By: John S. Morlu II, CPA
Running a nonprofit is a lot like running a kitchen—everybody brings their ingredients to the table. But if the chef is also secretly selling the groceries to their cousin’s store… well, we’ve got a problem.
That, friends, is what the IRS calls a conflict of interest—and it’s one of the top reasons a nonprofit can land in serious trouble.
Let’s dig into what this means, how it happens, and what to do about it—with real stories, strange facts, and a little humor to make it stick.
What Is a Conflict of Interest?
A conflict of interest happens when someone at a nonprofit—like a board member, officer, or key employee—can benefit personally from a decision the nonprofit makes.
Here’s a simple test:
If you’re voting on a contract, grant, or purchase—and your family, business, or bank account gets something out of it—you probably shouldn’t vote.
Conflicts aren’t illegal by themselves. Failing to disclose and manage them properly is.
Why the IRS Cares (A Lot)
The IRS gives nonprofits special privileges—like tax-exempt status and the ability to receive tax-deductible donations. But with great power comes great scrutiny.
If the IRS finds out your nonprofit is being used to benefit insiders, they can:
- Revoke your tax-exempt status
- Impose excise taxes on people involved
- Trigger audits, fines, and legal headaches
IRS Code Section 4958 specifically addresses “excess benefit transactions,” which often stem from unchecked conflicts of interest.
Real-World Case Studies
Case #1: The Overpaid Cousin
A youth services nonprofit in New Jersey hired the executive director’s cousin as a “consultant” for $180,000. No job description. No deliverables. No board vote.
IRS Outcome:
The cousin had to repay $45,000 in excess benefit taxes. The executive director lost their position. The board had to overhaul their conflict-of-interest policy.
Case #2: Renting from a Board Member
A rural animal shelter paid $3,500/month to rent space from a board member who owned the building—50% above market rate.
IRS Outcome:
The board member was fined under intermediate sanctions. The shelter had to refund misused grant funds and move operations.
Case #3: Private School, Public Trouble
A private school structured as a nonprofit gave its principal a zero-interest home loan and hired his son as a “curriculum consultant” for $90K.
IRS Outcome:
Both arrangements were deemed private inurement. The school faced excise taxes and had to restructure its board governance to meet IRS rules.
Fun Facts & Eye-Openers
- According to the National Council of Nonprofits, 1 in 3 nonprofits has at least one serious conflict of interest risk on their board
- Only 42% of small nonprofits regularly update their conflict-of-interest policies
- The IRS Form 990 includes two key questions about conflicts:
- Do you have a written conflict-of-interest policy?
- Did you monitor and enforce it last year?
Answering “no” raises red flags—fast.
How to Fix and Prevent Conflict of Interest Issues
1. Adopt a Written Conflict-of-Interest Policy
Every nonprofit—no matter how small—should have a clear, simple policy that:
- Defines conflicts
- Requires disclosure
- States who can (or can’t) vote on what
Sample language:
“Board members must disclose any potential personal interest in a matter before the board. If a conflict exists, the member must abstain from discussion and voting.”
2. Use Annual Disclosure Forms
Ask all board members and key staff to fill out a conflict-of-interest form every year. It should ask about:
- Family connections
- Outside employment
- Business ownership
- Financial relationships
3. Keep Good Board Minutes
If a board votes on a contract involving a potential conflict, the minutes should show:
- Who disclosed
- Who left the room
- Who voted
- Why the decision was still in the nonprofit’s best interest
4. Be Transparent with Donors and the Public
If there’s ever a question of ethics, showing that you took steps to disclose and manage it builds trust—and keeps the media (and IRS) off your back.
Pro Tip: Conflicts Can Be Avoided—But They Can Also Be Managed
Sometimes the best vendor is a board member’s company—or a board member really does have expertise. That’s okay—as long as the decision is made openly, fairly, and without personal gain taking priority over the mission.
Final Word: Mission Over Money, Always
Nonprofits are built to serve others—not ourselves. That’s why the IRS, donors, and the public take conflicts of interest seriously.
✅ Clear policies
✅ Honest conversations
✅ Documented decisions
That’s the formula for keeping your organization trusted, transparent, and tax-exempt.
Author: John S. Morlu II, CPA is the CEO & Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse.
Through cutting-edge technology and data-driven strategy, JS Morlu helps organizations operate with clarity, control, and compliance.
– ReckSoft (www.recksoft.com ): AI-powered reconciliation for nonprofit and donor accounting
– FinovatePro (www.finovatepro.com ): Cloud accounting for donor-driven missions
– Fixaars (www.fixaars.com ): Empowering nonprofits with maintenance and repair logistics
