How Much Should the IRS Regulate Nonprofit Governance?

The revised IRS Form 990, along with various comments from IRS TE/GE personnel (particularly Steve Miller), make clear that the IRS is delving ever deeper into issues of nonprofit governance. Not everyone, however, thinks this is a good idea. The former head of TE/GE, Marcus Owens, wrote a short piece in The Exempt Organizations Tax Review for June criticizing the IRS’s intrusion in nonprofit governance in the Form 990; his article is available from Lexis here. Of course, Owens now represents nonprofit clients in private practice, so one might be tempted to take his current views with a grain of salt; but even the IRS’s own advisory committee now urges caution by the IRS on the nonprofit governance front.

In a report issued on June 11 (available here, then scroll to page 82 of the PDF file), the TE/GE Advisory Council urges the IRS to be cautious in exercising regulatory authority over nonprofit governance. The beginning of its “Recommendations” section is an excellent summary of the Committee’s views:

We begin our recommendations by again acknowledging the IRS’s longstanding stake and legitimate interest in governance issues as they relate directly to compliance with the laws under its jurisdiction. As we stated in the introduction, the IRS’s view that “a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance” seems self evident. But efforts to promote good governance are fraught with complexity. While we may all agree that governance matters, the empirical evidence does not support the proposition that requiring specific governance practices results in greater compliance with the tax laws. Effective governance likely is much more a question of the attitude of responsibility and accountability of those in charge than the adoption of specific policies and practices. Given the diversity of the sector and the varying, and often unpredictable, challenges facing an organization, the organization’s governing board generally is in the best position to determine what the most appropriate practices are for its organization. We are very mindful of the fact that even the most modest level of prescription from a regulatory body such as the IRS regarding what constitutes “good” governance can undermine the fundamental and wholly legitimate authority of the organization’s governing board and can suggest a one-size-fits-all approach that can place undue burdens on an organization, divert the organization’s attention from meaningful governance to polices and procedures, and do damage to the uniquely diverse and vibrant charitable sector in this country. Accordingly, we believe that the IRS should approach the governance area with caution.

Very good advice, indeed, methinks.

JDC