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Exempt Organizations

Exempt Organizations
May 2011

With the current focus on nonprofit governance, there is an increased emphasis on documenting organizational decisions and implementing policies that ensure best practices. Such documentation and policies can also prove beneficial in the event of an IRS examination; if not specifically required to support a tax position, they can provide credibility to the organization.

On the other hand, credibility can be undermined if policies and procedures are not followed. Therefore, it is important that organizations strive to make compliance timely and contemporaneous, well-documented, and subject to periodic review. Identifying an individual (or perhaps a board committee) to monitor and periodically review a given policy should help to ensure that policies and procedures are followed.

Historically, the objectives of the IRS in conducting an examination include:

  • To confirm that the organization is organized and operated in furtherance of an exempt purpose
  • Annual return is complete and correct
  • All required returns and forms have been filed
  • Organization has paid any tax liability that may be due

Given the renewed emphasis on governance, the list of key organizational documents has expanded. The IRS will generally issues Information Document Requests (IDRs) when seeking documents to review. An initial IDR may include the following:

  • Mission Statement
  • Articles of Incorporation, including amendments
  • Bylaws
  • Application for Exemption
  • IRS determination letter
  • Audited financial statements
  • General ledger and trial balance
  • List of officers, directors
  • Minutes of board meetings; corporate resolutions
  • Cash receipts and disbursements journals
  • Bank statements
  • Copy of Forms 1096 and 1099, W-3 and W-2s; 941
  • Payroll register
  • Description of employee benefits

The recent revision to the Form 990 suggests that additional documentation could be requested by the IRS, including:

  • Conflict of interest policy; annual compliance documentation, if any
  • Document retention policy
  • Whistleblower policy
  • Fundraising policies and guidelines
  • Policy regarding noncash gifts, gift acceptance policy
  • Policy regarding participation in joint ventures; overall investment policy
  • Documentation regarding executive compensation, including comparability data, expense reimbursement policy; travel policy
  • Documentation regarding family and business relationships among board members and other key individuals

While these policies may not be statutorily required, their availability may set the tone in the event of an examination by creating a positive first impression. An organization that has a conflict of interest policy and obtains statements from directors on an annual basis may be perceived as having a better understanding of the prohibition against private inurement than an organization without such policy. An organization that has an executive compensation review policy that seeks to satisfy the requirements for the rebuttable presumption may be more likely to understand the requirements for reasonable compensation.

Compliance with policies does not necessarily prevent an organization from making poor decisions. However, it may be much more difficult for the IRS to second guess an organization that has a policy in place and has sought to follow its policy.

The revised Form 990 created pressure on organizations to draft new policies and procedures. It is not too soon to re-visit the policies that were established to ensure that they “fit” the organization and are being followed. As organizations assess their policies and procedures, it is also important to review the organizing documents (articles and bylaws) not only to confirm that their current activities are consistent with the exempt purposes for which they were organized, but also to ensure consistency with the governance format set forth in the organizing documents.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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