Conflict of Interest Policies & the Form 990 Governance Questions

What counts as a conflict

Conflicts of interest are normal. Recruit capable, connected people — exactly the people you want — and their interests will eventually intersect with the organization's. The local contractor on your board will someday be a logical bidder for your renovation. That intersection is not a scandal; it's Tuesday. What distinguishes healthy boards is what happens next.

Common conflicts in small nonprofits and churches:

• Transactions: buying goods or services from a member's business; leasing property a member owns; banking where a member works.
• Employment: hiring a member's spouse or child; a member's relative on staff being considered for promotion or raise.
• Compensation: any decision about pay or benefits for a person in the room (the reason ED compensation is set in executive session with the ED out).
• Competing loyalties: a member who also sits on the board of an organization competing for the same grant; a funder's employee on your board reviewing your application.
• Gifts and perks: vendors courting the person who picks vendors.
• Information: using donor lists, financial data, or strategic plans learned in board service for outside benefit.

The test worth teaching every member: would a reasonable outsider, reading about this in the local paper, wonder whose interest you served? If yes, disclose. Disclosure of a non-conflict costs thirty seconds; non-disclosure of a real one can cost the organization its credibility.

Why a written policy matters

The duty of loyalty already binds every director as a matter of state law. So why the policy? Because the duty is a standard, and standards need machinery:

• It moves disclosure from courage to routine. Without a policy, flagging a colleague's conflict is an accusation. With one, it's an agenda item.
• The IRS asks about it — twice. Form 990, Part VI asks whether you have a written policy, whether disclosures are collected annually, and whether you actually monitor and enforce compliance. "No" answers are public, and grant reviewers read 990s.
• It is the safe-harbor scaffolding. The IRS excess-benefit rules (below) give organizations a rebuttable presumption of reasonableness when transactions are approved in advance by independent members using comparable data with documented deliberation — which is precisely what a good COI procedure produces.
• Some states and most funders expect it. New York requires one by statute; many foundations ask for the policy with the grant application.

What a good COI policy contains

You don't need to draft from scratch — the IRS publishes a sample policy in Appendix A of the Instructions to Form 1023, and most organizations adopt a close variant. The essential elements:

1. Definitions. Who is covered ("interested persons" — directors, officers, key employees, and often their family members) and what counts as a financial interest, direct or indirect.
2. Duty to disclose. Affirmative obligation to disclose actual or potential conflicts as they arise — not when asked.
3. Recusal procedure. The conflicted person leaves discussion and abstains from the vote; the remaining members decide whether a conflict exists and how to proceed.
4. Independent determination. For approved transactions: a finding that the arrangement is fair, in the organization's interest, and the best available option — supported by comparables (competing bids, market rates, salary surveys).
5. Documentation. Minutes record the disclosure, the recusal, the data relied on, and the vote (see minutes that protect you).
6. Annual written disclosure. Every covered person signs a yearly statement listing affiliations and acknowledging the policy.
7. Violations clause. What happens when someone fails to disclose — from a corrective conversation to removal.

Handling a conflict, step by step

When a conflicted matter reaches the board:

1. Disclose. The interested member states the interest before discussion begins. (Or another member raises it — the policy makes that a procedural note, not an attack.)
2. Recuse. The member answers factual questions if asked, then leaves the room for deliberation and vote. Staying "just to listen" chills honest discussion.
3. Test the alternatives. The remaining members ask: can we get this without the conflict? If the answer is yes at comparable value, take the unconflicted route.
4. Decide on evidence. If proceeding, base the decision on comparable data — bids, appraisals, market rates — not on goodwill toward the member.
5. Document everything. The minutes name the conflict, record the recusal ("Mr. Okafor left the meeting at 7:42pm"), cite the comparables, and record the vote of the disinterested members.

Run this five-step pattern twice and it becomes culture. The member with the conflict usually appreciates it most — the procedure protects them from later suspicion as much as it protects the organization.

The Form 990 governance questions

Part VI of Form 990 is a governance questionnaire that is entirely public. None of its items are legally mandatory — and all of them are read by grantmakers, journalists, and watchdogs. The questions your board should be able to answer "yes" to:

Treat Part VI as a free governance audit: pull your organization's last 990 (it's public — and you can find any organization's filing basics in our nonprofit directory), read the Part VI answers, and put any "no" on the next board agenda. For the full filing walkthrough, see our Form 990 complete guide.

Where the IRS gets involved: inurement and excess benefits

Two federal doctrines give conflicts real teeth:

• Inurement: a 501(c)(3)'s net earnings may not benefit insiders. Absolute rule, no de-minimis threshold; the nuclear consequence is loss of exemption.
• Excess benefit transactions (IRC §4958): the more common enforcement path. When a "disqualified person" (officers, directors, key employees, substantial influencers — and their families) receives more value than they gave, the IRS can impose a 25% excise tax on the insider (200% if uncorrected) and a 10% tax on managers who knowingly approved it. These are personal taxes, not organizational ones.

The defensive play is the rebuttable presumption of reasonableness: approve insider compensation and transactions in advance, by independent board members, relying on comparable data, with contemporaneous documentation. Do those four things and the burden shifts to the IRS to prove unreasonableness. Notice they are exactly the steps your COI policy already requires — the policy and the safe harbor are the same machine.

Policy adoption checklist

• ☐ Start from the IRS sample policy (Form 1023 instructions, Appendix A) or your state association's model
• ☐ Adapt definitions to your reality (family relationships, covered roles, gift thresholds)
• ☐ Board adopts by resolution; adoption recorded in minutes
• ☐ All directors, officers, and key employees sign the annual disclosure form
• ☐ Disclosure forms filed with the corporate records; secretary tracks completeness
• ☐ COI packet included in new-member orientation
• ☐ Recusal procedure rehearsed once — walk the board through a hypothetical so the first real one isn't the first ever
• ☐ Annual review on the compliance calendar (re-sign disclosures, refresh the policy if roles changed)
• ☐ While you're at it: adopt the whistleblower and document-retention policies the 990 also asks about

One afternoon of policy work, repeated annually in miniature — that's the entire cost of being able to answer every governance question on the 990 with a clean yes.

Primary sources

• IRS, Instructions for Form 990 (Part VI: Governance, Management, and Disclosure)
• IRS, Intermediate Sanctions — Excess Benefit Transactions
• IRS, Inurement / Private Benefit
• IRS, Governance and Related Topics — 501(c)(3) Organizations