The Shifting Landscape for American Not-for-Profit Organizations

Good Governance Practices for 501(c)(3) Organizations: Should the IRS Become Further Involved?

The International Journal
of Not-for-Profit Law

Volume 10, Issue 1, December 2007

Thomas Silk1

The board of directors in the United States is today composed of directors who are essentially part-time performers with other demanding responsibilities. So structured, the board is blind, except to the extent that the corporation’s managers or independent gatekeepers advise it of impending problems.

–John C. Coffee Jr., Gatekeepers: The Professions and Corporate Governance, page 7 (2006)  


Should the IRS actively encourage good governance practices by exempt organizations?

The question is not entirely new. It was addressed directly some three years ago by former Commissioner Mark Everson, in his statement before the Senate Finance Committee on June 22, 2004.2 Commissioner Everson stressed the need to improve coordination with the States, particularly with NASCO (the National Association of State Charity Officers), and requested expanded authority to share with state charity officials tax-exempt organization returns and related information. He recognized a “need to publicize practices that will help and encourage … [exempt] organizations and their officers to prevent abuse,” and he announced the development by the IRS of a plain-language brochure that would “set-forth certain practices we believe will be useful in promoting good governance, ethics, and internal oversight.” The brochure was to be available in the fall of 2004.

Although the brochure seems to have gone missing, the governance project itself has recently shown signs of life. At a meeting of exempt organization councils, Marvin Friedlander, Manager, EO Technical Branch, mentioned the project which now had taken the form of
“Good Governance Practices for 501(c) (3) Organizations” (GGP). On February 2, 2007, that document was published unofficially.3

On April 27, Steven T. Miller, Commissioner, Tax Exempt and Governmental Entities, addressed the governance topic in his speech at the 24 th Annual Conference on Representing and Managing Tax-Exempt Organizations, sponsored by Georgetown University. His reflective paper raised the question of “what the Service should do with governance practice.” He allowed that “it’s neither self-evident that we should get involved, nor obviously something we should avoid,” and he asked “whether it would benefit the public and the tax-exempt sector to require organizations to adopt and follow recognized principles of good governance.” “At a minimum,” he concluded, “we should educate on basic standards and practices of good governance and accountability. And we should strongly encourage the community in its efforts to formally elevate standards…. Someone needs to lead the sector on this issue. If not the IRS, then whom?”4

The debate in response to that question has been, and may continue to be, spirited. I have heard many practitioners argue that governance is the sole purview of state law, and that the IRS should stay away from the issue. My own view is that whether IRS guidance on charitable governance is or is not a good thing is beside the point. It is going to happen – either under this administration or the next.

It is not far-fetched to imagine a national scandal featuring a prominent charity in violation of standards of charitable governance, but incorporated in a state with inadequate charitable enforcement. In the congressional hearings that might follow, the IRS would surely be in a far more defensible position if it had already gone forward to educate the charitable sector about the importance of good governance practices than if it had not. Subsequent legislation introduced by a supportive Congress may easily resolve any jurisdictional ambiguities about governance of charitable organizations and enforcement.

That the IRS and Congress are marching in step on governance is suggested by recent events. In a letter dated May 29, 2007, from Senators Max Baucus and Chuck Grassley to Treasury Secretary Paulson, they note that “time and time again we have seen poor governance at the core of problems of charities.” They refer to a similar mention by Commissioner Everson in his letter to the Finance Committee in March, 2005, “Many of the situations in which we have found otherwise law-abiding organizations to be off-track stem from the failure of fiduciaries to appropriate manage the organization.” And the Senators conclude by noting that “Form 990 can serve a useful purpose of bringing a focus on governance issues both for the board and management of the charity as well as the public.”5

On June 14, the IRS released for public comment a discussion draft of a redesigned Form 990, containing, for the first time, extensive questions about governance. The core governance information portion of the draft of the redesigned Form 990 is found at Part III, page 4.

The same factors that are compelling state charity officials to expand their public education efforts, particularly through the medium of the Internet, are also at work within the IRS. The cost of enforcement of charitable and tax-related laws at the state and federal levels is substantial and is not declining. Widespread and effective educational efforts may significantly reduce enforcement needs. The Internet provides a low-cost, high-tech option for reaching a national audience,6 and we are at the very early stages of discovering techniques that will further unleash the power of the Internet.

