Understanding Private Inurement in Nonprofit Organizations
Definition
Key Facts
- Definition: Private inurement occurs when an insider, such as an executive, board member, or key employee, receives any of the nonprofit organization’s net income or inappropriately uses its assets for personal gain.
- Prohibition: Nonprofit organizations, particularly those classified under section 501(c)(3) of the Internal Revenue Code, are prohibited from operating for the benefit of private interests. No part of a nonprofit’s net earnings should inure to the benefit of any private shareholder or individual.
- Purpose of Nonprofits: The primary goal of nonprofits is to advance the public interest and improve the quality of life for people in a community. Nonprofits should not be organized or operated for the private or financial gain of individuals.
- Private Benefit vs. Private Inurement: Private benefit refers to any monetary or nonmonetary benefit received by an individual or organization from a nonprofit. Private inurement specifically pertains to insiders who receive the organization’s net income or use its assets for personal gain. Private inurement is a transaction that benefits insiders, while private benefit can be provided to both insiders and outsiders.
- Consequences: If a nonprofit organization is found to be engaging in private inurement, the IRS has the authority to revoke its tax-exempt status. The IRS may also impose intermediate sanction penalties or disqualify the organization as tax-exempt. The severity of the consequences depends on the degree of inurement, repeat allegations, efforts to safeguard against inurement, and efforts to correct the issue.
Private inurement occurs when an insider, such as an executive, board member, or key employee, receives any of the nonprofit organization’s net income or inappropriately uses its assets for personal gain (Boardeffect, 2021).
Prohibition
Nonprofit organizations, particularly those classified under section 501(c)(3) of the Internal Revenue Code, are prohibited from operating for the benefit of private interests (IRS, n.d.). No part of a nonprofit’s net earnings should inure to the benefit of any private shareholder or individual.
Purpose of Nonprofits
The primary goal of nonprofits is to advance the public interest and improve the quality of life for people in a community (Boardeffect, 2021). Nonprofits should not be organized or operated for the private or financial gain of individuals.
Private Benefit vs. Private Inurement
Private benefit refers to any monetary or nonmonetary benefit received by an individual or organization from a nonprofit (Nolo, n.d.). Private inurement specifically pertains to insiders who receive the organization’s net income or use its assets for personal gain. Private inurement is a transaction that benefits insiders, while private benefit can be provided to both insiders and outsiders.
Consequences
If a nonprofit organization is found to be engaging in private inurement, the IRS has the authority to revoke its tax-exempt status (IRS, n.d.). The IRS may also impose intermediate sanction penalties or disqualify the organization as tax-exempt. The severity of the consequences depends on the degree of inurement, repeat allegations, efforts to safeguard against inurement, and efforts to correct the issue.
References
- Boardeffect. (2021). Understanding Private Inurement and How It Impacts Your Nonprofit. Retrieved from https://www.boardeffect.com/blog/private-inurement/
- IRS. (n.d.). Inurement/private benefit: Charitable organizations. Retrieved from https://www.irs.gov/charities-non-profits/charitable-organizations/inurement-private-benefit-charitable-organizations
- Nolo. (n.d.). What Is Private Inurement? Retrieved from https://www.nolo.com/legal-encyclopedia/what-is-private-inurement.html
FAQs
What is private inurement?
**Answer:** Private inurement occurs when an insider of a nonprofit organization receives any of the organization’s net income or inappropriately uses its assets for personal gain.
What is the difference between private benefit and private inurement?
**Answer:** Private benefit refers to any monetary or nonmonetary benefit received by an individual or organization from a nonprofit. Private inurement specifically pertains to insiders who receive the organization’s net income or use its assets for personal gain.
What are the consequences of private inurement?
**Answer:** If a nonprofit organization is found to be engaging in private inurement, the IRS has the authority to revoke its tax-exempt status. The IRS may also impose intermediate sanction penalties or disqualify the organization as tax-exempt.
How can nonprofit organizations safeguard against private inurement?
**Answer:** Nonprofit organizations can safeguard against private inurement by composing a board of independent individuals, establishing employment contracts that include a description of inurement and its consequences, and establishing a plan for accountability and using a system of checks and balances to verify that reimbursable expenses are directly connected to a nonprofit business.
What is an example of private inurement?
**Answer:** An example of private inurement would be if an executive of a nonprofit organization used the organization’s money to pay for their child’s college tuition or to purchase a luxury car for their personal use.
What is the purpose of the prohibition on private inurement?
**Answer:** The purpose of the prohibition on private inurement is to ensure that nonprofit organizations are operated for the public benefit and not for the private gain of individuals.
What are the different types of control that the IRS is concerned about in relation to private inurement?
**Answer:** The IRS is concerned about two types of control in relation to private inurement: direct control and indirect control. Direct control refers to direct control as enacted by a board director, high-level manager, founder, major donor, highest-paid employees, or family members of influential people within the nonprofit. Indirect control refers to control over others who are officers, directors, or those who have a strong influence over decision-making.
What should nonprofit organizations do if they are facing an allegation of private inurement?
**Answer:** If a nonprofit organization is facing an allegation of private inurement, it should immediately contact the IRS to discuss the matter. The IRS will investigate the allegation and determine whether or not the organization has engaged in private inurement. If the IRS finds that the organization has engaged in private inurement, it may revoke the organization’s tax-exempt status.