News and analysis
April 20, 2012

Good Governance Makes Tax Compliance More Likely, Says IRS Study

Richard White/Chronicle of Philanthropy

Charities that follow certain good-governance practices—for example, drawing up written mission statements and comparing their organizations to others when making compensation decisions—are more likely to comply with the Internal Revenue Service’s tax code, according to preliminary results from a new IRS study.

The study was described yesterday by Lois Lerner, director of the IRS division that oversees charities, in a speech at Georgetown University Law School. “Good governance and tax compliance go hand in hand,” she said.

The study, Ms. Lerner said, analyzed information provided by more than 1,300 charities that the IRS examined for reasons unrelated to their governance practices. But when researchers later reviewed those practices—as reported on the organizations’ Form 990 informational tax returns—they found certain correlations.

The new study, Ms. Lerner said, found that charities are more likely to follow IRS tax rules if they:

  • Have a written mission statement
  • Always compare their organization to others in making decisions about compensation
  • Have procedures to ensure that contributions and other revenues are used in accordance with the organization’s charitable mission
  • Require all trustees to review the organization’s Form 990.

Charities were less likely to meet IRS standards when control of their organization was in the hands of one person or a small number of trustees, the study found.

While the study was conducted with a select group of charities that are not representative of all nonprofits, Ms. Lerner said it “offers some insight into which questions and associated responses might be useful indicators of tax compliance.” The IRS, she added, is planning a repeat study with a wider group of charities.

Even though it is preliminary, the study offers some useful pointers for charities, said Michael Peregrine, a Chicago lawyer who advises large charities on governance issues. The full board should be engaged in reviewing the Form 990 each year, he said, and boards should make adequate comparisons with other organizations when setting pay levels for staff. He also cautioned charities against letting their organizations fall under the control of a single leader or small group of trustees.