Self Examination vs. Outside Scrutiny

The last thing a ministry leader needs is to be in the hot seat with the IRS. Here are five key questions that every ministry board needs to be in the clear on to avoid unwanted and reputation damaging scrutiny from the IRS.

1. Are there any areas in your ministry where the lines are blurred regarding private inurement?

In 2008 the IRS stiffened to reporting requirements on Form 990, your annual information tax return. The IRS is watching for anything that may inure to the benefit of any individual or group. To that end, legislation has been passed to ensure that all transactions are at arm’s length and that no self-dealing exists in the organization.

So, for example, if a board member owns an office building and rents space to the ministry, clear action from the board of directors must be reflected in the minutes that this decision to rent, which will bring benefit to the board member, is in the best interest of the organization and is not in any way “unreasonable.” The rental rates, therefore, must be competitive (i.e., not overcharged as a favor to the board member) to be in compliance. This is just one example among many private inurement possibilities.

2. Are you aware of any transactions conducted by “disqualified individuals” that need to be documented as decisions by the board of directors and saved into the organization’s corporate records (minutes)?

The IRS will look for anyone it considers to be a “disqualified member,” that is, any insider, whether a board member, family member, a key individual in the organization, or even contractors who have a significant amount of influence over the ministry, to ensure prevention of private inurement.

Think of this: imagine that the organization owns a vehicle to be used for ministry purposes, but the spouse of the executive director uses it to carry on personal business. If that portion of the use of the vehicle is not considered when filing personal taxes as a part of taxable income, a case can be made for private inurement, resulting in fines and in some cases loss of exempt status.

3. Are your board members aware of their legal responsibilities?

Board members are clearly the ones in charge of the organization from a leadership and fiduciary standpoint. The buck stops here. The board of directors will be held accountable for any and all dealings of the organization.

Why is this? Nonprofits (e.g., ministries), are “public charities”; therefore, no one can own or unreasonably benefit from an institution whose charter is to “serve the public.” This rationale is the one the government uses for granting a 501(c)(3) tax-exempt status, enabling ministries to provide tax-deductible receipts to donors when making contributions. Since nonprofits are the “third sector,” as distinctly different from governmental agencies and for- profit institutions, special regulations guard the public from fraud and unreasonable personal benefit.

4. Do you, as a board best practice, maintain organizational records, including minutes, that indicate all key decisions and conflict of interest forms signed each year from each board member?

Board members have an obligation to conduct business within guidelines that prohibit actual or potential conflicts of interest. Having each member sign a conflict of interest policy that outlines the expectations and requires full disclosure in questionable areas will help discourage any abuse before it happens. Get a free conflict of interest template for your board members.

5. Are you keeping all of your personal business separate from the nonprofit?

For example, let’s assume your spouse runs a small business to add income to the family budget. Do you use the ministry’s computer systems or any other assets of the organization to promote the for-profit business? If so, you would be in violation of the private inurement doctrines of the IRS.

Covering Your Board Responsibilities – Free Resource

We’ve developed a free resource to help you gauge how your board is covering its basic responsibilities. Click here or use the button below and we’ll send you our Board of Directors Responsibilities Checklist. This helpful document will provide a list of thirty-six governance and financial oversight items that should be addressed by your board for compliance sake. It’s a useful tool to keep your board on track and provide accountability for the ministry.