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Conflict of interest violations can threaten a nonprofit’s reputation, donor confidence, and tax-exempt status. While most nonprofit board members have no intention of acting improperly, many innocent decisions, including those that are in the best interest of the nonprofit, can create the appearance of self-dealing. That appearance alone can trigger IRS scrutiny, internal disputes, or damage to public trust.

What Constitutes a Conflict of Interest?

A conflict of interest occurs when a board member’s personal, financial, or professional interests could compromise, or just appear to compromise, their ability to act objectively in the nonprofit’s best interest. These situations don’t always involve bad faith or deliberate misconduct. In many cases, they arise from routine decisions involving familiar vendors, family connections, or overlapping roles.

It’s not necessary for the decision to have been wrong, or for there to have been a better alternative. Simply having a conflict of interest can lead to complications, even if the decision was objectively the best path forward.

Common Conflict of Interest Scenarios

Even well-meaning board members can expose their organizations to risk through everyday actions. Some examples include:

• Hiring a relative of a board member as an employee or contractor without proper disclosure or competitive review.
• Awarding a contract to a company owned by a board member or their close family member.
• Allowing a board member to vote on matters where they stand to benefit personally, such as approving their own compensation or authorizing a lease with a business they own.
• Accepting large gifts or donations from vendors or service providers currently under consideration by the board.
• Serving on multiple boards where interests may compete or overlap.

These examples are not inherently illegal, but they must be disclosed and managed carefully to avoid the appearance of impropriety.

How Conflicts of Interest Are Caught and Reported

Nonprofits are subject to public and regulatory oversight, particularly if they are required to file IRS Form 990. That form includes questions about conflict of interest policies and procedures. Auditors, grantors, or watchdog organizations may also request board meeting minutes, vendor contracts, or compensation documentation during reviews. If a conflict wasn’t disclosed, or if no recusal process was followed, the nonprofit may be flagged for further investigation.

Even internal disputes, such as disagreements among board members, can lead to whistleblower reports or public complaints if someone believes another board member acted improperly.

Legal and Financial Consequences

If the IRS determines that a nonprofit has engaged in private inurement or excess-benefit transactions, it may impose excise taxes on those involved. In serious cases, the nonprofit could lose its tax-exempt status. Conflict of interest mismanagement can also lead to civil litigation, grant clawbacks, or loss of key donor relationships.

What to Do if a Conflict Has Already Occurred

Conflicts of interest discovered after the fact must be handled carefully, even if the conflict was accidental and had no adverse consequences on the organization or its mission. Working with outside general counsel can be helpful in these scenarios. They can guide the board through damage control steps such as:

• Performing an internal investigation to document how the decision was made and whether it aligned with the nonprofit’s best interests.
• Reviewing whether the conflict was disclosed at the time and whether any recusals were documented.
• Revising conflict management procedures to ensure better oversight moving forward.
• Communicating transparently with stakeholders, if needed, to explain how the issue was identified and addressed.

Demonstrating that the board acted in good faith and with diligence is often key to mitigating regulatory or reputational consequences.

How to Manage Conflicts Proactively

The best protection is a clear, up-to-date conflict of interest policy that outlines:

• What constitutes a conflict
• When and how disclosures must be made
• What the recusal process should look like
• How conflicts will be documented in meeting minutes

Boards should revisit this policy at least once a year and have every member sign a conflict of interest disclosure form annually. Training sessions with outside general counsel can also reinforce expectations and give board members a safe space to ask questions about gray areas.

Protecting Your Atlanta Nonprofit’s Integrity and Status

Every nonprofit, regardless of size or mission, can be vulnerable to conflict of interest concerns. Establishing the right policies and following them consistently helps protect your tax-exempt status, your leadership, and the people you serve.

If your organization needs help reviewing its conflict policies or responding to a specific issue, the Law Office of Cameron Hawkins can help. Call (678) 921-4225 to schedule a consultation.