501(c)(3) Conflict of Interest Policy: IRS Guide | GBQ

A written policy won't prevent every conflict, but it gives your board a fair, consistent way to handle one, and the Internal Revenue Service (IRS) asks about it every year.

A conflict of interest isn't proof that anyone did something wrong. Board members bring business ties, family relationships, and community connections, and that's often why they're valuable. The risk comes when those interests go undisclosed or unmanaged. Then even a well-meant decision can create tax exposure, legal questions, and headlines no nonprofit wants. A written conflict of interest policy gives your board a clear process for spotting potential conflicts and keeping decisions focused on the mission.

Does The IRS Require A Conflict Of Interest Policy For Nonprofits?

Federal tax law generally doesn't require a 501(c)(3) organization to adopt a conflict of interest policy. However, organizations that file Form 990 with the IRS must answer three questions about one in Part VI:

1. Did the organization have a written conflict of interest policy at the end of the tax year?
2. Are officers, directors, trustees, and key employees required to disclose interests that could give rise to conflicts each year?
3. Does the organization regularly and consistently monitor and enforce compliance with the policy?

If you answer yes to the third question, the Form 990 instructions call for a description of those monitoring and enforcement practices on Schedule O.

Why does a "voluntary" policy matter so much? Form 990 is generally a public document. Anyone can read your answers, and a string of "no" responses in the governance section sends a message you probably didn't intend. The IRS also explains that it encourages organizations to adopt a conflict of interest policy to help protect against charges of impropriety involving officers, directors, or trustees.

What Can Go Wrong Without A Clear Policy?

When a transaction improperly benefits an officer, director, trustee, or key employee (or their family or business), the fallout can reach well beyond bad publicity. Depending on the facts, it could be an excess benefit transaction or private inurement.

Under Internal Revenue Code Section 4958, the IRS can impose excise taxes on excess benefit transactions. The tax falls on the person who received the benefit, and organization managers who knowingly approved it may owe a tax as well. In serious cases, the IRS may also propose revoking the organization's tax-exempt status.

State law can add its own layer, including nonprofit corporation statutes and charitable trust rules.

What Should A Nonprofit Conflict Of Interest Policy Include? 

An effective charity conflict of interest policy defines what a conflict is, names who it covers, lists the interests and relationships they must disclose, and spells out who decides whether a conflict exists and what happens next.

Most strong policies cover:

• Definitions: What counts as a conflict, with examples that fit your organization.
• Covered people: Typically officers, directors, trustees, and key employees.
• Disclosure: The financial interests and relationships that must be reported.
• Decision-makers: Who determines whether a conflict exists.
• Procedures: How the board avoids or resolves a conflict once it's identified.
• Violations: What happens if someone fails to disclose.

You don't have to start from scratch. The IRS publishes a sample conflict of interest policy in Appendix A of the Form 1023 instructions.

What Does This Look Like In Practice?

Say a board member's company bids on a contract with your nonprofit. Your organization might request bids from several vendors using the same specifications, then compare the terms side by side. Board members with no interest in the outcome decide whether the deal is fair, reasonable, and in your nonprofit's best interests.

How Should A Board Handle A Conflict When One Comes Up? 

The board member with the potential conflict discloses the relevant facts, then generally leaves the room while the rest of the board discusses and votes. The minutes should note who was present, the interested person's absence, the alternatives considered, the vote, and the reasoning behind the decision. Those minutes are often your best evidence that the process worked. (For more on what to record, see our guide to nonprofit meeting minutes.)

Keep The Policy Alive Year-Round 

A policy only works if people understand it and use it. A few practices help:

• Annual disclosure: Ask every covered person to disclose or update their interests, relationships, and holdings each year.
• A duty to speak up: Make clear that new potential conflicts should be raised as soon as they arise, not saved for the annual form.
• Periodic training: Short refreshers help board members recognize less obvious conflicts, such as a relative's employer or a board seat at a partner organization.
• Consistent application: Apply the policy the same way every time, whether the dollar amount is large or small.

Let's Make Sure Your Policy Works As Hard As Your Board Does 

A conflict of interest policy protects your mission, your board members, and the trust your donors place in you. As Ohio nonprofit accountants, GBQ's nonprofit team helps organizations review their policies, prepare clear Form 990 governance answers, and strengthen the practices behind them. To talk through your policy or other governance questions, reach out to Christy Zimmerman or talk to an expert on our team. Empowering growth is only a conversation away.

Frequently Asked Questions About 501(c)(3) Conflict Of Interest Policies

Is a conflict of interest the same as wrongdoing?

No. A conflict of interest exists when someone's personal or financial interests could affect their judgment on an organizational decision. It becomes a problem when it isn't disclosed or managed, or when the decision ends up benefiting the individual at the organization's expense.

Does the IRS provide a sample conflict of interest policy?

Yes. Appendix A of the Instructions for Form 1023 includes a sample policy. The IRS presents it as an example, so organizations can adapt it to fit their size, structure, and state law.