What is the Audit Committee’s Role with Respect to Consideration of Income Tax?

“In addition to failure to comply with disclosure rules and government reporting requirements, I counsel my clients to consider if there is anything about their organization or its operations that they would be embarrassed to read about in the local newspaper or hear discussed on the evening news. Reviewing all aspects of financial reporting, tax and internal controls through this perspective is key for those charged with governance.”

-Laura Kalick, JD, LLM in Taxation, National Director, Nonprofit Tax Consulting

The Internal Revenue Service (IRS) Federal Form 990 (Form 990) asks in Part VI, Section B whether the organization provided a complete copy of the Form 990 to all members of its governing board before filing the form. Additionally, the Form 990 asks organizations to describe their process for reviewing the From 990. Many organizations will assign the responsibility for review of the Form 990 to the audit committee. The audit committee may review the Form 990 with management and/or the tax accountants to ensure that all information has been accurately included and presented on the Form 990 and that all questions have been answered appropriately. This review should include independent tax experts who can answer the committee’s questions and provide the technical background related to the questions being asked on the form.

A nonprofit organization must not permit any portion of the organization’s assets to benefit any individual. This is referred to as private inurement and can result in the loss of an organization’s tax exempt status. Examples of private inurement include, but are not limited to, unreasonable compensation, unreasonable fringe benefits, improper use of the organization’s assets, personal expenses being paid by the organization, loans made at low-or no-interest to organization personnel or related parties, unreasonable housing allowances and any other transactions which are not conducted at arm’s length between the organization and its personnel or related parties. If it is deemed that a person has benefited personally a 25 percent tax will be imposed on the benefit the person was deemed to have received and the individual is personally liable for this penalty. If a correction is not made in a timely fashion, an additional 200 percent tax on the benefit will be imposed on the individual. In addition, organization managers who are deemed to have participated in a transaction that results in private inurement will be personally liable for a 10 percent tax on the benefit deemed to have occurred.

In addition, the audit committee should review the assessment completed by management as to whether the organization has any uncertain tax positions as discussed in Accounting Standards Codification 740-10, “Accounting for Uncertain Tax Positions.”

The audit committee has a responsibility to ask questions about transactions to ensure they are being conducted at arm’s length and that all appropriate documentation required by the IRS to substantiate transactions exists. The audit committee should understand the financial information and responses provided on the Form 990 and ensure that they are accurate.

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