IRS guidance on nonprofit boards

A client recently asked me what the IRS had to say about nonprofit boards. In general, the IRS is not the rule enforcer on nonprofit hoards. The states define the requirements to be a nonprofit and the size and make up of the board

As the IRS puts it,

“And while the tax law generally does not mandate particular management structures, operational policies, or administrative practices, it is important that each charity be thoughtful about the governance practices that are most appropriate for that charity in assuring sound operations and compliance with the tax law. As a measure of our interest in this area, we ask about an organization’s governance, both when it applies for tax-exempt status and then annually as part of the information return that many charities are required to file with the Internal Revenue Service.”

IOW, the IRS asks questions in its application for tax exempt status and in the annual returns nonprofit file (Form 990). These questions try to drive good behaviors.

In an IRS document titled Governance and Related Topics – 501(c)(3) Organizations the IRS recommends good practices for nonprofit boards. Some of the topics covered in the 8-page document include:

  • Mission-Know your mission, and purpose and review it regularly
  • Organizational Documents– includes bylaws and Articles of Incorporation (for nonprofit corporations) or Articles of Association (for unincorporated associations).
  • Governing Body-your board should consist of qualified, involved members who are independent and not dominated by employees or paid staff.
  • Governance and Management Policies-Have policies on compensation, conflicts of interest, investments, fundraising, documenting governance decisions, document retention and destruction, and whistle blower claims.
  • Financial Statements and Form 990 Reporting– The board should ensure the nonprofits funds are properly spent.
  • Transparency and Accountability-The Internal Revenue Code requires a charity to make its Form 1023 exemption application, Form 990, and Form 990-T available for public inspection.

How is your board doing in these areas? Need improvement?

How about we talk about it?

I’d love to set up a conference call or Zoom video chat with your board to discuss ways to improve your nonprofit’s governance. All this leads to better run organizations and less work and stress on your hard-working board members!

Contact me today and we can set up a call.

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