Nonprofit Tax Expert Urges IRS to Clarify Stance on Governance Practices

A former top official of the Internal Revenue Service is asking the Treasury Department to publish guidelines that would tell charities — and the IRS itself — what the federal government specifically expects from nonprofit organizations on matters of governance.

The federal tax code does not explicitly set out specific governance standards for the IRS to enforce, but the tax agency has shown increasing interest in keeping an eye on charity governance practices.

“Because there is no precedential federal tax law guidance that prescribes the appropriate standards for nonprofit governance, a number of my clients have raised questions about how to comply with the new IRS initiatives,” Marc Owens, a lawyer specializing in nonprofit issues in Washington, told the Treasury Department in a letter today.

“To address these inquiries, it would be helpful to have clear direction from the Treasury Department regarding the specific standards to which nonprofits will be held,” said Mr. Owens, who is the former chief of the IRS’s tax-exempt division.

Mr. Owens noted that the IRS’s internal “work plan” for 2009 includes the development of a governance checklist for agents’ use in conducting audits and that the new Form 990 informational tax return includes questions for charities about their governance policies.

“Additionally, we are aware of specific situations in which the service has questioned the governance practices of nonprofit organizations in the course of an ongoing examination,” Mr. Owens said.

But, he said, to date the Treasury Department has not issued guidelines that charities can rely on, a situation that he said creates a risk that “similarly situated” organizations could get differing treatment from the IRS.

“For example, without enforceable uniform standards, [organizations] who submit exemption applications or ruling requests may obtain disparate and subjective interpretations of the service’s policy, depending on the agent who happens to handle the matter,” Mr. Owens wrote.

In speeches in recent months, IRS officials have explained the tax agency’s interest in governance matters.

In November, Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, told a conference that “a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems.”

Mr. Miller added: “We are not interlopers trying to regulate an area that is beyond our sphere. Rather, the effects of good or bad nonprofit governance cut across virtually everything we see and do in our work.”