An IRS-perceived conflict of interest can put you at risk of being rejected for your tax-exempt status.
The principle conflicts are close connections, outside relationships and self-dealing, and excessive benefit or compensation.
IRS concerns over these close connections are aimed at separately established organizations that have (or plan to have) a relationship involving sharing or coordinating management and direction, finances, employees, or activities.
Informally agreeing to work with another organization is OK; formally attaching to another organization can be sticky and should be avoided, especially early on.
If you do not share funds, a majority of board members or employees, or cooperatively run activities with a non-exempt group or a for-profit company, then “close connection” is generally not a concern.
And if you do have a close connection, it’s usually okay if it’s disclosed properly. Another conflict is outside relationships among board members and key employees.
The IRS understands that often husbands and wives or other family members, or people who have business relationships often believe in a mutual cause or idea, and that this leads them to serve together on a board of directors.
These relationships are usually fine, as long as it’s disclosed.
What the IRS is more concerned about is the situation where people who are connected outside the organization exercise control and therefore could potentially use the nonprofit’s tax-exempt status in a way that benefits them personally.
Next is the conflict of “self-dealing”. This simply means, “Are individuals who are considered ‘insiders’ in the nonprofit benefiting from a decision made by the nonprofit?”
For example, steering lucrative advertising contracts to one board member’s ad firm, above market rates, is a clear conflict.
This is frowned upon and could get your tax-exempt status denied or revoked if you do not disclose and demonstrate that you have a policy to make sure no one will unfairly benefit.
Along with self-dealing, the idea of avoiding excessive benefit or compensation is a big IRS Red Flag.
This can be avoided by performing an online search to compare a similar position or contract in a similar size organization in a comparable geographic area and coming up with an average compensation rate.
Just print it out and throw it in a folder, and you’re covered!
Like the rest of these, the easiest test you can apply is the “smell test” - try explaining the compensation amount or potential conflict of interest to yourself or someone close to you, and rely on your own judgment. here.
As a nonprofit, you will need a Conflict of Interest policy document. To make things easy for you, we've included a copy of our tried and true document to get you started.
Also, if you're ready to start your nonprofit and you'd like everything done for you so you don't have to worry about any paperwork and details, then check out our done-for-you 501(c)3 nonprofit service.
Or, if you you're ready to get started, but you have a few questions, the please book a free strategy session here.
-Jacquelyn Long, IRS Friendly Conflict of Interest Policy, InstantNonprofit