Although the IRS has available to it a broad variety of publication formats which it may use to educate about governance, including Form 990, Form 1023, and related instructions, none can match the taxpayer-friendly accessibility and immediacy of the Internet. The usefulness of the IRS website,, to exempt organization specialists continues to increase, particularly with the addition of the Internal Revenue Manual and articles from the Exempt Organization Continuing Professional Education Program. Informational features have recently been added, directed to members of the public who may want to learn about forming or operating a charity, including “Life of a Public Charity,” “Life of a Private Foundation,” and an online interactive workshop on exempt organizations ( with, so far, five modules.

All this is irrelevant to the governance project, it may be objected, because the Commissioner has jurisdiction over federal tax-exempt organization matters but not over governance. It may be customary to think of the cluster of fiduciary duties as uniquely of state concern. But the truth is less narrow. Whether referred to as the duty of care or the duty of compliance, traditional fiduciary duty includes the duty to oversee and supervise compliance with federal tax laws as well as with state charitable and tax laws.

The purview of State Attorneys General and the IRS overlaps. The jurisdiction of State Attorneys General includes the prevention of waste of charitable assets, which may occur due to fines or penalties stemming from violations of federal tax laws as well as state laws. The jurisdiction of federal tax officials in enforcing federal tax-exempt organization laws extends to promoting compliance with those laws by directors and officers by providing guidance and information likely to enhance such compliance – including awareness of good governance practices.

It is surely in the public interest, and it may also be in the mutual interest of the IRS and NASCO, that good governance practices in the charitable sector, including high ethical standards and transparency, be encouraged. The solution may call for a joint effort. Perhaps IRS/EO and NASCO could join together and appoint a Task Force on Governance charged with producing the Good Governance Guide for Charities. Congress, in amending 6104 in 2006 to provide that the Service can disclose its audits to the Attorneys General, surely recognized this changing trend and the need for increased cooperation.

The complete text of the IRS’s GGP draft follows, together with my comments on the GGP as well as on the governance provisions of the draft of the redesigned Form 990.

Good Governance Practices for 501(c)(3) Organizations7

The Internal Revenue Service believes that governing boards should be composed of persons who are informed and active in overseeing a charity’s operations and finances. If a governing board tolerates a climate of secrecy or neglect, charitable assets are more likely to be used to advance an impermissible private interest. Successful governing boards include individuals not only knowledgeable and passionate about the organization’s programs, but also those with expertise in critical areas involving accounting, finance, compensation, and ethics.

Organizations with very small or very large governing boards may be problematic: small boards generally do not represent a public interest and large boards may be less attentive to oversight duties. If an organization’s governing board is very large, it may want to establish an executive committee with delegated responsibilities or establish advisory committees.

The Internal Revenue Service suggests that organizations review and consider the following to help ensure that directors understand their roles and responsibilities and actively promote good governance practices. While adopting a particular practice is not a requirement for exemption, we believe that an organization that adopts some or all of these practices is more likely to be successful in pursuing its exempt purposes and earning public support.


The first paragraph of GGP, on the composition of the governing body, contains sound advice – directors should exercise oversight in a manner that is informed and active; the board should avoid secrecy and neglect; and a governing body would be well-served by including one or more directors with expertise in the relevant areas of accounting, finance, compensation, and ethics.

The last clause, while well-intended, may produce unwanted results. An expertise qualification, while a realistic aim for boards of publicly traded companies, may be setting the bar too high for charitable organizations. The solution, I suggest, may be to broaden the qualification to “expertise, knowledge, or experience,” and to make plain that this is an ideal not always attainable in practice.

The second paragraph, addressing the structure of the governing body, warns against boards that are too large or too small. The cautionary note about large boards deserves at least another sentence to introduce the problem of trophy directors who fail to govern and to alert the more sophisticated reader to the interest taken by scholars in this problem and the solutions they propose.8 The statement about small boards – “Small boards generally do not represent a public interest” – is wrong and inappropriate. It should be deleted. The truth is that small boards come in many flavors, from the single trustee of a traditional charitable trust, to the few members on the board of a family foundation, to the start-up small charity that begins with a small board and seeks to grow, in time, with attentive and resourceful directors. It should also be noted that state laws authorize nonprofit boards with a single director.9

The third paragraph is important. While it contains the Service’s recommendation that directors actively promote good governance practices, it makes clear that “adopting a particular practice is not a requirement for exemption.”

