Once we have completed the charity formation process our nonprofit clients come to us and ask, now what? Obtaining IRS and FTB approval for tax-exempt status is just the tip of the iceberg, and we believe that the key to successfully maintaining favorable tax-exempt status is to ensure that proper written governance policies and procedures are adopted and followed from the get go. These policies and procedures provide for the segregation of duties, control of personnel and assets, execution of transactions, and record keeping requirements. Having these internal oversight procedures in place is important for two main reasons:

1)  When governance issues and problems arise (as they inevitably do), the procedures can help the charity deal with the problem so that the chances of it escalating and rising to the level of an investigation by the IRS, the Attorney General (“AG”), or other governmental agencies are reduced, and

2)  If a government agency such as the IRS or the AG initiates an audit or investigation of the charity, and the charity is able to demonstrate that it adopted well written governance policies and procedures far in advance of the problem and that the Board of Directors and officers have made a good faith effort to comply with them, then the organization’s chances of coming out of the investigation with it’s tax-exempt status in tact are increased.

And if these reasons are not enough, in many states (including California), having certain written governance policies in place is required by law! Whistle blower protection and prohibitions on document destruction are required under the federal Sarbanes-Oxley Act of 2002, and in California, the establishment of governance policies is required under the California Nonprofit Integrity Act of 2004.

In subsequent blogs we will describe what policies the IRS and the AG requires charities to adopt in connection with the following governance issues:

1. Good record keeping
2. Due diligence
3. Duties of loyalty and conflicts of interest
4. Private inurement
5. Private benefit
6. Code of ethics
7. Whistleblower policy
8. Compensation practices
9. Transparency
10. Disclosure statements

Stay tuned for our upcoming blogs on these and other subjects of interest to all charities, and as always, feel free to contact us for further information regarding these topics.

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