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IRS Study Finds Well-Governed Charities More Tax Compliant

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The IRS has maintained for some time that a direct relationship exists between exempt organizations adopting and following good governance practices and their compliance with the tax code.

Now the agency has research to back up its contention.

In a speech last week at Georgetown University Law School, Lois Lerner, the IRS’ director of exempt organizations, presented results of a study based on the governance check sheets agents have filled out at the end of every 501(c)(3) public charity exam since October 2009.

These check sheets are similar to Part VI of the Form 990 informational tax return organizations file every year, she said.

Lerner stressed that the study’s results were “preliminary” because the data came from some 1,300 exempt groups that had already been selected for exam for reasons unrelated to their governance structure, not from a statistically representative survey of the entire exempt sector.

She said the analysis found a statistically significant correlation between questions related to certain governance practices and tax compliance for organizations:

  • That have a written mission statement articulating their current 501(c)(3) purposes
  • That always use comparability data when making compensation decisions
  • That have procedures in place for the proper use of charitable assets consistent with their mission
  • Whose entire board of directors reviewed the 990.

Lerner highlighted the last point, saying, “It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.

“On the flip side, among the organizations we examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals, were less likely to be tax compliant.”

She said analysts also found that responses to some questions had no statistically significant correlation with tax compliance, one way or the other. These included questions relating to the following criteria:

  • Conflict of interest policies
  • Organizations that never or infrequently use comparability data to set compensation
  • Voting board members who have a family relationship and/or outside business relationship with any other voting or nonvoting board member, officer, director, trustee or key employee.

“The results seem to me to be generally consistent with the premise that good governance and tax compliance go hand in hand,” Lerner said. Better would be a review “that could verify whether the information from this select group is also true for the general exempt organizations population.”

She said she has asked her to team to develop a project proposal for such a study.

Lerner opened her talk on a note of caution regarding the filing of Form 990: Do not include Social Security numbers anywhere on any version of the form, she said.

She pointed to a recent study, showing that a significant number of exempt organizations had submitted 990s with one or more SSNs—a major risk factor for identity theft.


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