Since all three paragraphs of this first topic concern the governing body, I recommend that this, the only untitled and un-numbered topic, be entitled “governing body,” and be given the first number.

The draft of the redesigned Form 990 asks the organization to provide the number of members of the governing body, the number of independent members, and whether it made any significant changes to its governing documents. It also asks whether the organization takes and maintains minutes of its governing body and related committees.

1. Mission Statement

A clearly articulated mission statement that is adopted by an organization’s board of directors will explain and popularize the charity’s purpose and serve as a guide to the organization’s work. A well-written mission statement shows why the charity exists, what it hopes to accomplish, and what activities it will undertake, where, and for whom.


Doubtless, most texts in Nonprofit Governance 101 recommend a mission statement. It does belong in a Guide to Good Governance.

By itself, the process of drafting and discussing such an aspirational statement can be stimulating and beneficial, but if the mission statement is to be more than that, if it is to serve as a core description of charitable identity and a map for the future, the charity needs to find a way to foster, among its directors, a continuing awareness of its goals and objectives.

This is often done by including the mission statement in the charity’s Code of Ethics and by requiring directors to sign an annual statement affirming that they have read, understood, and agree to comply with the Code of Ethics.

The GGP should warn against allowing the mission statement to migrate into the Articles of Incorporation or other organic documents. Traditionally, statements of purposes and powers in Articles of Incorporation were highly detailed. The modern practice in most states is to give the charity the greatest flexibility of operation by drafting purposes and powers clauses broadly, enabling the charity to be organized and operated for any of the purposes described in Section 501(c)(3), and permitting the charity to exercise powers as defined by comprehensive state-empowering statutes. An extreme example of the disabling impact of a restrictive purpose clause is a California case in which the Court ruled that the purpose clause of the Articles, which provided that the charity was to own and operate a hospital, prevented the charity from selling the hospital and operating medical clinics instead.10

Oddly enough, the governance provisions of the draft of the redesigned Form 990 do not ask whether the organization has a mission statement. I recommend that the Glossary in redesigned Form 990 contain this definition of a mission statement: “A statement explaining why the charity exists, what it hopes to accomplish, and what activities it will undertake, where, and for whom.” Further, the mission statement should be added to the list of documents contained on line 11 of Part III, page 4, of the redesigned Form.

2. Code of Ethics and Whistleblower Policies

The public expects a charity to abide by ethical standards that promote the public good. The board of directors bears the ultimate responsibility for setting ethical standards and ensuring they permeate the organization and inform its practices. To that end, the board should consider adopting and regularly evaluating a code of ethics that describes behavior it wants to encourage and behavior it wants to discourage. The code of ethics should be a principal means of communicating to all personnel a strong culture of legal compliance and ethical integrity.

The board of directors should adopt an effective policy for handling employee complaints and establish procedures for employees to report in confidence suspected financial impropriety or misuse of the charity’s resources. Such policies are sometimes referred to as whistleblower policies.


If the Board intends to make plain to everyone involved with the charity that the Board expects them to adhere to the highest ethical standards – and that following minimum legal requirements are not enough – the Code of Ethics should reflect that intent. Here is one version of a suitable provision for the Code of Ethics.

Law and Ethics

Charity shall comply with all applicable federal, state, and local laws and regulations and shall seek the advice of counsel when necessary or appropriate. Compliance with the law, however, is the minimum standard of expected behavior. Charity shall also adhere to the highest ethical standards. All resolutions and other legal actions by the Board of Directors and all actions by directors, officers, and employees shall satisfy two requirements: (1) they shall be legally permissible, and (2) they shall also reflect the highest ethical standards as determined by the person involved within such person’s best judgment.

It has become a best practice for nonprofit organizations to adopt a whistleblower policy that goes far beyond the criminal prohibitions imposed by law. The charity should be alerted, however, that laws of many states add whistleblower provisions, including required postings in the workplace. Those provisions should be integrated into any whistleblower policy the charity adopts.

