Governing Body, Policies and Disclosure Sections of the Form 990February 12, 2021
In part six of our 990 series, we dive into the governance, management and disclosure sections. Here’s what you should be aware of when completing this part.
Editor’s Note: This blog has been updated as of February 12, 2021 for accuracy and comprehensiveness.
Our 990 series continues with a deep dive into part VI of the 990! Part VI of the 990 asks questions about the governing body and management, governance policies, and disclosure practices. Many charity watchdog agencies pay close attention to this section of the 990. The policies that organizations choose or don’t choose can have an impact on the organization’s rating. Let’s explore the details of this section.
Part VI- Sections A, B & C
Section A deals with the governing body and management; Section B relates policies about specific operating and management policies; and Section C delves into disclosures. It is the most controversial portion of the Form since it deals with questions that do not appear to have any relevance to the compliance task that is the primary responsibility of the IRS.
Section A – The Governing Body and Management
Section A starts off by asking how many voting members the governing body at the end of the tax year. There is no magic number here although it is generally accepted that the minimum number is three although the Better Business Bureau Wise Giving Alliance sets the minimum at five. While there is widespread criticism of universal requirement, the concept of having too many board members to be effective is a real danger. If an organization has so many board members that individual directors believe that they do not have the opportunity to meaningfully participate in discussions, deliberations, and decision-making, then the organization has too many directors. The next question asks the number of independent voting members of the governing body. The IRS, state attorney general, charity watch dog organizations and prospective donors are interested in this answer because independent directors are the foundation for good governance and independence. This is another area that does not set a specific minimum but some charity watchdog groups suggest that a substantial majority (at least two-thirds) should be independent.
This section also asks whether any officer, director or key employee has a family or business relationship with any other officer, director, or key employee. The IRS also wants to know if the organization delegated control over management duties normally performed by the board to anyone else. There are also questions that ask if the organization has members or stockholders and if those people have the power to elect members of the governing body and if they approve of the governance decisions of that body.
In this section, the IRS is trying to determine how effectively the organization is being managed. While reading the questions, you can easily determine which (yes or no) is the better answer. If your organization is unable to share the best answer, you may want to discuss this with your CPA or attorney to determine what risks your organization may be subject to.
Importance of By-laws and Other organizing documents
When your organization was first organized and it applied to the IRS for recognition of its tax-exempt status, one of the most important documents supplied to the IRS was your organization’s by-laws and other organizing documents. In question four, it asks if there were changes made to these documents during the past year, the IRS wants to know specifically what changes were made.
What does question 5 ask?
Question 5 asks if the organization became aware during the year of a significant diversion of organization assets – i.e., a theft or embezzlement. Unfortunately, this is not an uncommon issue that arises, and we are aware of an organization that had to answer “yes” to this question and subsequent to filing the return, had received a visit from the IRS. The reason for the visit was that the IRS wanted to see what changes and improvements had been made in the organization’s policies and procedures to deter such an occurrence in the future.
What does question 8 ask?
Question 8 in this section asks if the organization has contemporaneously documented the board meetings held and the actions undertaken because of those meetings. Board minutes as well as the minutes from sub-committees of the board are very important records which document the governance process as evidenced by these questions.
Section B – Policies
In this section the emphasis is on the organization’s operating policies and whether those policies are formalized and in writing and adopted throughout the organization. In addition to asking yes/no questions as to the existence of certain policies there are many instances where the IRS requests additional information to be presented in Schedule O (Supplemental Information to Form 990 or 990-EZ) of the form. For example, the IRS wants to know if all members of the Board reviewed the form 990 prior to when it was filed; whether the organization has a conflict-of-interest policy and if the process for determining CEO compensation included a review and approval by independent person. They also want to know if it included an examination of comparability data and if the process was documented in meeting minutes. In addition to these yes/no questions the organization must describe the process in detail in Schedule O.
Section B also asks if the organization has local chapters or branches; whether it has a whistleblower policy and a document retention and destruction policy; and if the organization participated in a joint venture with a taxable entity. Although there is no requirement in the Internal Revenue Code or any state law regarding the existence of such policies, the existence of these questions infers what the IRS considers best practices. If your organization cannot answer “yes” to these questions, contact us and we will assist you in creating these policies and procedures.
Section C – Disclosure
Section C focuses on how you comply with the public availability of the organization’s form 990 and whether your organization makes other documents available to the public. Although the IRS asks if your organization’s governing documents (i.e., by-laws), conflict of interest policy and financial statements are available to the public, this is one question where we believe that a “no” answer is as acceptable as a “yes” answer. We have seen many organizations respond “no” to this question and indicate in Schedule O that they do not believe any useful purpose would be served by the public disclosure of these documents.
What is the purpose of all these questions? After the new Form 990 was first published, the head of the IRS Tax-Exempt Division indicated in a speech that the IRS believed that organizations that had a more robust governance structure coupled with strong policies and procedures were more likely to comply with various IRS rules and regulations and better perform their tax-exempt mission.
Electronic filing has been a game changer for the IRS in the way that it is able to review 990 filings. There are over 200 data points that trigger “red flags.” Unfortunately, the IRS has not provided us a list of those triggers, but we can assume quite a few are included in Part IV, V and VI of the Form 990. We can conclude from the recent electronic filing requirements that the IRS will be using these tools to decide which organizations may need more active compliance monitoring and perhaps a periodic visit from the IRS in the future.
Let us know if you would like us to review your organization’s Form 990 and evaluate the risk of increasing visibility to the IRS.