What Governance Policies Should Your Nonprofit Have?

While not required by the IRS, every nonprofit should consider adopting governance policies.

By , J.D. · USC Gould School of Law

The IRS strongly encourages nonprofits to adopt certain types of governance policies to help prevent abuses. The IRS believes that these policies "are hallmarks of a well-governed organization," and a nonprofit that lacks them is "exposed to a greater risk of abuse… and more vulnerable to those who might use it for their personal benefit or to engage in nonexempt activities."

While adoption of these policies is strongly encouraged by the IRS, it is not required. Indeed, the IRS lacks the authority to impose such a requirement since governance matters are largely the province of state nonprofit corporation law, not the federal tax law administered by the IRS. Nevertheless, IRS officials have indicated that nonprofits that fail to adopt certain policies have a greater chance of being audited than those who do—the rationale being that nonprofits with such policies are more likely to be in compliance with the tax law.

IRS Form 990, the annual information return field by larger nonprofits, contains a series of questions asking whether certain policies have been adopted by your nonprofit. A series of "no" answers in this section of the Form just doesn't look good to members of the public who read the return.

That said, you don't necessarily have to adopt all the suggested polices. The Form 990 instructions provide: "Whether a particular policy, procedure, or practice should be adopted by an organization may depend on the organization's size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance."

Types of Governance Policies

Hold a board meeting to review key policies already in place at your nonprofit and discuss whether you should adopt or revise any of the following policies.

Conflict of interest policy. A conflict of interest policy is used to help all those associated with your nonprofit to identify, disclose, and deal with situations where there is a financial or other conflict. This is one policy all nonprofits, no matter how small, should have.

Expense reimbursement policy. Reimbursement or payment of expenses for nonprofit officers, directors, trustees, and key employees (ODTKEs) is a hot-button item for the IRS and the public. Form 990 contains a separate Schedule J dealing largely with this issue. The schedule specifically asks whether your nonprofit reimburses or pays ODTKEs for first-class or charter travel, companion travel, tax gross-up payments (payment of any taxes due on taxable perks such as travel), discretionary spending, housing, health or social club dues, and personal services such as use of a chauffeur. If your nonprofit reimbursed or paid an ODTKE for any of these things, you must disclose whether you have a written policy in place for such reimbursement or payment. If not, you must explain why not.

Whistleblower protection policy. A whistleblower policy encourages employees to report financial and other improprieties by establishing procedures to keep whistleblowers' identities confidential and to protect them from retaliation. A small nonprofit without employees probably doesn't need this.

Document retention and destruction policy. This policy provides guidance on how long records must be kept by your nonprofit before they are destroyed. This is a good policy for all nonprofits to have.

Joint venture policy. This policy requires a nonprofit to identify, disclose, and properly manage joint ventures—that is, relationships with for-profit businesses. Smaller nonprofits ordinarily are not involved in such ventures.

Gift acceptance policy. A gift acceptance policy establishes procedures for reviewing, accepting, and substantiating non-standard contributions. These are contributions of items that are difficult to sell and/or value—for example, vacation time-shares or stock in a privately owned company. If your nonprofit accepts such non-standard contributions, you should adopt such a policy.

Chapter, branch, and affiliate policies. You would need such a policy only if your nonprofit has local chapters, branches, or affiliates.

Where to Find Sample Policies

If you need to adopt one or more of the suggested governance policies, you'll need to draft a policy and have it approved by your board of directors. There is no single way to draft any of these policies. They can be quite simple or complex. The smaller your nonprofit, the simpler they can be.

There are many places where you can find sample policies. The organization, Board Source, has numerous sample policies that can be downloaded from its website for a small fee. Other websites that have downloadable sample policies include:

For more on compying with the IRS, see Nolo's book, Every Nonprofit's Tax Guide.

May 2013

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