IRS Asks Governance Questions on the New Form 990

This page is designed to help you prepare for the Policy Questions in the Governance section of the redesigned Form 990. 

The new Form 990 has a number of questions about policies and procedures that your board of directors may want to adopt in order to be able to answer "yes" to those governance questions in the return.  While answering "no" is not wrong and will not increase your chances for an IRS audit, some boards want to be proactive.  If you want to answer "yes" then your policy must be adopted by the end of your tax year. The key policies include: Conflict of interest policy, Whistleblower policy, Document retention policy, and Joint venture policy. The following is a brief description of each policy.

Conflict of interest policy - The IRS has encouraged charities to adopt a policy and has even published a model policy in the Form 1023 instructions. We have attached below a copy of the IRS model policy. A conflict can arise when a person is in a position of authority, such as a trustee, director, officer or key employee (we call them "tdokes") may benefit financially from a board decision, including indirect benefits to family members and related businesses. Sample policies are available for a small fee from industry sources, such as www.boardsource.org

Whistleblower policy - Employees and volunteers are encouraged to come forward with credible information on financial improprieties, illegal practices or violations of the nonprofit's policies. This policy helps protect from retaliation those who make good-faith reports and it should include an explanation on how to report information, investigate facts and take appropriate action in the event of a report.

Document retention policy - A document retention and destruction policy identifies the responsibilities of employees, volunteers, Board members, and outsiders to maintain and document the storage and destruction of your documents and records. We have provided below some suggested guidelines for document retention and destruction.

Joint Venture policy - Nonprofit organizations that undertake joint ventures or similar arrangements with taxable entities should have safeguards to ensure protection of its exempt status. Examples of safeguards include: having sufficient control, giving priority to exempt purpose over maximizing profits, being not engaged in activities that would jeopardize your exempt purpose, and using contract terms should be at lease arm's length in your favor.

Sample Policies:

Jacobson Jarvis does not provide legal advice and recommends that you seek professional assistance in developing your policies. The following sample policies have been collected from various sources and may assist you as a starting point for your organization but remember that they may not apply to your specific organization.

IRS Appendix A: Sample Conflict of Interest Policy
Note: Items marked Hospital insert – for hospitals that complete Schedule C are intended to be adopted by hospitals.
Article I - Purpose
The purpose of the conflict of interest policy is to protect this tax-exempt organization’s (Organization) interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the Organization or might result in a possible excess benefit transaction. This policy is intended to supplement but not replace any applicable state and federal laws governing conflict of interest applicable to nonprofit and charitable organizations.

Article II - Definitions
1. Interested Person - Any director, principal officer, or member of a committee with governing board delegated powers, who has a direct or indirect financial interest, as defined below, is an interested person.

[Hospital Insert – for hospitals that complete Schedule C - If a person is an interested person with respect to any entity in the health care system of which the organization is a part, he or she is an interested person with respect to all entities in the health care system.]

2. Financial Interest - A person has a financial interest if the person has, directly or indirectly, through business, investment, or family: a. An ownership or investment interest in any entity with which the Organization has a transaction or arrangement, b. A compensation arrangement with the Organization or with any entity or individual with which the Organization has a transaction or arrangement, or c. A potential ownership or investment interest in, or compensation arrangement with, any entity or individual with which the Organization is negotiating a transaction or arrangement. Compensation includes direct and indirect remuneration as well as gifts or favors that are not insubstantial. A financial interest is not necessarily a conflict of interest. Under Article III, Section 2, a person who has a financial interest may have a conflict of interest only if the appropriate governing board or committee decides that a conflict of interest exists.

Article III - Procedures
1. Duty to Disclose - In connection with any actual or possible conflict of interest, an interested person must disclose the existence of the financial interest and be given the opportunity to disclose all material facts to the directors and members of committees with governing board delegated powers considering the proposed transaction or arrangement.

2. Determining Whether a Conflict of Interest Exists - After disclosure of the financial interest and all material facts, and after any discussion with the interested person, he/she shall leave the governing board or committee meeting while the determination of a conflict of interest is discussed and voted upon. The remaining board or committee members shall decide if a conflict of interest exists.

3. Procedures for Addressing the Conflict of Interest - a. An interested person may make a presentation at the governing board or committee meeting, but after the presentation, he/she shall leave the meeting during the discussion of, and the vote on, the transaction or arrangement involving the possible conflict of interest. b. The chairperson of the governing board or committee shall, if appropriate, appoint a disinterested person or committee to investigate alternatives to the proposed transaction or arrangement. c. After exercising due diligence, the governing board or committee shall determine whether the Organization can obtain with reasonable efforts a more advantageous transaction or arrangement from a person or entity that would not give rise to a conflict of interest. d. If a more advantageous transaction or arrangement is not reasonably possible under circumstances not producing a conflict of interest, the governing board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Organization’s best interest, for its own benefit, and whether it is fair and reasonable. In conformity with the above determination it shall make its decision as to whether to enter into the transaction or arrangement.

4. Violations of the Conflicts of Interest Policy a. If the governing board or committee has reasonable cause to believe a member has failed to disclose actual or possible conflicts of interest, it shall inform the member of the basis for such belief and afford the member an opportunity to explain the alleged failure to disclose. b. If, after hearing the member’s response and after making further investigation as warranted by the circumstances, the governing board or committee determines the member has failed to disclose an actual or possible conflict of interest, it shall take appropriate disciplinary and corrective action.

