Conflict of Interest

A conflict of interest in the nonprofit context occurs when an individual in a position of authority — such as a board member, officer, or key employee — has a personal, financial, or professional interest that could interfere with their duty to act in the best interest of the organization. Common examples include a board member whose company provides paid services to the nonprofit, a CEO who hires a family member, or a director who sits on the board of a competing organization. The IRS strongly encourages (but does not legally require) all tax-exempt organizations to adopt a written conflict of interest policy, and Form 990 Part VI specifically asks whether the organization has such a policy and whether it requires annual disclosure statements from officers and board members. The IRS model conflict of interest policy recommends that conflicted individuals disclose the conflict, recuse themselves from discussion and voting on related matters, and that the remaining board members determine whether the transaction is in the organization's best interest. Failure to manage conflicts of interest can lead to allegations of private inurement or excess benefit transactions, which can result in excise taxes under IRC Section 4958 or even revocation of tax-exempt status. For donors researching nonprofits on NonprofitTruth, the presence of a conflict of interest policy is one indicator of sound governance practices.