Compliance with IRS-Encouraged Nonprofit Policies and Other Best Practices Updates

Transcription

1 Compliance with IRS-Encouraged Nonprofit Policies and Other Best Practices Updates Nishka Chandrasoma April 18, 2013 New York City Bar Association 1 st Annual Institute on Not-for-Profit Law pbwt.com

2 Why Do Boards Adopt Policies? To ensure adherence to state and federal laws (e.g., reasonable compensation requirements, NYPMIFA) To provide guidance for management and employees To ensure compliance with fiduciary duties To respond positively to IRS questions on Form 990 To promote consistency and clarity in governance 2

3 Role of Policies in Ensuring Good Governance According to the IRS and state regulators, a well-governed organization is a compliant organization, and policies are a means towards achieving good governance Policies that we will discuss today: Conflicts of interest Whistleblower Document retention 3

4 Background: Governance Today Traditionally: State law duties of care, loyalty, and obedience A simpler IRS Form 990 Now: Activist attorneys general in several states Robust IRS role Increased legislative and executive branch interest Watchdog organizations and social media 4

5 What Remains Constant: The Key Role of the Board The board of directors is the key governance body for all nonprofits, responsible for: Evaluating performance and fidelity to mission Setting strategic direction Overseeing the organization s financial well-being Ensuring compliance with laws Hiring and evaluating the CEO 5

6 Role of Directors vs. Management The board is responsible for overall management of the nonprofit Day-to-day management duties are typically delegated to officers and employees charged with operating the organization under the board's supervision Directors do not carry out day-to-day decision making, but are held to certain fiduciary standards in order to ensure that the organization is achieving its mission through its activities 6

7 Legal Framework: State Law Fiduciary Duties Duty of Care Prudent person standard Business judgment rule Duty of Loyalty Undivided loyalty standard Disclosure and recusal Duty of Obedience Fidelity to law and mission 7

8 Legal Framework: Federal Tax Law Issues Affecting Governance Adherence to tax-exempt mission Prohibition against private inurement and limitation on private benefit Excise taxes on excess benefit transactions and self-dealing 8

9 IRS Statements about Governance Good governance is important to increase the likelihood that organizations will comply with the tax law, protect their charitable assets and, thereby, best serve their charitable beneficiaries. -- IRS Website We believe there is a nexus between good governance and tax compliance. It s as simple as that. That belief underlies our work in this area. -- Steven T. Miller Commissioner, Tax Exempt & Government Entities 9

10 IRS Governance Initiatives Good Governance Practices Revised Form 990 Governance Checksheets 10

11 IRS Good Governance Practices Establish and regularly review mission Maintain organizational documents Select knowledgeable and engaged governing body Implement certain governance and management policies Executive compensation, conflicts of interest, investments, fundraising, documenting governance decisions, document retention and destruction, and whistleblower Monitor financial statements and Form 990 reporting Ensure transparency and accountability 11

12 Form 990: Governance, Management and Disclosure Part VI of the Form 990 has three sections concerning governance: Section A: Governing Body and Management Section B: Policies Section C: Disclosure Part VI requires disclosure of whether the organization has a conflicts policy, whistleblower policy, or document retention policy Also a policy on activities of local chapters, branches, or affiliates and a policy on joint ventures, if applicable 12

13 IRS Governance Checksheets for Public Charity Exams Questions track Form 990: Written mission statement? Comparability data used in compensation determinations? Any family relationships or outside business relationships with other board members, officers, directors, or key employees? Controlled by a single or select few individuals? Written conflict of interest policy? 13

14 IRS Comments about Governance Practices and Tax Compliance Based on 1,300 exam checklists, the IRS found: Organizations more likely to be compliant if have a written mission statement, always use comparability data for compensation decisions, have procedures in place for the proper use of charitable assets, and Form 990 is reviewed by the entire board of directors. Less likely to be compliant if control concentrated in one individual, or in a small, select group of individuals No correlation with tax compliance: conflict of interest policies, occasional use of comparability data, or family and business relationships between directors, officers, etc. 14

15 Attention on Governance from Other Sources Proposed New York Non-Profit Revitalization Act U.S. Senate Finance Committee focus on tax-exempt sector Watchdog organizations and social media 15

16 Proposed New York Non-Profit Revitalization Act The Act s governance provisions would mandate*: Processes for approving related party transactions Conflicts of interest policies and filing with the AG s Office Fair and reasonable compensation for all employees set outside the presence of the employee in question Whistleblower policies for all New York not-for-profits with 5+ employees and annual revenues over $1,000,000 * This is based on the Act as introduced on May 15, 2012 but could be subject to change. 16

17 Conflicts of Interest Policies: Purpose Primarily addresses fiduciary duty of loyalty Enables the board of directors to: identify or learn about interested party transactions (i.e., those involving officers, directors, key employees, their family members, their related entities, etc.), evaluate the actual, potential, or apparent conflicts of interest presented by such transactions, and determine the best course of action and procedures to be followed under the circumstances. 17

18 Conflicts of Interest Policies: Key Components Definitions Covered persons Covered transactions Procedures Disclosure Recusal Independent review and approval (with appropriate standard) Documentation 18

19 Conflicts of Interest Policies: Other Components Provide overview of intermediate sanctions or self-dealing rules Annual acknowledgment Annual disclosure statement 19

20 Whistleblower Policies: Purpose Encourages individuals with credible information to report on illegal or unethical practices or violations of organization policies Policy is required by many states, and non-retaliation components are required by Federal law (as well as by some states) 20

21 Whistleblower Policies: Key Components Scope of policy (i.e., types of complaints covered and who may make a complaint) Procedures for filing complaints Written or oral complaints Recipient of complaints and alternate(s) Description of how complaints will be handled and what action will be taken in case of misconduct Protection from retaliation Confidentiality (to the extent possible) 21

22 Document Retention Policies: Purpose Establishes clear procedures for managing, retaining, and disposing of an organization s records, consistent with applicable legal, tax, and auditing requirements Ensures that important documents, such as documents relating to investigations or litigation, are maintained as long as necessary, and that other documents are disposed of in a timely manner 22

23 Document Retention Policies: Key Components Types of records received or created by the organization Location and medium of records Required time period during which records must be maintained (in accordance with applicable law) Procedures to follow if an investigation, litigation, or other event compels suspension of document destruction under the policy 23

24 Other Policies to Consider Investment Policy (required by NYPMIFA) Compensation Policy Gift Acceptance Policy, if applicable Joint Venture Policy, if applicable 24

25 Practical Considerations The importance of customization Questions to ask in drafting or reviewing a policy Does the reporting mechanism work? Is the proper person or committee responsible for reviewing and administering the policy? Is it user friendly and easy to understand? Does it accurately reflect the current legal, tax, and audit requirements? Is there a procedure for circulating it and making sure new directors, officers, and employees receive a copy? A policy that isn t followed isn t much better than no policy at all 25

26 Contact Information Nishka Chandrasoma IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.) The information presented is for general informational purposes only and should not be construed as specific legal advice Patterson Belknap Webb & Tyler LLP 26