Wisconsin Lawyer: New IRS Form 990: Promoting Good Governance of Nonprofits:

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    New IRS Form 990: Promoting Good Governance of Nonprofits

    Stephen C. Borgsdorf

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    Believing that well-governed nonprofit organizations better benefit the groups they serve and are more likely to comply with tax laws, the IRS has redesigned the Form 990 tax return for nonprofit entities to include specific governance controls to show quality management and transparent operations. Starting with the 2008 tax year, the IRS is phasing in the new form over three years.

    Wisconsin LawyerWisconsin Lawyer
    Vol. 82, No. 2, February 2009


    For the first time since 1979, the Internal Revenue Service has redesigned Form 990, the tax return for nonprofit entities. According to the IRS, the prior form “fails to meet the Service’s tax compliance interests or the transparency and accountability needs of the states, the public, and the local communities served” by nonprofit organizations.1 The new “Governance, Management, and Disclosure” section of the revised 990 is the crown jewel of IRS efforts to create a climate of transparency and to encourage specific policies and procedures that promote good governance of nonprofits.2

    From the IRS’s perspective, a well-governed nonprofit organization is more likely to comply with tax laws.3 The IRS thus now requires every nonprofit board to respond to several good-governance inquiries:

    • How many members of the governing board are independent?
    • What is the process by which the governing board reviews the organization’s tax filings?
    • Does the organization have a written conflict of interest policy?
    • Does the organization require regular disclosure of potential conflicts?
    • Does the organization have a written whistleblower policy?
    • Has the organization identified persons to whom whistleblowers may voice concerns?
    • Does the organization have a written document retention and destruction policy?
    • Does the organization have a process to determine compensation for its chief personnel?
    • How does the organization make its tax filings (forms 1023 and 990) available to the public?
    • How does the organization make its governing documents (articles and bylaws), conflict policy, and financial statements available to the public?

    The draft instructions advise that all organizations must answer each question in this section and acknowledge that while “certain governance, management, and disclosure policies and procedures may not be required under the Internal Revenue Code, the IRS considers such policies and procedures to generally improve tax compliance.”4

    Deal With It

    Debates on whether, as a matter of federalism or separation of powers, the IRS ought to be influencing the internal structures and policies of state-created nonprofit entities are interesting,5 but a scholarly discourse will not help lawyers’ nonprofit clients file their next tax returns. Commissioner Steven T. Miller described the IRS position succinctly: “[W]e 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…. The question is no longer whether the IRS has a role to play in this area, but rather, what that role will be.”6 Critics of IRS efforts correctly note that good governance cannot be captured in a punch list, and that policies – no matter how well-crafted – are no substitute for good practices.7 Yet it seems that IRS encouragement on the topic of governance has provided an opportunity for the nonprofit community to focus its attention on internal structures and controls, and it is hoped this will benefit the people and groups served by the nonprofit community.

    Tempting Fate

    The revised Form 990 acknowledges that it requests information about policies not required by the Internal Revenue Code.8 But organizations that treat this section cavalierly do so at their own peril. The IRS seeks to prove the correlation between good governance and tax compliance by reviewing examinations of nonprofit organizations’ returns to determine whether a problem was uncovered that could have been interrupted or eliminated if appropriate governance structures were in place.9 And if the IRS truly believes that good governance leads to tax compliance, it may be more likely to closely examine the returns of organizations that lack appropriate governance structures.10

    The Bell Tolls for Thee

    Starting with the 2008 tax year, the IRS will phase in the new form over three years. The 990-EZ form, without governance inquiries, will be available only for nonprofits with less than $200,000 gross receipts and less than $500,000 total assets by the 2010 tax year.11 The IRS has produced a table to explain the filing thresholds (see Figure 1).

    An organization may file the 990-EZ form only if it satisfies both the gross receipts and the assets limitations.

    What to Do Now

    There are several specific governance controls that nonprofits may enact or update now, to show quality management and transparent operations. The first tasks are to focus on the specific policies about which Form 990 inquires: a conflict of interest policy, a whistleblower policy, and a document retention and destruction policy. Although it will take some effort for a nonprofit to craft a set of policies that is matched to its specific circumstances, the new Form 990 provides basic standards for these types of policies.


    Figure 1
    Form 990-EZ Filing Thresholds

      Gross receipts Assets
    2008 tax year (filed in 2009) Between $25,000 and $1 Million Less than $2.5 million
    2009 tax year (filed in 2010) Between $25,000 and $500,000 Less than $1.25 million
    2010 and later tax years Between $50,000 and $200,000 Less than $500,000

    Conflict of Interest Policy. A conflict of interest arises when a person in a position of authority within an organization, such as an officer, director, or manager, may benefit financially from a decision that he or she could make in the position. Included are indirect benefits to family members or to other entities with which the person is affiliated.12 Organizations should have a policy that defines conflict of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest. Form 990 asks three specific questions about how nonprofit organizations handle conflicts:

    • Does the organization have a written conflict of interest policy?
    • Are officers, directors, and key employees required to annually disclose interests that could give rise to conflicts?
    • Does the organization regularly and consistently monitor and enforce compliance with the policy?
    Stephen C. 

    com sborgsdorf dykema Stephen C. Borgsdorf, U.W. 2004, is a litigation attorney with Dykema in Ann Arbor, Mich., and serves on the board of directors of Community Action Network and the Old West Side Association.

