The IRS has released preliminary results from their study of tax-exempt organizations’ governance practices. As expected, the preliminary findings suggest that organizations with good governance policies are more likely to comply with tax laws.
On April 19, Lois Lerner, the Director of the IRS’ Tax-Exempt and Government Entities Division, spoke on this issue at a program sponsored by the Georgetown University Law Center. There, Lerner stated the IRS has long believed there is a connection between nonprofit governance and tax compliance but that there have been no studies to prove it. The IRS developed a check sheet for agents to use toward the end of examinations of section 501(c)(3) organizations. The check sheet asks about organizations’ governance practices, including mission statements; the use of comparability data when determining compensation; family or outside business relationships between board members, officers, trustees, or key employees; control of the organization; policies on conflicts of interest; policies on the proper use of assets; and whether an organization’s Form 990, “Return of Organization Exempt From Income Tax,” was reviewed by the board or a designated committee.
To measure the correlation between what the IRS believes to be good governance practices and tax compliance, the IRS analyzed the information collected on the check sheet. The IRS’ analysis found that there was a statistically valid relationship between some of the questions and compliance or noncompliance. According to Learner, the analysis found a statistically significant correlation between questions related to some governance practices and tax compliance including the following:
- Organizations with a written mission statement are more likely to be compliant,
- Organizations that always use comparability data when making compensation decisions are more likely to be compliant,
- Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant, and
- Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. This is an important point and one I’d like to highlight. It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.
Interestingly, Lerner noted that among the organizations examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals, were less likely to be tax compliant.
The team also found that responses to some questions had no statistically significant correlation with tax compliance, one way or the other. These include questions relating to:
- Conflict of interest policies
- Organizations that never or only occasionally use comparability data to set compensation, and
- Voting Board members having a family relationship and/or outside business relationship with any other voting or non-voting board member, officer, director, trustee, or key employee.
Lerner noted that the study was based on charities all ready selected for examination and that the IRS is planning a future study to be based on a random sample. During her remarks, Lerner also commented on the following issues:
Lerner said the Review of Operations unit, an office of the IRS exempt organizations examinations division, conducted a recent study of significant diversions of charitable assets based on form 990 data. They looked at the tax filings and publicly available information on the 285 organizations that reported a significant diversion of assets in 2009. Specifically, study found:
- Roughly $170 million in significant diversions was identified;
- Many of the cases involved theft or embezzlement, though there were many other cases where the taxpayer didn’t explain the significant diversion, as Schedule O requires; and
- A handful involved Ponzi schemes.
Lerner said the IRS found that during the initial phase of the automatic revocation of exemptions for organizations not filing returns for three straight years, many organizations ineligible to file the Form 990-N filed both a Form 990-N and a Form 990 or 990-EZ, she said. As a result, the IRS has begun a project to look at two groups of these taxpayers:
- Those that filed a 990-N and another 990 in the same year.
- Those that filed the 990-N when it looks like they did not qualify for the 990-N and should have been filing a different return and supporting organizations that filed 990-Ns.
Lerner issued a strong warning that anyone who prepares Form 990 returns should avoid putting Social Security numbers on the forms, schedules, or attachments, a practice that could lead to identity theft. She noted that the Form 990 does not require social security numbers and the IRS does not want them. She also cited a study, reported in The Chronicle of Philanthropy, that found that one in five exempt organizations had included Social Security numbers on the forms between 2001 and 2006. She added that the IRS is required to make the returns publicly available but that it has no authority to redact Social Security numbers.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.