Nonprofits are increasingly subject to growing regulatory burdens and high expectations from donors, clients and the public. One way nonprofit boards can promote compliance with law and best practice, is by implementing thoughtful governance policies and procedures. By adopting and enforcing thoughtful nonprofit governance policies, nonprofit organizations can improve their internal compliance with the law and best practices, helping directors fulfill their duty of care. However, the benefit of nonprofit governance policies in promoting good governance and legal compliance requires that the policies not only be adopted but also be consistently enforced. Nonprofit governance policies, like an organization’s bylaws, are living documents that should be reviewed and revised regularly throughout the organization’s life cycle. When considering policies, make sure that they are:
- Compliant with current law and best practices
- Modified to make sense in the context of the organization and its operations
- Reviewed periodically
- Understood by the parties that will be responsible for enforcing the policy
The IRS has an interest in nonprofit governance policies and procedures as well. The Form 990 now asks whether exempt filers have certain policies in place. While there is no legal requirement under the tax law that nonprofits adopt these policies, organizations that report they do not have them may be more likely to be subjected to an IRS audit or compliance check.
Should you be considering creating your own governance policies for your nonprofit, we’ve pulled together information on some policies that you may find useful for your organization:
Conflicts of Interest Policy
A conflicts of interest policy is one of the most important governance policies a tax-exempt organization can adopt. Improperly managed conflicts of interest are one of the most common causes of violations of the self-dealing, private inurement and excess benefit laws. The IRS has made public a sample policy for hospitals, however, the IRS’ sample policy is more complex than is necessary for most nonprofits. In addition, since that template policy was introduced, the Form 990 has been revised to include questions regarding conflicts. To properly respond, the policy should include a carefully crafted questionnaire to monitor conflicts. This questionnaire should be circulated at least annually.
The policy should also require conflicted members of the board or board committees to recuse themselves and leave the room when matters that involve the conflict are discussed and voted upon. Board minutes should properly document any disclosures of conflicts and recusals from discussions and votes. Proper documentation includes a description of the nature of the conflict, the identity of the disinterested members present, the fact of the conflicted member’s recusal and, ideally, exit from the meeting room during the discussion and vote of the conflict transaction. It should also include the body’s due diligence regarding alternative arrangements that do not give rise to a conflict, the body’s decision and, if they approve the conflict transaction, their rationale for doing so.
Sarbanes-Oxley imposes criminal liability on tax-exempt organizations for retaliation against whistleblowers.Specifically, retaliation against anyone who provides truthful information relating to a commission or possible commission of a federal offense is a crime. The penalty is a fine and/or imprisonment up to ten years. Form 990 requires filers to disclose whether they have a written Whistleblower Policy in place.
Document Retention and Destruction Policy
Sarbanes-Oxley also imposes criminal liability on tax-exempt organizations for destruction of records with the intent to obstruct a federal investigation.Sarbanes Oxley made it a criminal offense for “any organization” to “knowingly alter, destroy, mutilate, conceal, cover up or falsify any record, document or tangible object with intent to impede, obstruct or influence the investigation or administration of any matter within jurisdiction of any United States agency or bankruptcy case.” Form 990 requires filers to disclose whether they have a Document Retention and Destruction Policy in place.
Joint Venture Policy
A Joint Venture Policy should outline procedures to evaluate potential relationships with taxable entities and to safeguard a nonprofit’s tax-exempt status. Form 990 includes questions regarding whether exempt filers have engaged in a joint venture with a taxable entity, and if so, whether they have a joint venture policy. A Joint Venture Policy is not necessary for every organization, but any organization that enters into or may consider a joint venture with a taxable entity should consider adopting one.
Gift Acceptance Policy
Form 990 asks whether the organization has a Gift Acceptance Policy that requires a review of any non-standard contributions. Generally, a “non-standard contribution” is an item that is not expected to be used by the organization in its charitable operations and which is not readily convertible to cash, making the item’s value difficult to ascertain.
