What is a conflict of interest policy?

What counts as a conflict of interest

The IRS explanation of a conflict policy focuses on a process for disclosing relevant facts when personal interests may affect an organization's decision. Here are three practical situations to consider when defining your policy's scope:

• A financial interest. An ownership or investment stake in, or compensation from, a party the organization does business with or is negotiating with. The board member whose printing firm bids on the newsletter is the textbook case.
• A competing loyalty your policy may also address. A board or leadership role at another organization that chases the same funders, serves the same community, or is on the other side of the transaction.
• A personal benefit that is not money. A job or a contract for a family member, a place in an oversubscribed program, use of the organization's property, or a gift from a vendor beyond ordinary courtesy.

Define covered relationships and interests explicitly. Your policy, state law, and a particular tax form may use different definitions of family or related parties. For Form 990 line 12a, competing duties to two organizations without a material financial interest are excluded from that question's definition. They may still warrant attention under a broader organizational policy. IRS Form 990 instructions, line 12a

Five working parts to consider

The IRS sample in Appendix A of the Form 1023 instructions provides a useful starting structure. Adapt it with counsel to the organization and applicable law; it is not a universal safe harbor.

1. Who it covers. Name the roles and relationships covered. Consider directors, officers, and people with purchasing or vendor-selection authority rather than leaving the scope implicit.
2. A duty to disclose as soon as someone becomes aware of an interest, and in any case before the board discusses the matter.
3. What happens next. Set a procedure for disclosure, questions, recusal, review of alternatives, and a decision by the authorized people without the conflict. Identify who records the result.
4. What the record should capture. The disclosed interest, participants and recusals, alternatives considered, decision, and vote. Retain supporting disclosures with the decision record; minutes alone do not establish that a transaction was permissible.
5. An annual statement from every covered person, and a periodic review of the policy itself.

Why the annual return asks about it three times

For organizations filing Form 990, Part VI, Section B splits the conflict question into three separate lines: whether the organization had a written policy at all (12a), whether officers, directors, trustees and key employees were required to disclose annually (12b), and whether the organization regularly and consistently monitored and enforced compliance (12c) — with a Yes on that last one to be described on Schedule O.

Answer each applicable line separately, following the form's skip instructions. Having a written policy does not establish how it was operated, and an annual disclosure requirement is distinct from actual monitoring. These reporting questions do not replace state requirements. IRS Form 990 instructions, lines 12a–12c

The IRS says adopting a conflict policy is not itself required to obtain recognition of exemption under the Form 1023 guidance. That does not make a transaction with an insider permissible or settle state-law duties. Form 1023 instructions and sample policy

Compensation is the case that needs the most care

For organizations and transactions covered by the federal intermediate-sanctions rules, a compensation arrangement can qualify for a rebuttable presumption of reasonableness through advance approval by an authorized body without conflicts, appropriate comparability data, and timely documentation. This is not a guarantee that the arrangement is reasonable; failing to qualify does not by itself prove it unreasonable. IRS explanation of the rebuttable presumption

For that procedure, prepare the records by the later of the authorized body's next meeting or 60 days after its final action, then have the body review and approve them within a reasonable time. Preserve the data and reasoning used, not just the salary figure. IRS Publication 5835, documentation requirements

Practical mistakes to avoid

• Collecting disclosure forms only from the people who think they have something to declare. An explicit no-interest response helps distinguish a completed disclosure from one that was never returned.
• Treating recusal as leaving the room and nothing else. Record the recusal and how the remaining decision-makers handled the transaction so the process can be checked later.
• Assuming a conflict means someone did something wrong. A disclosed interest calls for the appropriate review. It does not by itself establish wrongdoing or make the transaction acceptable.
• Filing the forms without reading them. Someone has to read the returns and flag the ones that need a conversation, or the annual disclosure is a filing exercise.

A template is a starting draft, not advice

A disclosure form cannot decide whether a particular transaction is lawful. Have a lawyer familiar with your state's nonprofit law review the policy and advise on material conflicts. Federal tax rules and state obligations can apply independently of the wording your board adopts. Sources were checked for this general explanation; this is not a legal or tax review of an organization's policy.

Related templates and concepts

A conflict of interest policy is one of the governance policies the annual return asks about by name. The free board meeting agenda and minutes templates are an ungated taste — the minutes template is where a disclosure and recusal actually get recorded. The full Nonprofit Board & Volunteer Policy Template Pack adds the policy itself, the annual disclosure form, and fourteen more governance and volunteer documents. See also what a gift acceptance policy is, policy templates vs. hiring a nonprofit lawyer, which policies a small nonprofit needs, and the templates for nonprofits hub for the rest.