Passive-Aggressive Regulation
New IRS governance questions threaten non-profits' tax exempt status.
February 28, 2009 at 07:00 PM
4 minute read
One of the worst things that could happen to a charity's in-house lawyer would be the loss of his organization's tax-exempt status during his watch. It would be like a NASCAR driver running out of gas mid-race. You don't want it to happen to you.
Fortunately, the law about how to keep that tax exemption has stayed pretty consistent. All you have to do is make sure your organization is “organized and operated exclusively” for exempt purposes–understanding, of course, that “exclusively” really means “primarily.” This is the language of the Tax Code and it provides much-needed wiggle room to accommodate the wide range of activities that could constitute an exempt purpose. These are the words Congress used, and, as such, they are our ultimate authority.
So what does document handling have to do with maintaining an exempt purpose? The IRS seems to think there is some connection because its new Form 990 asks every charity, “Does the organization have a written document retention and destruction policy?” This is just one of the so-called corporate governance questions on the new form, each requiring either a yes or a no answer. Others ask about written conflict of interest and whistleblower policies, and whether corporate minutes are kept. Obviously, the only acceptable answer to these questions is “yes.” It is also obvious that the IRS added these questions in response to recent governance problems in both the for-profit and non-profit sectors. But here's my question: How can the IRS pre-empt both Congress' role and state corporation law?
I, for one, don't see how a charity's failure to have a document retention policy means that it is or is not “organized and operated exclusively” for exempt purposes. In fact, I am willing to bet there are literally thousands of true-blue charities operating today without any idea of what document retention means. The hungry are being fed and the sick being healed, two clearly charitable activities deserving of a tax exemption. What is the connection between those activities and a paperwork policy?
There is no statutory connection, which means the IRS is acting beyond its authority by requiring answers to such questions in the Form 990, which almost all charities must file annually. Not only is the IRS going beyond what Congress told it to do, I think it is also treading on the states' traditional jurisdiction over corporations.
This fine legal point is relevant because too many (or even one?) “no” answers to these questions is like waving a red flag in front of the IRS auditors. Let's say an audit reveals your charity has no documents policy, has no whistleblower policy, keeps no minutes, has no written conflicts policy, etc. But the audit also reveals it is nevertheless “organized and operated exclusively” for exempt purposes. That would mean all of these governance questions on the Form 990 are completely irrelevant. If that is so, why are they there?
It must be because the IRS now believes that you cannot be “organized and operated exclusively” for exempt purposes unless you comply with all these policies implied by the governance questions. If so, the IRS is rewriting the statute. No matter how closely I read the Tax Code, I cannot find “whistleblower policy” anywhere in it, and I don't think a judge would, either.
If these governance policies are such a good idea (and I think they are), Congress should require them expressly. Then we can do away with what amounts to passive-aggressive regulation in the form of these insidious questions.
Try a direct question: “Does the organization comply with the document retention policy requirement?” A “yes” would be the right answer. A “no” would be the wrong answer. Simple.
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