Should Charities Adopt Written Policies in Response to the New Form 990?

Charities filing the new Form 990 for 2008 will be required to respond to three or four questions regarding whether the organization has adopted certain written governance policies.

Three of the questions apply to all charities: the conflict of interest policy, the whistleblower policy, and the document retention and destruction policy. The fourth question, about joint venture policies, applies only if the organization answers yes to the question of whether it has participated in a joint venture or similar arrangement. The questions are found in Part VI, section B of the new form.

The IRS background paper summarizing the Form 990 redesign process describes the written policy questions as follows: “The section headings and related instructions explain that this section asks for information about policies and practices that are not required by federal tax law.” The final instructions hedge this a bit by saying that while the policies are “generally” not required under the Internal Revenue Code “The IRS considers such policies and procedures to generally improve tax compliance”. The IRS cautions that the absence of appropriate written policies and procedures may increase the chance of transactions occurring which are inconsistent with tax exempt status. In other words, the IRS thinks charities should have these written policies.

What the presence or absence of the written policies will mean on audit remains to be seen, but it is apparent that the adoption of at least the conflict of interest and joint venture policies is becoming the norm, and certainly appears to be the best practice.

The whistleblower and document retention policies are less likely to be of interest to the IRS on audit or involve issues that will negatively affect an organization’s tax exempt status. These policies were apparently derived from Sarbanes-Oxley, which does not apply to charities, and are not likely to have a negative tax impact if not adopted.

While these policies are certainly not required by federal tax law, adopting the policies may prove to be very helpful on audit. All charities should review their written policies and procedures, and strongly consider the adoption of new written policies and procedures addressing, at the least, conflicts of interest, compensation and joint ventures.

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