So if you have your board read your 990, you will be a better run NPO. Right?

That is perhaps the conclusion you could reach from reading a new study from the IRS.

Holly Hall, of The Chronicle of Philanthropy, reports on a speech by Lois Lerner of the IRS in a post, Good Governance Makes tax Compliance More Likely, Says IRS Study.

The IRS looked governance issues in 1,300 charities after the IRS had involvement with those organizations for other reasons. They found a very strong correlation between organizations that had good governance and high levels of compliance with the tax law.

Key findings:

The new study, Ms. Lerner said, found that charities are more likely to follow IRS tax rules if they:

  • Have a written mission statement
  • Always compare their organization to others in making decisions about compensation
  • Have procedures to ensure that contributions and other revenues are used in accordance with the organization’s charitable mission
  • Require all trustees to review the organization’s Form 990.

So, does that mean if your Board of Directors reads the 990 right before you send it to the IRS that you will be a better run organization?  You won’t get in trouble with the IRS if you put your mission statement in writing?

I don’t think so.

Simply doing those things doesn’t mean you will comply with the tax law.

Let’s look at it a bit differently.

Let’s say you have board members with the skill to read and grasp the 990. They take the time to do so.  They can ask questions about comments in the return that don’t well represent your organization or numbers that conflict with what was discussed in a recent meeting.

Let’s say you establish procedures to make sure that you track restrictions on contributions and then make sure that money is spent accordingly.

Let’s say a board committee will prepare a comparative analysis for salary of your senior staff and seriously consider the appropriate compensation.  Let’s say your full board reads that report and carefully ponders it’s content.

If you do that, then I would guess that your board can read a monthly financial statement and challenge senior leadership why money is not being spent the way intended or planned during the budget process.

I would guess your board will insist on good statistics that report on how well the organization is doing in accomplishing its mission.

I would guess your board would ask about how you’re complying with some new employment law, major tax regulation, or major accounting requirement that’s been all over the news lately.

Having a board that is seriously engaged will move your organization towards accomplishing its mission. It will have the side benefit of greatly increasing the level of tax compliance.

So the answer to the question is no, just having your board read the 990 won’t make you a better organization. Having a board that is sufficiently engaged that they have the skills and take the time to do so means you have a board that is doing a whole host of other things that will make you better organization.  Oh, and the fringe benefit is you won’t get in trouble with the IRS.

I looked for the full IRS study but could not find it. When I do so, I’ll discuss it more.

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