Page 92 - Washington Nonprofit Handbook 2018 Edition

Nevertheless, answering “no” to any of these questions is likely to raise a red flag
(or at least a yellow one) for the IRS agent reviewing the application. If the answer
to any of these questions is “no”, it is advisable to provide additional information
describing why the organization has not adopted a particular practice and what
other safeguards it has put in place to ensure that compensation paid to officers,
directors, trustees and highly compensated employees and independent
contractors is reasonable.

y Lines 5a-5c

As noted above, although an organization is technically not required to have
a conflict of interest policy, the IRS strongly suggests that every organization adopt
such a policy. The Instructions to Form 1023 include a sample document that can
be adopted and included as part of the application. A sample conflicts of interest
policy is available at https://wayfindlegal.org/tools/legal/.

y Lines 6a & 6b

While 501(c)(3) organizations are not prohibited from compensating
individuals through nonfixed payments, such as discretionary bonuses or revenue-
based payments, such arrangements must be carefully designed to ensure that
they are reasonable and consistent with the rules applicable to 501(c)(3)
organizations. See the discussion regarding intermediate sanctions in Chapter 30 if
the organization intends to pay discretionary bonuses or make revenue-based
payments, particularly if the organization will make such payments to directors,
officers or highly compensated employees. It is advisable to do market research of
similar organizations to determine whether compensation arrangements are
appropriately structured.

y Lines 7a & 7b

It is preferable to truthfully answer “no” to both line 7a and 7b. A “yes”
answer will likely raise a red flag with the IRS. As indicated in the IRS instructions,
you do not need to answer “yes” simply because directors, officers or other persons
described in this question can purchase goods or services from the organization on
the same terms as the general public. Nevertheless, if the answer to either
question is “yes”, you may be able to alleviate IRS concern by indicating that the
purchase or sale of goods or services between the organization and the officer,
director or other person described in this question will be approved consistent with
the rebuttable presumption set out under the intermediate sanctions regulations.

See Chapter 30.

WASHINGTON NONPROFIT HANDBOOK -81- 2018