What Does “Good Governance” Mean for Nonprofits?

Maribeth Wright | May 21st, 2010

IRS auditors know what good governance practices are, and they’re not afraid to test them on your not-for-profit organization.

Tax-exempt organizations represent a significant and growing industry. There are more than 1.9 million exempt organizations, not including those with religious exempts, and more than 200 new applications are approved each day. With such large numbers, it’s not surprising the agency is placing increased focus on this area.

The IRS Tax Exempt and Government Entities Division’s field auditors have developed checklists to test an organization’s governance practices and internal controls. The intended outcome of the new governance requirements is increased transparency and accountability. Therefore, unprepared organizations may find themselves at risk.

The field auditors will use the Form 990 to look for disclosures, or a lack of them, that indicate excessive compensation, political intervention or private benefit. The IRS believes good governance practices lessen the risk of misuse of tax-exempt status and charitable assets.

Key Good Governance Tips

Among the top principles of good governance outlined by the IRS:

  • Boards that clearly understand the organization’s mission
  • Boards that are engaged and informed and act independently
  • Boards that take real responsibility and authority
  • Boards that have policies to address executive compensation, protect against conflicts of interest and support independent financial review
  • Boards whose decisions, relationships and actions are transparent
  • Boards that accurately and in good faith complete their Form 990
  • Boards that develop appropriate internal controls to ensure that the organization properly uses and safeguards its assets.

Your financial advisor can help your organization develop good governance policies as well help you document those policies when completing the Form 990.

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