Does your private foundation have a detailed conflict-of-interest policy? If it does not — or if you do not follow the policy closely — you could face IRS attention that results in penalties and even the revocation of your tax-exempt status. Here is how to prevent accusations of self-dealing.

Who Is Disqualified?

Conflict-of-interest policies are critical for all non-profits. But foundations are subject to stricter rules and must go the extra mile to avoid anything that might be perceived as self-dealing. Specifically, transactions between private foundations and disqualified persons are prohibited.

The IRS casts a wide net when defining “disqualified persons,” including substantial contributors, managers, officers, directors, trustees, and people with large ownership interests in corporations or partnerships that make substantial contributions to the foundation. Their family members are disqualified, too. In addition, when a disqualified person owns more than 35 percent of a corporation or partnership, that business is considered disqualified.

What Transactions Are Prohibited?

Prohibited transactions can be hard to identify because there are many exceptions. But, in general, you should make sure that disqualified persons do not engage in: selling, exchanging or leasing property; making or receiving loans or extending credit; providing or receiving goods, services or facilities; and receiving compensation or reimbursed expenses. Disqualified persons also should not agree to pay money or property to government officials on your behalf.

What happens if you violate the rules? Your foundation’s manager and the disqualified person may be subject to an initial excise tax (five percent and 10 percent, respectively) of the amount involved and, if the transaction is not corrected quickly, an additional tax of up to 200 percent of the amount. Although liability is limited for foundation managers ($40,000 for any one act), self-dealing individuals enjoy no such limits. In some cases, private foundations that engage in self-dealing lose their tax-exempt status.

What Is Off-Limits?

Your foundation likely has good intentions, but that may not protect you. For example, you might assume that transactions with insiders are acceptable so long as they benefit your foundation. However, you would be wrong. Most activities that the IRS describes as self-dealing are off-limits.

Because the rules can be complicated, talk with us before executing any transaction that could violate IRS rules.