990 Policy Compliance Series – Conflict of Interest Policy

Continuing with our 990 policy compliance series is a discussion about what is required for a sound conflict of interest policy. Everyone can agree that an entity that uses public, government or donated funds should have a policy to address potential conflicts of interest with those that are controlling the organization. On Part VI of the 990, there is a three-part question regarding the existence of a conflict of interest policy and its components.

First, what is a conflict of interest (COI)? The IRS defines COIs as a circumstance that arises “when a person in a position of authority over an organization, such as an officer, director, manager or key employee (as defined by the IRS), can benefit financially from a decision he or she could make in such a capacity, including indirect benefits, such as to family members or businesses with which the individual is closely associated.”

The following criteria must be met in order to answer “yes” to the three-part question on Part VI of the 990 regarding your COI policy:

  • #12a: Is there a written policy? Answer yes only if a written policy is in place, as of the last day of the tax year, that defines conflicts of interest, identifies the class of individuals to which the policy applies, facilitates disclosure of information that can help identify potential conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.
  • #12b: Are covered individuals required to disclose potential conflicts? Answer yes only if officers, directors, trustees and key employees (as defined by the IRS) are required to disclose or update annually (or more frequently) information regarding their interests and those of their families that could give rise to conflicts of interest.
  • #12c: Did the Organization regularly and consistently monitor and enforce compliance with the policy? The IRS does not define how this is to occur, but, if the answer is yes, then a narrative disclosure describing the process of how the policy is monitored and how conflicts are dealt with is required on Schedule O. Schedule O is the supplementary schedule that is used to provide any narrative or other information to answer required questions throughout the 990 or to provide any information that would be useful to the IRS or reader of the 990. In describing the process on Schedule O, include the following:
    • Explanation of which persons are covered by the COI policy.
    • The level at which determinations of whether a conflict exists are made and at what level they are reviewed.
    • Explanation of what restrictions, if any, are imposed on individuals with a conflict, such as prohibiting them from participating in the deliberations and decisions regarding the transaction under review.

In our next post we’ll cover the process for determining compensation for top earners at organizations.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

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