Policies and procedures are used by nonprofits for many reasons. First, there are policies that nonprofits need to have to meet IRS recommendations and Nonprofit Industry Standards. Although the IRS does not formally “require” policies, these are questions with yes and no answers on the 1023 and 990 forms AND are part of audits both for writing grants and by the IRS that, if not place, can cause your nonprofit to fail an audit. Second, foundations require some policies to write grants.

Most importantly, they can help prevent serious consequences for nonprofits. Here some examples of what having and following policies and producers can help prevent:

  • A nonprofit allowed a volunteer to open mail for them without another person with them. The volunteer took the checks, opened a checking account in the name of the nonprofit, and deposited the money and spent it. The nonprofit found out about it when a donor called and said they didn’t get their Thank You note and receipt. The nonprofit lost thousands of dollars. They learned that they needed a procedure in their Fiscal/Financial Policy that would always have multiple people involved in the handling of money. They also learned that following their policy of giving a receipt for every donation, in their Gift Acceptance Policy, helped prevent further theft by this volunteer.
  • A nonprofit received a State grant. When they wrote the grant they were unaware of the reporting requirements. Once they learned that they needed a $10,000 audit, money not covered by the grant, they realized they couldn’t meet the reporting requirements of the grant. The board decided they needed to return the grant. A policy about accepting gifts/donations, writing for grants and preparing in advance for grant requirements could have helped guide the organization to accepting such a grant.
  • A director on the board owned a printing business. He offered to do the printing of brochures for the nonprofit at a lower cost than what other printers might them. The board didn’t follow the Conflict of Interest policy they had in place and went with that director’s printing company. This director received a financial and marketing benefit from the organization, a violation of the Board Innurement requiring individuals not receive a personal financial benefit when serving on the board of a nonprofit organization. The IRS can revoke a nonprofit’s 501c3 status for such a violation.

Policies and procedures make sure the organization is following nonprofit law and maintain their tax exempt.

The IRS uses Form 1023, used by new nonprofits to obtain their 501c3 tax exempt status, and the 990 annual tax exempt return to recommend organizations have certain policies. The following policies are in some way mentioned in these documents:

Compensation Policy

This policy references the IRS requirement that a) staff compensation is of fair market value or less and b) the process of determining and administering staff compensation is free of conflicts of interest.

In order to determine that a salary is of fair market value the organization should obtain at least 3 salary comparables of like organizations (similar size, mission, gross income, etc.). This information can be found at local or state nonprofit associations who conduct salary surveys, national nonprofit salary surveys, and salary.com or other online salary sites. The Employers Council is another resource and other HR service providers have compensation data as well. No salary should overly compensate any individual in the organization.
One of the more common conflicts of interest occurs when a family member, often spouses, serve on the board and staff. If a wife is the Executive Director, which is a staff position, and the husband serves on the board, there is conflict of interest in the husband voting on the wife’s salary (and duties) because money she makes from her work in the nonprofit can benefit the family. The husband should not be involved in voting on his wife’s salary. Any time someone on the board may benefit personally from the organization, there could be a conflict of interest and this applies to compensation.

Conflict of Interest Policy

The organization should have a separate Conflict of Interest Policy that addresses any possible conflicts of interest that may apply to a director on the board. The policy addresses the requirement of nonprofit organizations to avoid Board Inurement where a director or officers can benefit financially from the nonprofit. An example of a possible conflict of interest could something like this:

One of the directors/officers on the board owns a printing company. The director offers the nonprofit printing of a brochure at wholesale cost. This is a conflict of interest as the director does receive a financial benefit, and a marketing benefit for his business, from the nonprofit.

The IRS wants the organization to avoid conflicts of interest. Simplified, the policy requires individual directors/officers and/or those on the board who think someone else on the board may have a conflict to divulge the conflict of interest. Then the board meets without the person with the conflict of interest and can determine how they want to handle the situation. The board could decide that the person should not vote on the issue at hand or could vote on the issue or the situation may require to remove the director due to the existence of an ongoing conflict of interest. Whatever the decision, it must be documented in writing.

Documentation Retention and Destruction Policy

The IRS wants to know an organization will be keeping documents for a proper length of time and will be deleting/destroying documents properly. In the policy, organizations may want to include document storage and duplication for disaster recovery. The policy details each type of document in a variety of categories to ensure everyone in the organization in different departments are abiding in the management of documents related to their work.

Fiscal/Financial Policy

This policy ensures the organization is following standard accounting internal and external control processes and procedures, asset management, and budgeting that is specific to their organization. The board and staff of a nonprofit have a duty to ensure money is being properly handled by at multiple unrelated people. This fiscal responsibility is meant to prevent embezzlement and/or mismanagement of money belonging to the organization. The organization should have both their nonprofit bookkeeper and accountant review the policy. As with all policies, whatever is listed in the policy is what the organization must do.

Gift Acceptance Policy:

This policy should include the IRS reporting requirements of the nonprofit and donors. There are paperwork requirements the IRS has for nonprofits and donors that are required to support donations made to nonprofit organizations. Nonprofits should have a separate spreadsheet, referenced in the policy, of non-cash donations that includes the item, donor name and contact information, donated item, donors intent for the donation and reference to the written agreement. The policy should acknowledge protections of elderly and/or mentally compromised individuals including ensuring they have proper legal representation for complex donations. The policy addresses unrestricted and restricted gifts and how they will be handled. Organizations have the right to refuse donations and the IRS has recognized situations where donations may not align with the organization’s mission statement. The policy recognizes acceptance of many kinds of gifts such as annuities, life insurance, oil and gas rights, vehicles, real estate and more. Furthermore, a best practice is for nonprofits to know all their donors by tracking all donations, including cash donations, and providing receipts.

Whistleblower Policy

According to Wikipedia, “A whistleblower is a person who exposes any kind of information or activity that is deemed illegal, unethical, or not correct within an organization that is either private or public.” There is quite a history of the development of Whistleblower policies dating back to the False Claims Act of 1863 and revised at various times since that time. The policy is meant to protect anyone that feels it necessary to report on a nonprofit organization. The policy sets up an independent compliance officer and compliance committee, not associated with anyone on the board, staff or even volunteers, that will evaluate a complaint brought forth, protecting the complainant and the allowing for the organization to handle the situation properly. Often the policy will allow for following an internal chain of command before going to the outside compliance officer. If the organization cannot resolve internally, the complainant can still go to the State Attorney General, local police and/or IRS to file an external complaint. In order to avoid more severe actions being taken against the organization, it is important the organization attempt to resolve the issue as internally as possible. Regardless, no one should be retaliated against for bringing forth a complaint and the policy sets up these protections.

Other Policies

There are dozens of policies that organizations can establish. Foundations often require organizations have an Anti-Discrimination Policy in order to receive grants. A Code of Ethics policy is common for nonprofits. Also, policies on Human Resources, investments, computers and equipment and more can all be developed depending on the needs of the nonprofit organization. The more policies and procedures the organization develops, the less questions and issues the nonprofit will need to deal with in the future!