Reasons mount for aconflict-of-interest policy

Questions on the new Form 990 are the latest reasons to have a conflict-of-interest policy in place. The new form, now in use for 2008 returns, directly asks if your tax-exempt nonprofit has a written conflict-of-interest policy.

New IRS requirements

The form also asks if your officers, directors, trustees and key employees are annually required to disclose “interests that could give rise to conflict.” And it inquires if your organization “regularly and consistently” monitors and enforces policy compliance.

The IRS doesn’t require charities to adopt a conflict-of-interest policy (or other policies). But lacking such a policy could prompt the agency to take a closer look at your tax returns. (See “Navigating trouble spots on revised Form 990” for more information on the new form.)

Tax-exempt status

Having a conflict-of-interest policy also is important for obtaining tax-exempt status. A significant part of the application for organizations seeking 501(c)(3) tax-exempt status deals with questions of possible conflicts with key employee and board members. The application also asks if your organization has adopted a conflict-of-interest policy consistent with the IRS’s sample policy included in the application instructions.

Connections and disclosures

Your conflict-of-interest policy should address the questions mentioned above from the new Form 990. It also should cover whether any of your officers, directors or trustees are connected to each other through family or business relationships. And it should state whether the individuals who approve compensation arrangements follow a conflict-of-interest policy.

Your policy also should require the board and key staff members to annually pledge to protect your organization’s integrity by disclosing interests, relationships and financial holdings that could result in a conflict of interest. Making formal disclosures and having a signed statement usually occurs annually, but board and staff members should update information as needed and speak up when issues arise that could pose a conflict.

Most policies specify that board or staff members who have a possible conflict on an issue should abstain from discussion and decision making regarding that issue. Keep in mind that you can describe instances when there might be exceptions.

You can find examples of conflict-of-interest policies and language for annual disclosures on the Internet. Your audit firm or professional advisor also may be able to supply a sample policy you can customize for your organization. An attorney can check the policy to make sure it doesn’t conflict with other governing documents, such as your bylaws, or statutes in your state.

Message from the top

Keep in mind that it’s your organization’s leaders who set the stage for avoiding conflicts of interest. If they’re open in their discussions about the subject — and take the actions necessary to make sure conflicts don’t evolve — your full staff and board will get the message. And any regular observer to your board meetings will be able to discern that conflicts of interest are off limits for your nonprofit. •