Non-profit board members are responsible for the organizations that they govern. And although the duties that officers and directors of a non-profit organization owe to each other and to the organization are determined primarily state law, Congress and the IRS have each become increasingly involved in recent years.
The IRS has taken the lead in non-profit reform by stepping up its oversight of non-profit corporations, seeking sharing of non-profit tax returns and related information, and better coordination of enforcement between the IRS and state officials. The IRS has instituted a strategy to encourage directors of exempt organizations take active roles in leadership, particularly when deciding compensation of key employees, and establish conflict-of-interest policies that deal with relationships that create the potential for private inurement. The IRS has published a conflict of interest policy that, although not a prerequisite for exemption, is viewed favorably by the IRS. The IRS has also released a draft paper on Good Governance Practices for 501(c)(3) Organizations.
Certain members of Congress have also taken notice of what is believed to be inadequate state oversight of the non-profit sector and have called for increased scrutiny of the non-profit sector by the states. Both state and federal legislatures have proposed non-profit reform laws, many of which are gaining broad support. These laws include more extensive charitable registration and reporting requirements, many of which could catch uninformed non-profit officers and directors by surprise.
This surge of increased scrutiny has prompted additional state law involvement and left non-profit organizations scrambling to establish good practices that will strengthen their corporate governance. In light of the increased focus on accountability and transparency, non-profit officers and board members should be well-versed in local and federal laws that apply to non-profit organizations. We will examine four areas of potential liability – state law conflict of interest, inurement, excess benefit transactions, and private benefit – and provide a few guidelines that will help keep non-profit board members out of trouble.