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Inconsistent IRS Guidance on Conflicts of Interest
Although not directly a financial issue, it’s definitely an IRS regulatory issue and touches on both IRS Form 1023 instructions and annual Form 990 governance/policy reporting requirements. I encourage comments because I discovered this only recently.
Adapted from a recent post to ARNOVA-L:
Initial post:
I was looking at the sample conflict of interest policy contained in Appendix A of the Form 1023 instructions. The definition of “interested person” is much narrower than the definition of “disqualified person” contained in IRC Section 4958 (which deals with conflicts of interest, excessive compensation, and private inurement).
Has anyone here run across the difference? If so, can you point me to a resource that deals with reconciling the distinction in a “real world” context? I am not an attorney, but a longtime nonprofit hospital client asked me for sample conflict of interest policies and disclosure forms. Yes, I have recommended they consult with their legal counsel, but they are a rural hospital with no internal legal staff.
Follow-up post:
As a follow-up to my inquiry last week, I did a little pseudo-research by querying two different AI platforms, Grok and ChatGPT. Both gave me essentially the same answer, using the IRS.gov and Cornell.edu websites as primary references.
Here’s the Grok conversation (inquiry and response) hyperlink:
https://x.com/i/grok?conversation=2084708064968761667
Essentially, “interested person” and “disqualified person” are, indeed, different. The distinction is apparently intentional on the part of the IRS, with one being a “defined term” used in policy development (as cited in Form 1023 instructions, Appendix A), where the other is a statutory term applied to enforcement activities.
Since “disqualified person” is both statutory and broader in scope (i.e., more people are included) than “interested person,” I’m glad that my consulting practice and training has focused on the “disqualified person” definition.
However, I’m concerned about the fact that I have traditionally cited the IRS’s sample conflict of interest policy as a model from which nonprofits (especially healthcare nonprofits) should develop their own policies. That recommendation, I now see, is incomplete and perhaps even glib.
Going forward, I’ll use the advice I gave a hospital client last week: use the IRS sample as a *guide*, but be aware of the incomplete nature of the “interested person” definition. In addition, be sure that your policy includes consideration of Stark Law and False Claims Act issues affecting healthcare professionals (usually doctors and surgeons) serving on boards and/or in leadership roles.
Please note that I would not go so far as Anthony Mancuso does in his book, “How to Form a Nonprofit Corporation.” I believe the conflict of interest policy should be a policy and not be placed in toto into the nonprofit’s by-laws.
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1 Reply
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This is an important distinction that many nonprofit leaders may overlook, especially when relying on standard IRS guidance for governance policies. Organizations should view the IRS sample conflict of interest policy as a starting point while ensuring their policies address broader statutory requirements and sector-specific risks. It would be valuable to hear how other nonprofit professionals have adapted their conflict of interest frameworks to address this difference in practice.