Charity and Nonprofit Audits: Governance Issues
Form 990 gives the IRS a great deal of information about organizational governance practices. We use this data to look at connections between certain governance practices and tax compliance. Part VI of Form 990 asks about the composition and independence of the governing body, governance policies and procedures, and whether and how an organization makes governance and financial information available to the public. It also asks whether there has been a significant diversion of assets.
We designed a governance checksheet that mimics Part VI of the Form 990 and is available to the public on our website. Since October 2008, agents have filled out this checksheet at the end of every 501(c)(3) public charity exam, for organizations that were selected for exam for reasons unrelated to their governance structure. Thus, it is not a statistically representative survey of the EO population. For this reason, we can't generalize the findings to the EO community as a whole. However, this effort generated data with checksheets from over 1,300 section 501(c)(3) public charity exams. We review the data to see if there was a correlation between the answers to certain questions and whether the organization was tax compliant.
There are 26 questions on the governance checksheet, including:
- Does the organization have a written mission statement that articulates its current 501(c)(3) purposes?
- Does the authorized body (e.g., the board) rely on comparability data in making compensation determinations?
- Did any of the organization's voting board members have a family relationship or outside business relationship with any other voting or non-voting board member, officer, director, trustee or key employee?
- Does effective control of the organization rest with a single or select few individuals?
- Does the organization have a written conflict of interest policy?
- Are there systems or procedures in place intended to make sure assets are properly used, consistent with the organization's mission?
- Prior to filing, was the Form 990 reviewed by the full board or a designated committee?
Our analysis found a statistically significant correlation between questions related to some governance practices and tax compliance:
- Organizations with a written mission statement are more likely to be compliant.
- Organizations that always use comparability data when making compensation decisions are more likely to be compliant.
- Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant.
- Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. This indicates that having the entire board engaged in what is being reported on the 990 is not only helpful, but correlates to better compliance.
Those that said control was concentrated in one individual, or in a small, select group of individuals, were less likely to be tax compliant.
We also found that responses to some questions had no statistically significant correlation with tax compliance. These include questions relating to:
- Conflict of interest policies
- Organizations that never or only occasionally use comparability data to set compensation
- Voting board members having a family relationship and/or outside business relationship with any other voting or non-voting board member, officer, director, trustee or key employee.
This is an initial analysis. It is not a statistically representative sample or an analysis of the overall population. However, it provides an interesting starting point and offers some insight into which questions and associated responses might be useful indicators of tax compliance.
Using a statistically representative sample of the general EO population, we are developing a project to verify whether the information from this select group is also true for the EO population as a whole. Additionally, we will conduct an examination program regarding significant diversion of assets. While organizations aren't normally selected for exam based on the answer to any particular question on the Form 990, a significant diversion of assets is noteworthy.
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