Conflict of Interest Explained

What is the purpose of the conflict of interest policy?  

Charitable organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors, or trustees. The IRS also has an oversight role concerning charitable organizations. An essential part of this oversight is providing organizations with strategies to help avoid the appearance or actuality of private benefit to individuals in a position of substantial authority. The recommended conflict of interest policy is a strategy we encourage organizations to adopt to establish procedures that will offer protection against charges of impropriety involving officers, directors, or trustees.

A conflict of interest occurs when individuals’ obligation to further the organization’s charitable purposes is at odds with their or professional financial interests.

Conflict of Interest in Business Transaction

For example, a conflict of interest occurs when an officer, director, or trustee votes on a contract between the organization and a business owned by the officer, director, or trustee.

Conflict of Interest Establishing Compensation

Conflicts of interest frequently arise when setting Compensation or benefits for officers, directors, or trustees. A conflict of interest policy’s purpose is to help ensure that when actual or potential conflicts of interest arise, the organization has a process under which the affected individual will advise the governing body about all the relevant facts concerning the situation.

Establishes Procedures and Protocol for Handling Conflicts of Interest

A conflict of interest policy is also intended to establish procedures under which individuals with a conflict of interest will be excused from voting on such matters.

Apart from any appearance of impropriety, organizations will lose their tax-exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes.

IRS Reference Page:

Form 1023: Purpose of Conflict of Interest Policy. https://www.irs.gov/charities-non-profits/form-1023-purpose-of-conflict-of-interest-policy