Whistleblower policies tend to contain the following elements: (1) they encourage employees to be vigilant about possible illegal or unethical conduct at the state or federal level and to report that information; (2) they allow the report to be made anonymously; and (3) they assure employees that no retaliation, demotion, or other adverse action will be taken against any person who reports a good-faith concern and warn employees that they may not participate in retaliatory action.

Whether a whistleblower policy is expressed as part of the Code of Ethics or as a separate document is a matter of individual style. My preference is to include it in the Code of Ethics for the practical reason that the requirement of annual affirmation of the Code by each director may bring the whistleblower policy to the attention of those directors without the need to remember to affirm yet another document.

It is one thing to adopt appropriate policies, but it is equally, if not more important, to make sure that all board members are aware of the policies and that the policies are followed. Many of the for-profit corporations that have found themselves in the public spotlight during the past ten years had solid conflicts of interest and ethics policies in place, but they neglected to remember to actually follow them.

The draft of the redesigned Form 990 asks whether the organization has a written whistleblower policy, but it is silent as to a Code of Ethics. I recommend that line 11 of Part III be amended to include a Code of Ethics in the list of documents listed, and I recommend that the Glossary contain the following definition of a Code of Ethics: “A policy that expresses a commitment to ethical standards and may address matters such as transparency, accountability, diversity, and governance.”

3. Due Diligence

The directors of a charity must exercise due diligence consistent with a duty of care that requires a director to act:

  • In good faith;
  • With the care an ordinarily prudent person in a like position would exercise under similar circumstances;
  • In a manner the director reasonably believes to be in the charity’s best interests.

Directors should see to it that policies and procedures are in place to help them meet their duty of care. Such policies and procedures should ensure that each director:

  • Is familiar with the charity’s activities and knows whether those activities promote the charity’s mission and achieve its goals;
  • Is fully informed about the charity’s financial status; and
  • Has full and accurate information to make informed decisions.


There is a glaring omission from this general description of the duty of care in the GGP, and that is the complete absence of any mention of reliance provisions. Common law, nonprofit corporation statutes in most states, and the standards of conduct for directors in the Revised Model Nonprofit Corporation Act (1987) and the Proposed Model Nonprofit Corporation Act (Third Edition, 2006), permit a director to avoid duty of care liability if the director acts in reliance on individuals or committees under certain circumstances.11

Because fiduciary duties are interpreted frequently at the state rather than at the federal level, this topic would benefit by adding the views of NASCO representatives or appointees to those of IRS representatives or appointees.

The draft of the redesigned Form 990 makes no direct statement about the duty of care. Fiduciary duty is tested in another way, however, by determining how the organization responds to questions about conflict of interest policies and practices, compensation review, financial review, and other related detailed inquiries.

4. Duty of Loyalty

The directors of a charity owe it a duty of loyalty. The duty of loyalty requires a director to act in the interest of the charity rather than in the personal interest of the director or some other person or organization. In particular, the duty of loyalty requires a director to avoid conflicts of interest that are detrimental to the charity. To that end, the board of directors should adopt and regularly evaluate an effective conflict of interest policy that:

  • Requires directors and staff to act solely in the interests of the charity without regard for personal interests;
  • Includes written procedures for determining whether a relationship, financial interest, or business affiliation results in conflict of interest; and
  • Prescribes a certain course of action in the event a conflict of interest is identified. Directors and staff should be required to disclose annually in writing any known financial interest that the individual, or a member of the individual’s family, has in any business entity that transacts business with the charity. Instructions to Form 1023 contain a sample conflict of interest policy.


Adoption of conflict of interest policies by charitable organizations is encouraged today by a many sources. The Sarbanes-Oxley Act requires listed companies to adopt a conflicts policy, and the influence of that Act on nonprofit organizations has been substantial, particularly on large educational institutions and hospital foundations. Best practice codes recommend that charities adopt a conflicts policy.

The content of conflicts policies is also changing. The traditional conflict of interest policy, emerging from corporate law, focused on validation, the procedures a Board must follow to permit a conflict of interest to exist. The modern conflicts policy requires disclosure of conflicts as a separate matter, entirely apart from validation. It contains remedies for failing to disclose conflicts. In the charitable sector, the concept of conflicts of interest is being transformed to reflect, as well, emerging ethical concerns. This is best illustrated by the treatment of conflicts of interest in the American Law Institute’s project, Principles of the Law ofNonprofit Organizations, where a single-page conflict of interest text is followed by 50 pages of commentary and where conflicts policies reach beyond financial conflicts and include non-pecuniary conflicts as well.12 Finally, the modern conflicts policy applies to directors, officers and employees, while the traditional policy applies only to directors.

