October 5, 2010 | Read Time: 3 minutes
Silver Spring, Md.
Charity governance practices were among the key topics discussed by charity regulators and lawyers for nonprofit groups at a meeting Monday of the National Association of State Charity Officials.
Lois G. Lerner, director of the Internal Revenue Service’s Exempt Organizations division, noted that the tax agency has received criticism in recent years for its interest in the governance practices of charities.
The federal tax code does not explicitly set out governance standards for the IRS to enforce, but the tax agency is keeping an eye on charities’ practices.
Some nonprofits and legal experts have said the IRS has overstepped its legal authority, but Ms. Lerner said the controversy has faded.
“When we first raised the word ‘governance,’ they came after us with apples, tomatoes, and big frying pans to hit us over the head: You’re the IRS, you have no business in governance,” Ms. Lerner told conference participants.
“No one thinks that anymore,” she said. “Everyone understands this is important to us because it’s an indicator for whether you are following the tax rules.”
The IRS’s revised Form 990 informational tax return, the primary document that charities file each year, includes a series of questions about organizations’ governance policies and practices, in part because the tax agency believes good governance increases the likelihood that organizations will comply with tax law and protect their assets. Last year, the IRS released several documents to help its agents as they gather data about the governance practices and related internal controls of charities they are auditing.
Ms. Lerner said she thinks most large charities understand the importance of putting in place strong governance practices.
“I’m worried about the middle-sized organizations and the small organizations,” she said. “And that’s where I say ‘shame on you’ to the larger organizations for not reaching out to your smaller counterparts and helping them with this issue that can be difficult if you don’t understand it. I think the larger organizations have a responsibility to try to help the smaller ones.”
Jason Lilien, head of the New York State Charities Bureau, said, “Nonprofit governance is a challenge, probably the largest challenge I face as a state regulator: how to get organizations to do the right thing.”
Mr. Lilien said he frequently hears that people will not want to volunteer to serve on nonprofit boards if too many governance requirements are in place. “I don’t believe that,” he said. “We’re talking about doing the right thing, and board members who want to do the right thing will do the right thing.”
One of the “missing ingredients” in efforts by nonprofits to improve their governance practices is organizations’ lack of a key contact—a lawyer, Mr. Lilien said.
“I would estimate that 80 to 90 percent of nonprofits in New York never speak to a lawyer on a regular basis,” he said. “So they have no understanding or no access to a lawyer to learn about fiduciary responsibilities when an issue comes up: ‘What minutes should we keep? What records? Do we need to meet as a board on an issue?’”
Mr. Lilien added: “Basic governance issues are not being discussed because there is not a lawyer present to provide regular advice. I think that is absolutely critical.”
