Does your private foundation have a detailed conflict-of-interest policy? If it doesn’t — and if it doesn’t follow the policy closely — you could face IRS attention that results in penalties and even the revocation of your tax-exempt status. Here’s how to prevent accusations of self-dealing.
Conflict-of-interest policies are critical for all not-for-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% 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 ensure that disqualified persons don’t 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 shouldn’t 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 (5% and 10%, respectively) of the amount involved and, if the transaction isn’t corrected quickly, an additional tax of up to 200% 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.
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. But you’d 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.