Thursday, November 25, 2010

Donnelly Publishes Critique of IRS Governance Oversight through Form 990

Karen Donnelly (UMKC, J.D. 2010) has published Comment, Good Governance: Has the IRS Usurped the Business Judgment of Tax-Exempt Organizations in the Name of Transparency and Accountability?, 79 UMKC L. Rev. 163 (2010).  The comment briefly (and selectively) overviews the charitable sector and state regulation thereof, notes the impetus for increasing scrutiny of the sector over the past decade (generally, and specifically by the IRS), and discusses (1) the new Form 990 information return that charities are required to file with the IRS, and (2) the likely effects of complying with the new form.  The comment concludes as follows:

The negative implications of the IRS' new Form 990 far outweigh the benefits. Although the IRS claims that the new approach to nonprofit governance is not a "one size fits all" mandatory list of governance policies and programs, the practical application of the new form says otherwise. If charities feel compelled to check "yes" to whether they've adopted a conflict of interest policy, whistleblower policy, or document retention policy, many organizations, and particularly smaller and rural organizations, may hastily adopt boilerplate policies found on the Internet that do not fit their organizational structure, mission, or programs for fear of receiving a bad rating, bad reputation, and donor disapproval that could potentially result from the information going public.

Further, the prohibitive cost to complete the new Form 990 is also a major disadvantage to the IRS' intrusion into the states' sphere of governance regulation. In many cases, the IRS' new governance reforms are hurting charities more than they are helping. Charitable assets that could have been used to further an organization's exempt purpose are now going toward reporting expenses. The IRS may succeed in encouraging tax compliance, but it may also threaten the business judgment and financial viability of many effective charitable programs by "encouraging" them to wear a shoe that does not fit and costs way too much. A uniform system of regulatory law enforced by a new executive agency, staffed with the necessary resources to adequately oversee nonprofit governance practices, rather than proposing sweeping legislation in an already overregulated industry, may result in the most effective and efficient way to regulate the industry of good deeds.


(Hat Tip: TaxProf Blog)

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