The sample conflicts policy recommended by the IRS should be reviewed and revised to include non-pecuniary conflicts, to reach officers and employees as well as directors, and to contain an annual statement affirming that they have read, understood, and agree to comply with the conflict of interest policy.

The draft of the redesigned Form 990 asks whether the organization has a written conflict of interest policy, and how many transactions the organization reviewed under this policy during the year (lines 3a and 3b, Part III, page 4). The definition of conflict of interest policy in the glossary does not cover most employees but limits the policy to officers, directors, and managers. However, the definition of a conflict is broad, extending beyond financial benefits (a conflict exists whenever a covered person “may benefit personally from a decision he or she could make”).

5. Transparency

By making full and accurate information about its mission, activities, and finances publicly available, a charity demonstrates transparency. The board of directors should adopt and monitor procedures to ensure that the charity’s Form 990, annual reports, and financial statements are complete and accurate, are posted on the organization’s public website, and are made available to the public upon request.


Comprehensive website disclosure – whereby nonprofit organizations strive toward maximum transparency of operations to the widest possible audience with a minimum of expenditure – has quickly become a best practice of nonprofit governance. Website disclosure may result from legal requirements. For example, the IRS requirement of tax-return disclosure for charities gives the taxpayer the choice of making its annual Form 990 or 990 PF available to anyone who requests it or, alternatively, posting it on the charity’s website. California has also adopted the website-posting option for public disclosure of audited financial statements required by the Nonprofit Integrity Act of 2004.

A charitable organization may benefit if it maximizes use of its website as a channel of information accessible to all who desire to be informed about the charity and its operations.13

I recommend that the following transparency policy be included in a Code of Ethics, adopted and enforced by the Board of Directors, and posted on the charity’s website:


Charity shall provide comprehensive and timely information to the public, the media, and all stakeholders and shall be responsive to reasonable requests for information. All information about charity shall fully and honestly reflect its policies and practices. All financial and program reports shall be complete and accurate in all material aspects.

Basic financial and organizational information about charity, including the current Form 990 and the current audited financial statement, shall be posted on charity’s website, along with this Code of Ethics, the Conflict of Interest Policy, the Articles of Incorporation (or other organizing document), and Bylaws.

The draft of the redesigned Form 990 addresses the transparency issue indirectly. It does not require outright that the organization make information available to the public. Instead, Part III, line 11, asks whether the organization makes available to the public its governing documents, conflict of interest policy, Form 990, Form 990-T, financial statements, audit report. The organization may check one of five boxes: not applicable, website, other website, office, or other.14

6. Fundraising Policy

Charitable fundraising is an important source of financial support for many charities. Success at fundraising requires care and honesty. The board of directors should adopt and monitor policies to ensure that fundraising solicitations meet federal and state law requirements and solicitation materials are accurate, truthful, and candid. Charities should keep their fundraising costs reasonable. In selecting paid fundraisers, a charity should use those that are registered with the state and that can provide good references. Performance of professional fundraisers should be continuously monitored.


This is a topic that could benefit from the help of NASCO. Other points might be made here, such as a reminder of the need to register in each state where the charity solicits funds.

The draft of the redesigned Form 990 contains a new Schedule G applicable to fundraising activities. The Schedule addresses fundraising activities generally, events, and gaming, requiring detailed financial information about each type of activity.

7. Financial Audits

Directors must be good stewards of a charity’s financial resources. A charity should operate in accordance with an annual budget approved by the board of directors. The board should ensure that financial resources are used to further charitable purposes by regularly receiving and reading up-to-date financial statements including Form 990, auditor’s letters, and finance and audit committee reports.

If the charity has substantial assets or annual revenue, its board of directors should ensure that an independent auditor conduct an annual audit. The board can establish an independent audit committee to select and oversee the independent auditor. The auditing firm should be changed periodically (e.g., every five years) to ensure a fresh look at the financial statements.

For a charity with lesser assets or annual revenue, the board should ensure that an independent certified public accountant conduct an annual audit.

