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The Internal Revenue Service recently announced a number of governance practices it considers important for tax-exempt healthcare and related organizations in carrying out their exempt purpose.

Although the announcement was in a speech that was sans dark cloud, tall mountain and stone tablets, it is clear that the IRS will consider these practices as significant in evaluating whether a healthcare organization is fulfilling its charitable purpose. Many of the pronouncements are already being used by exempt healthcare organizations. There are some recommendations that suggest the IRS is focusing on new areas of governance, such as codes of ethics and whistleblower policies.

The IRS made 10 specific recommendations in its "good governance practices" advice. The guidelines specifically recommend the following:

1. Adopting a clearly articulated mission statement that states why the organization is a charity, what it hopes to accomplish, what activities it will undertake and who it will serve;

2. Adopting and regularly reviewing a code of ethics and whistleblower policy;

3. Establishing policies for directors to exercise due diligence to be fully informed of the charity's activities and financial status in order to fulfill their duty of care and act in the charity's best interests;

4. Adopting and regularly reviewing a conflict of interest policy to ensure directors fulfill their duty of loyalty to the charity;

5. Providing full and accurate information about the charity's mission, finances and activities to directors, regulators and the public in an easily accessible format, such as on a Web site;

6. Implementing policies to promote truthful, accurate and candid fund-raising activities that are compliant with state and federal laws, along with a discriminating selection of reputable paid fundraisers;

7. Regularly reviewing financial data, and for charities with significant assets, providing for independent audits with auditors rotated every five years;

8. Except in extraordinary cases, avoiding paying directors any compensation other than reimbursement of expenses;

9. Fixing officer and staff compensation using the rebuttal presumption method in Section 4958; and

10. Establishing and regularly reviewing document retention, integrity and destruction policies.

The recommendations by the IRS are consistent with the current trends and best practices for nonprofit governance. This list provides a good opportunity to review one's governance practices and determine whether they can be improved in light of the IRS' recommendations.

Unfortunately, an organization will need to consult its lawyer on the next steps. The law giver is not providing further interpretations. Golden calves are highly discouraged.


G. Cowart is chairman of the health law/public policy department of Baker, Donelson, Bearman, Caldwell & Berkowitz. He can be reached via dcowart@bakerdonelson.com.

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