Article IV - Records of Proceedings
The minutes of the governing board and all committees with board delegated powers shall contain: a. The names of the persons who disclosed or otherwise were found to have a financial interest in connection with an actual or possible conflict of interest, the nature of the financial interest, any action taken to determine whether a conflict of interest was present, and the governing board’s or committee’s decision as to whether a conflict of interest in fact existed. b. The names of the persons who were present for discussions and votes relating to the transaction or arrangement, the content of the discussion, including any alternatives to the proposed transaction or arrangement, and a record of any votes taken in connection with the proceedings.

Article V - Compensation
a. A voting member of the governing board who receives compensation, directly or indirectly, from the Organization for services is precluded from voting on matters pertaining to that member’s compensation. b. A voting member of any committee whose jurisdiction includes compensation matters and who receives compensation, directly or indirectly, from the Organization for services is precluded from voting on matters pertaining to that member’s compensation. c. No voting member of the governing board or any committee whose jurisdiction includes compensation matters and who receives compensation, directly or indirectly, from the Organization, either individually or collectively, is prohibited from providing information to any committee regarding compensation.

[Hospital Insert – for hospitals that complete Schedule C d. Physicians who receive compensation from the Organization, whether directly or indirectly or as employees or independent contractors, are precluded from membership on any committee whose jurisdiction includes compensation matters. No physician, either individually or collectively, is prohibited from providing information to any committee regarding physician compensation.]

Article VI - Annual Statements
Each director, principal officer and member of a committee with governing board delegated powers shall annually sign a statement which affirms such person: a. Has received a copy of the conflicts of interest policy, b. Has read and understands the policy, c. Has agreed to comply with the policy, and d. Understands the Organization is charitable and in order to maintain its federal tax exemption it must engage primarily in activities which accomplish one or more of its tax-exempt purposes.

Article VII - Periodic Reviews
To ensure the Organization operates in a manner consistent with charitable purposes and does not engage in activities that could jeopardize its tax-exempt status, periodic reviews shall be conducted. The periodic reviews shall, at a minimum, include the following subjects: a. Whether compensation arrangements and benefits are reasonable, based on competent survey information, and the result of arm’s length bargaining. b. Whether partnerships, joint ventures, and arrangements with management organizations conform to the Organization’s written policies, are properly recorded, reflect reasonable investment or payments for goods and services, further charitable purposes and do not result in inurement, impermissible private benefit or in an excess benefit transaction.

Article VIII - Use of Outside Experts
When conducting the periodic reviews as provided for in Article VII, the Organization may, but need not, use outside advisors. If outside experts are used, their use shall not relieve the governing board of its responsibility for ensuring periodic reviews are conducted.

Board Source - Sample Whistleblower Protection Policies
On the www.boardsource.org website, you may purchase for $8 a download of four samples that provide different approaches to reporting procedures, whistleblower protection, and defining fraudulent activity versus misbehavior.

1. This policy is written in simple language and focuses on the intent behind whistleblower protection.
2. This sample provides clear definitions and provisions for handling allegations of misconduct while protecting the organization under difficult circumstances.
3. This one expands the list of improprieties that are subject to the whistleblower policy to include fraudulent actions and actions that violate other codes of conduct.
4. This policy provides a description of reporting procedures in further detail.

Sample Retention Periods for your Data Destruction Policy

Sample Joint Venture Policy - ( if you search the web with these key words, you will find some examples such as this one).

The Joint Venture Policy of The National Association of Fleet Administrators, Inc. (“NAFA,” dba NAFA Fleet Management Association) requires that NAFA evaluate its participation in joint venture arrangements under federal tax law and take steps to safeguard NAFA’s exempt status with respect to those arrangements. It applies to any joint ownership or contractual arrangement through which there is an agreement to undertake jointly a specific business enterprise, investment or exempt-purpose activity.
1. Joint ventures or similar arrangements with taxable entities. For purposes of this policy, a joint venture (“venture”) means any joint ownership or contractual arrangement through which there is an agreement to undertake jointly a specific business enterprise, investment or exempt-purpose activity without regard to: (a) whether NAFA controls the venture; (b) the
legal structure of the venture; or (c) whether the venture is taxable as a partnership or an association or a corporation for federal income tax purposes. A venture shall be deemed to conform to this policy if it meets both of the following conditions:
(a) 95% or more of the venture’s income for its tax year ending within NAFA’s tax year is excluded from unrelated business income taxation, including but not limited to: (i) dividends, interest, and annuities; (ii) royalties; (iii) rent from real
property and incidental related personal property except to the extent of debtfinancing; and (iv) gains or losses from the sale of property; and
(b) The primary purpose of NAFA’s contribution to or investment or participation in the venture is not the production of income or appreciation of property.
2. Safeguards to ensure exempt status protection. NAFA will: (a) negotiate in its transactions and arrangements with other members of the venture such terms and safeguards adequate to ensure that NAFA’s exempt status is protected; and (b) take steps to safeguard NAFA’s exempt status with respect to the venture. Some examples of safeguards include:
(a) Control over the venture sufficient to ensure that it furthers the exempt purpose of NAFA;
(b) Requirements that the venture gives priority to exempt purposes over maximizing profits for the other participants;
(c) The venture is not engaging in activities that would jeopardize NAFA’s exempt status; and
(d) Safeguards that all contracts entered into with the taxable entity be on terms that are at arm’s length or more favorable to NAFA.

Our tax specialist at Jacobson Jarvis, recommend that you become familiar with page 9 of 11 of the IRS Form 990 Instructions for Part VI of the core form which describes the key features of a joint venture policy. See http://www.irs.gov/pub/irs-tege/part_vi_instructions.pdf for details.

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