    These questions mark the shape of a good conflict policy: It should be written, define what a conflict is, describe who may have a conflict, require annual disclosure of potential conflicts and prompt disclosure of real conflicts, and prohibit conflicted directors, officers, or key employees from making final decisions on matters related to the conflict. Such a policy might read as follows:

    Conflicts of Interest. A conflict of interest may arise when a decision-maker for the Corporation has a financial, family, or other interest that may conflict with the decision-maker’s duty to work in the best interests of the Corporation. To avoid real and perceived conflicts of interest, all directors, officers, and employees are to promptly disclose in writing to the Board any conflicts of interest that emerge. The Board will determine whether a conflict exists, and whether the conflicted director, officer, or other individual may vote or otherwise make decisions on matters related to the conflict. All directors and officers must at least annually disclose in writing to the Board any potential conflicts of interest that may foreseeably arise.”

    Whistleblower Policy. A whistleblower policy encourages employees and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect persons who do so from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.13 While revised Form 990 asks only whether an organization has a whistleblower policy, mere possession of a written policy does not quite meet the IRS standard. A nonprofit will have to identify the specific people to whom whistleblowers may direct their concerns, and – for the sake of the individuals so identified – a clear matrix as to what they should do to investigate or address concerns raised by a whistleblower. One possible version of a whistleblower policy is the following:

    Reporting Wrongdoing. Any person with knowledge or suspicion of any illegal, fraudulent, or wrongful behavior by any person associated with the organization is encouraged to report these concerns to any officer or director. The officer or director is to promptly advise the entire Board of the reported behavior, and the Board will determine what action, investigation, or other response is warranted under the circumstances. The Board will protect the reporting individual from any retaliation arising from the good-faith reporting of suspected illegal, fraudulent, or wrongful behavior.”

    Document Retention and Destruction Policy. A document retention and destruction policy identifies the responsibilities of employees, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.14 Requesting this type of policy may be one of the closest links the new Form 990 has with Sarbanes-Oxley, the federal law that requires corporations to meet certain governance and accountability standards, particularly related to disclosure, transparency, and preservation of documents and records.15 As in the for-profit sector, this is an area in which one size does not fit all. It is helpful for the nonprofit organization to know the types of key corporate records it has, such as tax records, meeting minutes, contracts, leases, monthly bills, emails, and press releases. Different types of records call for different maintenance regimes and responsible personnel. 

    The revised Form 990 asks the following:

    • Indicate how your organization makes its tax returns available for public inspection by checking all that apply:

    __ own Web site

    __ another’s Web site

    __ on request.

    • Describe whether and how your organization makes its governing documents, conflict of interest policy, and financial statements available to the public.

    • State the name, physical address, and telephone number of the person who possesses the books and records of the organization.

    Implicit in these questions is the suggestion that nonprofits maintain significant documents on their Web site. Indeed, a Web site can be a cost-effective and reliable place to archive documents, from tax returns to meeting minutes and committee reports.

    Seize the Opportunity

    Lawyers who have nonprofit clients or who serve on nonprofit boards should strive to provide the best structure in which the nonprofit can accomplish the most good with the lowest risk of bungling its mission or being swindled. Certainly there is room for improvement: Only half of nonprofits have a written conflict of interest policy, and the vast majority, 71 percent, do not require officers or directors to disclose potential conflicts.16 The guideposts in revised Form 990 provide an opportunity for nonprofit clients to discuss governance and work to craft appropriate policies. It is right for a nonprofit to have good governance: to keep the mission paramount, to police conflicts of interest, to avoid self-dealing. This normative argument is far more persuasive than any technical tax compliance argument. By following the specific steps outlined above, lawyers can ensure that the nonprofits they serve are in the best position to achieve their mission and can keep the IRS happy at the same time.


    1Aug. 19, 2008, Background Paper, Summary of Form 990 Redesign Process, at 1. Most sources cited in this article are available at irs.gov and at www.wisbar.org/wislawmag/Feb09/. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77290

    2April 23, 2008, remarks of Steven T. Miller, Panel on Nonprofit Governance at the Georgetown Seminar on Exempt Organizations (hereinafter Miller April 23 remarks). http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77291

    3April 24, 2008, remarks of Steven T. Miller, Georgetown Law Center Seminar on Representing and Managing Tax-Exempt Organizations (hereinafter Miller April 24 remarks). http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77292

    4Draft 2008 Instructions for Form 990 (Core Form), Instructions for Part IV. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77293

    5See, e.g., The Appropriate Role of the Internal Revenue Service with Respect to Tax-Exempt Organization Good Governance Issues, Advisory Committee on Tax-Exempt and Government Entities (ACT), June 11, 2008 (hereinafter ACT Report). http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77294

    6Miller April 23, remarks, supra note 2. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77291

    7ACT Report, supra note 5, at 44-45. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77294

    8Revised Form 990, at 6. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77295

    9Miller April 23 remarks, supra note 2.http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77291

    10This depends on how the IRS decides to focus its limited enforcement resources; Commissioner Miller noted that over the last 10 years the number of nonprofit entities doubled from 650,000 to more than 1.2 million, while IRS staffing has not changed. See Miller April 24 remarks, supra note 3.http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77292

    11Form 990 Redesign Frequently Asked Questions, Nov. 19, 2008. http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77296

    122008 Form 990 Glossary, April 7, 2008 Draft, “conflict of interest policy.” http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77297

    132008 Form 990 Glossary, April 7, 2008 draft, “whistleblower policy.”http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77297

    142008 Form 990 Glossary, April 7, 2008 Draft, “document retention and destruction policy.”http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77297

    15See Francie Ostrower, Nonprofit Governance in the United States: Findings on Performance and Accountability from the First National Representative Study 3-4 (The Urban Institute, 2007). http://www.wisbar.org/AM/TemplateRedirect.cfm?Template=/CM/ContentDisplay.cfm&ContentID=77298

    16Id. at 9.