• 501(c)(3) Organizations:  IRS Advises How to Steer the Ship
  • January 25, 2010 | Author: James A. Dietz
  • Law Firm: Dressman Benzinger LaVelle psc - Crestview Hills Office
  • The Internal Revenue Service ("IRS") is rather vigilant in regulating charities and revoking their Federal tax-exempt status if they act contrary to the 501(c)(3) rules.  In fact, on its website, the IRS rather proudly displays a list of "Recent Revocations of Section 501(c)(3) Determinations."  A review of this list indicates that 41 different charities have lost their federal tax-exempt status just since 2005.

    On February 7, 2007, the IRS issued a set of draft guidelines entitled "Good Governance Practices for 501(c)(3) Organizations."  These guidelines will help charities understand how they can operate in pursuit of true tax exempt purposes and avoid the improper use of their assets.

    In the opening paragraph, the IRS zooms in on what it may perceive as the most important factor in keeping charities on the straight and narrow:  the composition of their boards.  The IRS states its belief that governing boards should be composed of persons who are talented, informed, and active in overseeing a charity's operations and finances, and who will not tolerate a climate of secrecy or neglect.

    The guidelines then set forth a number of operational and policy practices and suggest that charities review them and consider their adoption.  The suggested practices are the following:

    • Adopting a clearly articulated mission statement.

    • Adopting and regularly evaluating a code of ethics describing behavior to be both encouraged and discouraged, along with an effective whistleblower policy.

    • Ensuring the charity's directors act with sufficient due diligence (i.e., act in good faith, with care of an ordinarily prudent person, and in the charity's best interests).

    • The directors act in a manner consistent with their duty of loyalty, which requires directors to avoid conflicts of interest.

    • The charity demonstrates transparency, meaning that its financial information is readily available to the public.

    • The charity carries out proper fundraising, which includes compliance with applicable laws and the use of accurate, truthful, and candid solicitation materials.

    • Conducting appropriate financial audits.

    • The charity pays only reasonable compensation for services rendered by officers and staff; generally, directors should not be compensated other than for direct expenses they incur.

    • Adoption of an appropriate document retention policy, including guidelines for handling electronic files.

    While these guidelines are still in the drafting stage, nevertheless, they contain principles that would benefit all 501(c)(3) organizations to enact immediately.  The message being sent by the IRS is clear:  we are doing our job, so we expect charities to do theirs as well.  Following these guidelines will reduce the risk that a charity may slip into improper behavior and possibly jeopardize its own tax-exempt status.