In an effort to better understand the link between good governance and tax compliance, the IRS this year intends to study the governance practices, compensation reporting, and charitable spending habits of a sample of 200 section 501(c)(3) organizations and 200 section 501(c)(4) tax-exempt organizations. In its FY2012 Work plan, the IRS stated that it intended to explore “connections between certain governance practices and tax compliance” using information gleaned from the Form 990.

The IRS Exempt Organization (EO) Division plans to conduct a few different types of examinations, including a field audit (IRS examiner visits charity), an office audit (completed via correspondence) or a compliance check (a request for information from a charity that is not being audited, where the IRS asks the organization to voluntarily complete a questionnaire designed to help EO better understand how organizations satisfy federal tax law requirements).

In a preliminary study regarding the impact of various governance practices of public charities, the EO — after analyzing 1,300 checksheets from 501(c)(3) organizations — found increased compliance among organizations with written mission statements, as well as those that:

• Rely on comparability data when setting compensation
• Have established procedures to ensure proper use of charitable assets
• Require their governing boards to review Form 990

The EO this year also intends to look at charitable spending and compensation. To study compensation — specifically whether certain organizations are accurately reporting compensation levels — the IRS will explore organizations with high gross receipts and low reported compensation amounts for officers, directors, trustees and key employees.

The EO's investigation into not-for-profits' spending habits will focus on charities with relatively high fundraising expenses when compared to expenditures for the organizations' charitable programs.

If you have any questions regarding the governance practices of Not-for-Profit organizations, contact your local CBIZ office.

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