Substitute practices for very small organizations would include volunteers who would review financial information and practices. Trading volunteers between similarly situated organizations who would perform these tasks would also help maintain financial integrity without being too costly.


Only a few states currently require annual financial audits of nonprofit corporations, although that is changing.15 Independent financial audits have become such a fundamental and essential test of the financial soundness of any corporate enterprise that all best practice codes of nonprofit governance require that every nonprofit corporation with substantial assets or annual revenue should be audited annually by an independent auditing firm.

Along with a mandatory audit requirement for nonprofit organizations of significant size, core best practices require that the board of directors appoint an audit committee. GGP should be revised to address the notion of an audit committee. The audit committee should be composed of one or more directors. All of the directors must be independent, in the sense that they may not be paid for services by the nonprofit corporation, aside from a reasonable honorarium. While audit committee members need not meet the SEC definition of an “audit committee financial expert,” it is desirable that at least one member should be knowledgeable, generally, about organizational financial matters.

The audit committee must have received delegated authority from the board to function effectively and independently of management.

Two provisions in the GGP warrant further discussion. The notion of changing the auditing firm every five years is a legacy from Sarbanes-Oxley. Like the requirement of including an expert on the board, this requirement to change auditing firms is neither practical nor appropriate for nonprofit organizations generally. The availability of auditing firms with the expertise to audit charities and the willingness to do so for a reduced fee is limited. Moreover, the costs to an accounting firm of creating a financial baseline for a new client are not insignificant. Many accounting firms spread those fees over a number of years. But if the expected life of a charitable client is to be limited to five years, the universe of available auditing firms may diminish even further.

Another solution should be sought so that the charity may benefit by a fresh auditing perspective. Changing the auditing partner but not the auditing firm may be worth considering. This may be an area where the insights of NASCO could be helpful. NASCO’s view might also be useful in evaluating the practicality of advising small charities to use volunteers to review financial information and to trade volunteers with similar organizations.

The draft of the redesigned Form 990 asks three questions about financial review: whether the organization has an audit committee, whether the financial statements are prepared by an insider or by an independent accountant, whether they take the form of a (checkoff) compilation, review, or audit, and whether the governing body reviews the Form 990 before filing (lines 8, 9, 10, Part III, page 4).

8. Compensation Practices

A successful charity pays no more than reasonable compensation for services rendered. Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service. Director compensation should be allowed only when determined appropriate by a committee composed of persons who are not compensated by the charity and have no financial interest in the determination.

Charities may pay reasonable compensation for services provided by officers and staff. In determining reasonable compensation, a charity may wish to rely on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6.


This is one area where the charitable sector is far ahead of the for-profit sector. Most restrictions on the payment of compensation to corporate officials in the for-profit sector are imposed by new corporate governance rules adopted by the New York Stock Exchange and other stock exchanges. The Sarbanes-Oxley limitations on compensation are modest and require the CEO and CFO to pay back bonuses or other incentive or equity-based compensation paid during the 12 months after financial statements are restated under certain circumstances.

In the charitable sector, by contrast, restrictions on the payment of excessive benefits, including unreasonable compensation, are imposed by federal tax law. To benefit from a presumption of reasonableness for insider compensation decisions, charities must base compensation decisions for chief executive officers, chief operating officers and chief financial officers on objective, documented comparable information. It is becoming a best practice for charities to rely on that type of information in determining the compensation paid to anyone if it is substantial, whether or not they happen to be a senior officer or other insider.

The draft of the redesigned Form 990 devotes two pages to detailed questions about compensation paid to insiders and to independent contractors (Part II, pages 2-3). This is a substantial change from the meager information requested on compensation by the current Form 990. This detailed information will give the IRS as well as state charity officials new tools to enforce existing prohibitions on excess compensation, and the disclosures (or lack thereof) may lead to new legislation or regulations.

9. Document Retention Policy

An effective charity will adopt a written policy establishing standards for document integrity, retention, and destruction. The document retention policy should include guidelines for handling electronic files. The policy should cover backup procedures, archiving of documents, and regular check-ups of the reliability of the system. For more information see IRS Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt Organizations, available on the IRS website.


