Of particular interest is the clarification that questions in Section B (about whether an exempt organization has adopted certain governance policies such as a written conflict of interest policy and a written whistleblower policy) may be answered affirmatively if a committee of the board with the power to do so has approved such policies by the close of the tax year. This should come as welcome news to those exempt organizations that reacted negatively to a 2010 revision to the instructions, which stated that an organization should only answer yes to these questions if its entire governing board adopted the policies. Some exempt organizations complained that requiring full board approval was in contrast to their usual practice of delegating the authority to adopt such policies to a committee of the governing board. An IRS official indicated earlier this week that in addition to making this point clear in the new FAQ, the IRS will be revising the 2011 instructions to Form 990 accordingly.
Some of the other key points of guidance in the new FAQ are highlighted below:
- Clarification on whether the policies and practices described in Part VI of Form 990 are required by law: The response to FAQ 2 acknowledges that generally, these policies and practices (for example, a written conflict of interest policy) are not required by the Code, but warns exempt organizations that the IRS will use the information reported to assess an exempt organization's noncompliance and risk of noncompliance with federal tax law, and also reminds them that the Code requires exempt organizations to make certain items described in Question 18 publicly available (such as an exempt organization's Forms 990 for its three most recent tax years).
- No requirement of receipt and review of the Form 990 by the governing board: The response to FAQ 6 acknowledges that the Code does not require an exempt organization to provide a copy of its Form 990 to the governing board or require review of the Form 990 by the governing board prior to its filing. However, the response reminds exempt organizations that they are required to answer Question 10 of Part VI, which specifically asks if the exempt organization took either of these actions prior to filing the form.
- Deadline for adopting a policy for Form 990 reporting purposes: The response to FAQ 3 provides that where a question specifically asks whether the exempt organization adopted a particular policy as of the close of its tax year, the organization must answer no if the policy was not in place by that time; however, if an exempt organization adopted the policy after the close of the tax year, but prior to filing the Form 990, it may include this information in Schedule O of the form.
- Extent of due diligence efforts required when evaluating director independence and certain relationships of board members, officers and key employees: The response to FAQ 8 clarifies that an exempt organization need not engage in more than a "reasonable effort" to obtain the information necessary to answer Questions 1 and 2 of Part VI, which request information about director independence and business and family relationships among board members, officers and key employees. The response also provides that an example of a "reasonable effort" would be the annual distribution of a questionnaire to each of these persons asking the necessary information. Importantly, the response states that an exempt organization may rely on the information it obtains in response to such a questionnaire when answering these questions.
