In efforts to defend against mishandlings, the IRS recommends that nonprofits adopt particular types of governance policies. A nonprofit with a strong organizational foundation will undoubtedly be more successful than one that does not have a set governance policy. The IRS does not have the authority to require nonprofits to adopt governance policies- that is the job of state nonprofit corporation law. However, the IRS is more likely to audit nonprofit organizations that have not adopted certain policies, believing that nonprofits with these certain governance policies are more tax compliant organizations.

Which governance policies are important?

1. Document retention and destruction policy- It is important to know how long your nonprofit needs to hold on to records before destroying them. Not only does a document retention and destruction policy allow for accuracy and dependability, but also better overall organization. Watch out for certain laws concerning the state you reside in, and laws concerning document retention for minors. In this day and age, it is important also to consider emails in your nonprofit’s document retention and destruction policy.
2. Conflict of Interest policy- A conflict of interest policy (one policy that all nonprofits should have!) is useful for recognizing, revealing and managing situations where there may be a financial conflict. Nonprofits are targeted many times when they appear to have incurred inappropriate benefits from relationships with directors, officers, or trustees. A conflict of interest policy will ensure that your nonprofit is in compliance with a specific set of rules, which could include perhaps a procedure saying that persons who have a conflict of interest in a certain matter will be excused from voting on that issue. Any nonprofit is intended to benefit the public in a charitable fashion, so naturally, any private benefits reaped by any member of a nonprofit is unacceptable.
3. Expense reimbursement policy- For nonprofit officers, directors, trustees, and key employees who are reimbursed for certain expenses (travel, housing, health, discretionary spending), the nonprofit governance must establish a policy disclosing the reimbursement.
4. Gift acceptance policy- This policy is necessary when a nonprofit is in a situation where it must evaluate, validate, and accept uncommon contributions to the organization. Your nonprofit must decide if it accepts nonstandard contributions such as vacation time shares.
5. Joint venture policy- Joint ventures, or business relationships with profitmaking companies, are typically found with larger nonprofits. A joint venture policy will ensure that your nonprofit’s relationships are properly disclosed and managed.
6. Whistleblower protection policy- A policy protecting whistleblowers is important so that employees are motivated to report financial and other misdemeanors within the organization anonymously so that the threat of retaliation from fellow employees is gone.

Drafting a policy can seem like a daunting task, but once your board of directors approves it, your nonprofit will be in a better position with the IRS. For questions concerning your nonprofit’s system of governance contact any member of our Not-for-profit Services Team.