This is a topic on which the input of NASCO would be particularly helpful. For example, the reference to IRS Publication 4221 tends to reinforce the notion that records need be kept only for three or four years, standard periods of limitation for federal income tax and employment tax records. But state laws differ widely. In California, for example, the limitation period applicable to actions by the Attorney General for violations of the charitable self-dealing statute is 10 years.16 Relevant corporate records, including minutes and accounting records, should be kept for at least that long.

Document destruction policies can be a trap for the unwary. At the least, a reader should be advised that all document destruction should be halted the moment the charity knows it is being investigated by a federal or state law enforcement agency, and routine destruction should not be resumed without the written approval of legal counsel or the chief executive officer.

The draft of the redesigned Form 990 asks whether the organization has a written document retention and destruction policy (line 5, Part III, page 4)


The Service’s interest in good governance practices of exempt organizations is expressed by statements of IRS officials, in the draft of Good Governance Practices, and in the draft of the redesigned Form 990, which adds, for the first time, questions about governance practices.

The governance questions on the draft form are not to be taken lightly. They are not asked as part of a benign poll of charitable organizations. They are backed with the full enforcement power of the federal government. Form 990 must be signed under penalties of perjury, requiring that the information be complete and truthful, to the best of the knowledge and belief of the signing officer. An incomplete or false statement made knowingly on Form 990 may be punishable as a civil matter (IRC § 6721), as a misdemeanor (IRS § 7207), or as a felony (IRC § 7206).

Practitioners would be well advised to counsel their exempt organization clients on the wisdom of (1) adopting good governance policies, (2) following them in practice, and (3) responding in a complete and truthful manner to the governance and other questions on the redesigned Form 990.


1 Thomas Silk is senior counsel at Silk, Adler & Colvin, San Francisco. This article was originally published in the Journal of Taxation, Vol. 107, No. 1, p. 45 (July 2007).

2 IR-2005-81.

3 EO Tax Journal (vol. 12, no. 1, January/February 2007). (Hereinafter sometimes referred to as GGP.)

4 EO Tax Journal’s Weekly Email Tax Service, 05/01/2007, pp. 6-7.

5 See Tax Analysts Doc. 2007-12969.

6 In its report on “High-Speed Services for Internet Access: Status as of June 30, 2006,” the FCC reported (pp. 1-4) that 65 million high-speed lines connect homes and businesses to the Internet, and in the prior 12-month period, high-speed lines had increased by 52%. Further, “more than 99% of the country’s population lives in the 99% of Zip Codes” where high-speed Internet services are available.

7 Focus on IRS and Treasury, EO Tax Journal (vol. 12, no. 1, January/February 2007).

8 Failure to Govern? The Disconnect Between Theory and Reality In Nonprofit Boards And How to Fix It, Stanford Social Innovation Review (Sept. 2005); Marion R. Fremont-Smith, Governing Nonprofit Organizations: Federal and State Law and Regulations, p. 433 (2004); Fishman and Schwarz, Nonprofit Organizations: Cases and Materials, p. 180 (2d Ed., 2002); American Law Institute, Principles of the Law of Nonprofit Organizations, p. 99-103 (Preliminary Draft 3, May 12, 2005).

9 See, e.g., Cal. Corp. Code §5120(a).

10 Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359 (1977).

11 See, e.g., Cal. Corp. Code §5231(b).

12 Discussion Draft, April 6, 2006 (Disclosure: I am an adviser to that ALI Project.)

13 Taxpayers are also becoming aware that other websites can be used for marketing purposes. For example, Guidestar maintains a comprehensive database of tax returns of 501(c)(3) organizations, provided by the IRS. Sophisticated donors are turning to Guidestar’s database for information about possible grantees. In turn, sophisticated donees, in recognition that the audience for the tax returns is not only the IRS but also possible donors, are expanding the description of their purposes and activities as described in Form 990, transforming it into a marketing publication for donors as well as an information return for the IRS; for an example, see Memorial Sloan-Kettering Cancer Center’s Form 990 for 2004.

14 Questions about written policies are not limited to Part III in the redesigned Form 990. For example, Part VII, lines 11 and 12, asks whether the organization has a written policy to review investments or participation in affiliates and whether it has a written policy requiring it to protect its exempt status as to transactions with affiliates.

15 California, for example, did not mandate charitable audits until it enacted the Nonprofit Integrity Act of 2004, requiring financial audits of charities with annual gross revenues of $2 million or more.

16 Cal. Corp. Code §5233(e).