Part VI of the Form 990 asks a series of questions about your organization’s management and governance. The questions reflect best practices and, while they’re not required by the Internal Revenue Code (IRC), they are recommended. If you indicate that your organization doesn’t follow these best practices, there’s no penalty, but there is a higher risk of being audited by the IRS for noncompliance with tax law. Good governance typically lowers the risk of non-compliance.
Good governance can also build trust and credibility with donors, stakeholders, and the public, since Forms 990 are public documents – you’re required to make available the last 3 forms you’ve filed with the IRS.
If you’re approaching the end of your fiscal year, preparing to file the Form 990, and realize you don’t have some of the policies or practices in place, don’t rush to write something up just so you can check the “Yes” box. Take the time to write a policy that covers that circumstances and needs of your organization and that the policy is truly followed. Having a policy that you ignore is worse than not having a policy in the first place. If you adopt a policy after the end of the fiscal year, you can put a comment about it in the Form 990 Schedule O to demonstrate that you’re moving to implement best practices.
Part VI, Section A asks about your governing body, typically a board of directors. Question 1 addresses whether your board is the right size (large enough to oversee the work of the organization and have proper governance, but not so large that it’s unwieldy and ineffective), and whether you have independent board members playing a significant role. Question 8 asks whether meeting notes for the board and significant committees are contemporaneously documented, which is defined as the later of the next meeting, or 60 days after the meeting.
Section B is largely about policies and practices your organization should have in place. Having board members review the Form 990 before it’s filed (question 11) is one part of keeping them informed about financial and operational information, and that filings are being made in a timely manner. Specific policies this section asks about are:
- Conflicts of Interest Policies: How you prevent conflicts from impacting decisions made by board members and key staff. Officers, directors, trustees, and key employees should be required to disclose any potential or actual conflicts at least annually, in addition to those of their family members.
- Whistleblower Policies: How you handle potential ethical or legal violations reported by staff. The process should be clearly documented, encourage staff to come forward with information about illegal behavior or violations of organizational policies, and protect whistleblowers from retaliation if they’re acting in good faith.
- Document Retention and Destruction Policies: How long you keep certain types of documents in your files. The amount of time will vary based on the nature of the document.
- Reviewing Executive Compensation: This should be reviewed by independent board members without conflicts of interest and rely on compensation information from organizations similar to yours. Compensation decisions should be documented adequately and in a timely manner.
The questions raised in Part VI guide you towards policies and procedures that are good for your organization to implement even if you have a low audit risk and your Form 990 won’t be read by many people. In addition to helping ensure tax compliance, they’ll reduce the risk of compromising situations and staff or board decisions that raise bad publicity. Part VI should remind you to have the policies in place, and to periodically review what you do have to see if they still meet the needs of your organization.