided to all Board members prior to filing? Organizations must then describe the process actually used to review Form 990 prior to filing.

● Does the organization have a written conflict-of-interest policy? If “yes,” are officers, directors and key employees required to disclose any interest that could give rise to conflicts? Does the organization regularly and consistently monitor and enforce compliance with the policy?

● Does the organization have a written document retention and destruction policy?

● Does the organization have a written whistleblower policy?

● Did the organization invest in, contribute assets to, or participate in a joint venture or similar arrangement with a taxable entity during the year? Importantly, this question is very broad and includes disclosures pertaining to for-profit subsidiaries controlled by, or affiliated with, a tax-exempt organization.

Some have termed the adoption of the Governance Check Sheet and the revisions to Form 990 as attempts by the IRS to “legislate by the form.” After all, the corporate governance practices of nonprofit entities are predominantly matters of state, and not federal, law. Many legal commentators have therefore questioned whether the IRS should be in the business of monitoring matters of nonprofit governance. The IRS has responded to these concerns by stating its belief that better governed organizations are more tax compliant. Additionally, the IRS is seeking enhanced transparency so that it can better compare similar organizations and get a more realistic picture of tax-exempt organizations. The IRS also claims that the revised Form 990 will minimize the filing burden on tax-exempt entities; however, this justification is a bit confusing given that the revised Form 990 increased in length from 9 to 12 pages, and the number of schedules has increased from two to 16!

Regardless of the justification posited by the IRS for its journey into the governance abyss, the fact is that the IRS is now asking extensive questions about your governance practices. Will an IRS Revenue Agent “swoop down” upon your organization if you answer “no” to some or all of the questions regarding corporate governance practices? Likely not, but it is quite clear that the IRS wants your organization to answer “yes” and to ultimately improve your governance practices. Moreover, answering “no” could subject your organization to a greater risk of audit. Wouldn’t it be easier to answer “yes” and let it go at that?

Finally, now is the time to take the necessary steps to adopt the necessary policies and to improve your association’s governing practices. Since the IRS phased in the requirement to file the revised Form 990 over three years, many tax-exempt organizations have not yet met the filing threshold and may not be aware of the contents of the new form. For calendar or fiscal years beginning in 2009, most organizations with at least $500,000 in annual gross receipts and total assets of at least $1,250,000 will be required to file the revised form. For calendar or fiscal years beginning in 2010, these amounts will be reduced to $200,000 and $500,000, respectively.

So, after all is said and done, why do you care about the Governance Check Sheet and revised Form 990? The answer is simple - the IRS is asking!