Form 990 Part VI: governance questions, line by line

Part VI of the Form 990, Governance, Management, and Disclosure, involves no money, but it says a lot about how the organization is run.

Required to answer, not required to adopt

The IRS instructions are direct about this: federal tax law "generally doesn't mandate particular management structures, operational policies, or administrative practices," but every organization is required to answer each question in Part VI. Section B even says on the form that it asks about policies "not required by the Internal Revenue Code."

So a "No" is not a violation. But the IRS also says it considers these policies to generally improve tax compliance, and that their absence can open the door to excess benefit transactions, inurement and other problems. Because the Form 990 is public, your answers are read by grantmakers, watchdogs and charity rating sites. State law or your bylaws may also require some of these practices. Part VI appears only on the full Form 990. The 990-EZ and 990-N don't include it.

Section A: governing body and management

Lines 1a and 1b: board size and independence

Line 1a is the number of voting members of the governing body (usually the board of directors or trustees) at the end of the tax year. If members have materially different voting rights, or the board delegated broad authority to an executive committee, explain on Schedule O. Narrow committees, such as audit, investment or compensation committees, don't need to be described.

Line 1b is how many of those voting members were independent. A member is independent only if all four of these were true for the whole year:

1. The member wasn't paid as an officer or employee of the organization or a related organization.
2. The member didn't receive more than $10,000 as an independent contractor from the organization and related organizations, other than reasonable pay for serving as a director.
3. Neither the member nor a family member was in a transaction with the organization that must be reported on Schedule L (transactions with interested persons).
4. Neither the member nor a family member was in a similar reportable transaction with a related organization.

Being a donor, even a large one, doesn't make a member less independent. The organization can rely on an annual questionnaire signed by each member.

Line 2: family and business relationships

Answer "Yes" if any officer, director, trustee or key employee listed in Part VII had a family or business relationship with another one. On Schedule O, name the people and write "family relationship" or "business relationship"; more detail isn't required. Business relationships include one person employing the other, transactions between them of more than $10,000 in a year outside the ordinary course of business, and both serving as directors, officers or greater-than-10% owners of the same business. Attorney-client, doctor-patient and clergy relationships don't count.

Line 3: delegation to a management company

Answer "Yes" if an outside management company or person performed duties normally done by officers or key employees, such as hiring staff or running budgets. Payroll processing and ordinary investment management don't count. Describe the arrangement on Schedule O.

Line 4: changes to governing documents

Report significant changes to your articles or bylaws not reported on a prior return: purpose, name, board size or composition, officer duties, the dissolution clause, voting rules and similar items. Describe them on Schedule O, but don't attach the amended document unless the name changed. The IRS wants these changes reported here rather than in a letter. See changing your name, address or fiscal year.

Line 5: diversion of assets

Answer "Yes" if during the year you became aware of a significant diversion, such as embezzlement or theft, even if it happened earlier. It is significant if the total exceeds the lesser of 5% of gross receipts, 5% of total assets, or $250,000. Explain on Schedule O what happened, the amounts and what you did about it, without naming the person responsible.

Lines 6 to 9: members, minutes and addresses

• Lines 6, 7a and 7b ask whether the organization has members or stockholders, whether anyone other than the board elects board members, and whether any decisions need outside approval. Describe each "Yes" on Schedule O.
• Lines 8a and 8b ask whether you contemporaneously documented every board meeting and every meeting of a committee with authority to act for the board. Minutes, emails or similar writings count. "Contemporaneous" means by the later of the next meeting or 60 days after the meeting. Answer "No" on 8b if you have no such committees.
• Line 9 asks whether any listed person can't be reached at the organization's address. Addresses given on Schedule O become public.

Section B: policies

Answer "Yes" to a policy question only if the governing body (or a committee with delegated authority) adopted it by the end of the tax year and it applies to the whole organization. A policy used in one department only is a "No."

Line 11: board review of the 990

Answer 11a "Yes" only if each voting board member received the complete final return, schedules included, before it was filed. Emailing a link to a password-protected copy counts. Saying a copy is "available on request" doesn't, and neither does redacting anything, even a donor's name on Schedule B. On 11b, describe on Schedule O who reviewed the return, when and how thoroughly. If nobody did, the instructions tell you to say "No review was or will be conducted."

Line 12: conflicts of interest

A conflict of interest policy defines conflicts, says who it covers, provides for disclosure and sets out how conflicts are handled. Line 12b asks whether covered people must disclose their interests annually. If you answer 12c "Yes," describe on Schedule O how you monitor transactions, who decides whether a conflict exists, and what restrictions apply, for example that conflicted members leave the room and don't vote.

Lines 13 and 14: whistleblower and record retention

A whistleblower policy encourages staff and volunteers to report illegal practices or policy violations, protects them from retaliation and says whom to report to. A document retention policy sets out who keeps which records and how they are stored and destroyed. Even without written policies, federal criminal law (18 U.S.C. sections 1513(e) and 1519) applies to tax-exempt organizations: it is a crime to retaliate against whistleblowers who report federal offenses or to destroy records to obstruct a federal investigation.

Line 15: how compensation is set

Answer "Yes" only if the process included all three elements: approval by independent board or committee members without a conflict, comparability data for similar positions at similar organizations, and contemporaneous documentation of the decision. On Schedule O, describe the process, the positions it covered and the year it was last used. If the top official wasn't paid, answer "No" on 15a. See compensation reporting on Form 990.

Section C: disclosure

• Line 17: the states where you must file a copy of the 990, even if not yet filed. See state charity filings.
• Line 18: how you make your Forms 1023, 990 and (for 501(c)(3)s) 990-T available: your own website, another's website, on request or other.
• Line 19: on Schedule O, whether and how you made governing documents, the conflict of interest policy and financial statements public.
• Line 20: the name, address and phone number of the person who keeps the books and records.

Schedule O is where your answers make sense

Schedule O (Supplemental Information to Form 990) is required for every Form 990 filer, and Part VI depends on it. A short, plain description of what you actually do (who reviewed the return, how a conflicted director stepped aside) usually reads better than boilerplate. Check the box at the top of Part VI when Schedule O contains a Part VI response.

If your board has never adopted these policies, the year before a large grant application is a good time to start. When we prepare your Form 990, we go through Part VI with you and draft the Schedule O explanations from what your board actually did.

990IRS.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.