Gift Acceptance Policies are useful to trigger appropriate review of any non-standard contributions. Increasingly, charities are approached by donors with complex non-cash gifts including closely held business interests, real property, insurance and annuity contracts, art and collectables. Some such gifts can contain hidden liability risks. A well drafted Gift Acceptance Policy should provide procedures for evaluating such gifts as well as to identify gifts that may have hidden risks and therefore require legal counsel review.
The IRS scrutinizes executive compensation. To assist the IRS in monitoring compliance with the limits on executive compensation, Form 990 requests significant detail regarding the compensation and benefits paid to executives.
To provide a thorough and favorable answer for Form 990 questions and to increase consistency in setting compensation, we recommend that clients with paid executives adopt a Compensation Policy. A Compensation Policy serves as a long-term policy on executive compensation. It should articulate how the organization links pay to performance, strategy, values and mission. It should specify comparable peer groups, target market position with respect to salary, long and short-term incentives, total cash compensation, standard benefits, and any executive benefits and perquisites. It should also require the organization to rely on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6 when determining executive compensation.
Travel and Expense Reimbursement Policy
To ensure travel and expense reimbursements are not reasonable and not excessive, Schedule J of Form 990 asks whether the organization provides certain types of benefits, including such things as: first-class, chartered, or companion travel, tax gross-up or reimbursement payments, discretionary spending accounts, certain housing-related allowances or payment, club dues, and personal services (such as maids, chauffeurs, and chefs). If so, then the organization must indicate whether or not it followed a written policy with respect to such expenses. We recommend implementing a travel and expense policy to provide clarity around reimbursements and ensure their reasonableness. In addition, if the policy’s requirements meet the criteria for an “accountable plan” the reimbursements will not be taxed as income to the recipient.
Grant-Making Procedures should set forth the process for making grants including eligibility criteria, basis for selection of grant recipients, how funds are disbursed, what records are kept, who makes the decision, etc. Schedule I of the revised Form 990 requires certain information regarding the filing organization’s record-keeping practices with respect to grants it makes to U.S. organizations and individuals. The filing organization must indicate whether or not it maintains records that substantiate the amount of grants or assistance awarded, the grantee’s eligibility for the grants or assistance, and the selection criteria used to award the grants or assistance.
Parent-Subordinate Consistency Policy
Form 990 asks whether the filing organization has local chapters, branches, or affiliates. Form 990 goes on to ask how the organization ensures the activities and operations of its local chapters, branches, or affiliates are consistent with those of the parent organization. A Parent-Subordinate Consistency Policy or Policies and Procedures manual is a good way to ensure consistency with the parent organization’s policies across all chapters.
Many of these policies and practices are not legally required; however, the IRS has stated, through high ranking officials that such policies are a fair indication of whether the organization has adequate internal controls. The IRS strongly believes that the existence of an independent governing body and governance policies and procedures increases the probability that an exempt organization is complying with federal tax law.
Additional policies we have found practically useful for our clients include:
Signature Authority Policy
A Signature Authority Policy requires progressive approvals for various expenditure levels and is an important oversight tool. It helps to ensure that the appropriate parties are aware of and have approved of major expenditures. The policy can address expenditures as well as contractual commitments.
Foreign Aid Policy
A Foreign Aid Policy can ensure compliance with OFAC guidance for nonprofits operating or making grants abroad including checking the OFAC List of Specially Designated Nationals and Blocked Persons for names of individuals and entities with whom the organization is dealing to determine if they are included on the list and complying with U.S. laws that restrict or prohibit U.S. persons from engaging in transactions and dealings with sanctioned countries, entities, and individuals.
A Fundraising Policy requires nonprofits to comply with existing fundraising laws and regulations. It can also address donors’ rights and adopt policies that promote ethical fundraising.
Social Media Policy
A Social Media Policy sets forth guidelines for social media including the types of content that is appropriate, who is authorized to create and control accounts on behalf of the organization, etc.
Scholarship Guidelines are required for private foundations making scholarships to individuals and are useful for any organization that grants scholarships. Scholarship Guidelines should outline who is eligible to apply for the scholarship, who makes the selection decision, the criteria used to select recipients, and details about how funds are disbursed.
See 18 U.S.C. § 1513(e) (2008).
See 18 U.S.C. § 1519 (2008).
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at firstname.lastname@example.org.