Focus Areas of Core Form 990, Section VI: Governance, Management and Disclosure

New Obligation, New Opportunity

Form 990, Part VIGovernance, Management and Disclosure

• Part VI is a new Section of the Form 990.

• IRS calls Part VI the “crown jewel” of the Form 990, based on concept that a well-governed organization is more likely to be tax compliant.

• IRS says it intends to continue to “educate, engage and indeed irritate” in the area of nonprofit governance.

• This presentation focuses on “highlights” of Part VI.

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

In the News: What the IRS Perceives as “Good Governance”

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• IRS TE/GE Commissioner Sarah Hall Ingram has recently stated that there are four key principles to “good governance.”

1. Clearly stated mission2. Engaged, informed, and independent board3. Policies and procedures to safeguard corporate assets4. Transparent, well-documented Board decision-making and

reporting

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Leaders in Community Benefit

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• Community benefit a hallmark of Catholic health ministry

• The Catholic health ministry helped to shape the current Form 990

• We should be leading models of how this is done well

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Focus #1:Board Member Independence

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• Tax law does not require certain number of “independent” directors, but majority of independent directors is becoming “gold standard.”

• Form 990 asks about size of board and how many directors are “independent.”

• “Independent director” is defined as a person who: − Was not compensated by the organization or a related

organization;− Did not receive > $10,000 as an independent contractor; and− Did not (or family member did not) engage in a transaction with

the organization.

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Focus #1:Board Member Independence

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• A director does not lack independence because he or she is a: − Major donor− Member of sponsoring religious order (Added at request of

CHA)− Member of charitable or other class receiving benefits from the

organization

Pointer: Nominating Committees should be aware of the “independent director” definition when

recruiting new board members to ensure appropriate balance.

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Focus #2:Cross-Relationships

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• Form 990 requires disclosure of “family” and “business relationships” among officers, directors, and key employees. IRS concerned about “cross-relationships.”

• “Family” is broadly defined.

• “Business relationships” includes employment, investment, and outside board relationships.

Pointer: Boards should consider using an annual questionnaire or similar process to identify director “independence”

and potential cross-relationships.

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Cross-Relationship Examples

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• Director purchases automobile at FMV from dealership owned by another director – not reportable as a cross-relationship.

• Two directors serve on the boards of each other’s employers – reportable as a cross-relationship.

• Hospital officer utilizes services of accounting firm in which a director is one of 300 partners – not reportable as a cross-relationship.

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Focus #3:Documentation of Decisions

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• IRS concerned about quality of documentation of board and

committee meetings.

• IRS wants to know if documentation includes specifics on the

action taken, when taken, who made the decision and if the

documentation was “contemporaneous”.

Pointer: Boards and committees should review their processes for documentation of meetings to make sure complete and timely.

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Focus #4:Board Review of Form 990

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• IRS does not require board to receive or review the Form 990 prior to filing.

• Simply emailing a copy of completed Form 990 to board members immediately before filing is sufficient to say it was “received” by the Board.

Pointer: Many organizations are developing a process for the board or a committee thereof, such as the Audit Committee, to review Form 990 prior to filing. If reviewed by a

committee, then some organizations still plan to have full board review the Form 990 at the next regularly scheduled meeting after filing.

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Focus #5:Policies and Procedures

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• As part of its focus on governance practices, the IRS has added several questions about whether the organization has certain written policies and if procedures are in place. These include:

• Conflicts of Interest Policy• Whistleblower Policy• Document Retention and Destruction Policy• Policy on Compensating Senior Executives• Policy Regarding Joint Ventures

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Focus #6:Disclosure/Transparency

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• IRS wants to know whether the following documents are made available to the public:

Articles and Bylaws Conflict of Interest Policy Financial Statements Form 990s and 990Ts (required)

• If they are made available, IRS asks whether via the website or only by request

Pointer: Board should consider posting all of these documents on the organization’s website.

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Summary

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• In planning for the filing of the Form 990, the board should consider:

• Evaluating board size and director independence

• Distributing annual questionnaire to officers, directors and key employees

• Establishing process for reviewing/distributing Form 990

• Enhancing minutes of board and committee meetings

• Determining disclosure practices of key documents

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An Opportunity to Lead

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure

• Compliance and reporting can be seen as burdensome.

• This is another opportunity to “tell our story” and lead by example.

• It is a form of accountability that we can embrace.

• In an environment where ethical standards have been shredded, we put forth models that command public trust.

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Thank You!

Focus Areas of the Core Form 990, Section VI: Governance, Management and Disclosure