Who Is an IRS Interested Person for Nonprofits?

An IRS interested person for nonprofits is any insider whose financial dealings with the organization have to be disclosed on Schedule L of Form 990. That group is wider than most boards realize. It covers current officers, directors, trustees, and qualifying key employees, but it also reaches founders who no longer hold a role, anyone who held influence in the past five years, close family members of those people, businesses those insiders control, and donors who cross certain giving thresholds. For private foundations, the same basic idea applies under a stricter set of rules that can prohibit the transaction outright.

Who Counts as an Interested Person

The term comes from the instructions for Schedule L, and the IRS does not use a single definition across the whole form. For Part I of Schedule L, which covers excess benefit transactions, an interested person is anyone who qualifies as a “disqualified person” under Section 4958 of the Internal Revenue Code. For Parts II through IV, which cover loans, grants, and business transactions, the definition is broader.¹ A person can trigger reporting under one part without being a disqualified person under the other, so organizations need to track both categories.

Every officer, director, and trustee who served at any point during the tax year is automatically an interested person.² The formal title is not what controls. Someone who exercises the authority an officer or director would hold qualifies based on their actual role, whatever the organization chooses to call the position.

Key employees qualify only if they meet three tests, all of them and in order. The employee must receive reportable compensation over $150,000 from the organization and its related entities. They must hold responsibilities comparable to those of an officer or director. And they must manage a segment of the organization accounting for 10% or more of its activities, assets, or expenses.² An employee earning $200,000 who runs a minor administrative function does not qualify.

For Parts II through IV of Schedule L specifically, the organization’s creator or founder is also treated as an interested person, even if they no longer hold any governance role. Members of a grant selection committee count for Part III purposes.¹ Neither category appears in the Section 4958 disqualified person definition, which is why the two lists diverge.

Former Insiders Still Count for Five Years

Stepping down does not end the classification. Under Section 4958, anyone who held a position of substantial influence over the organization at any point during the five years before a transaction is a disqualified person for that transaction.³ A board chair who left three years ago and now leases office space to the organization is still an insider for that deal.

For Schedule L business transaction reporting, former officers, directors, trustees, and key employees within the last five tax years are treated as interested persons even if they are not otherwise required to be listed on the return.¹ Keep records of who left and when.

Family Members and Controlled Businesses

When someone is an interested person, their close relatives inherit the same status. For Section 4958 purposes, the family circle covers a spouse, parents, grandparents and other ancestors, children, grandchildren, great-grandchildren, the spouses of those descendants, and siblings and their spouses.⁴ A transaction with a board member’s brother-in-law gets the same treatment as a transaction with the board member.

Businesses and other entities are pulled in when insiders hold enough ownership. An entity is a “35-percent controlled entity” when disqualified persons collectively own more than 35% of a corporation’s voting power, a partnership’s profits interest, or a trust’s beneficial interest.⁴ Insider and family holdings are combined. If the executive director owns 20% of a company and the treasurer owns 18%, that company is a 35-percent controlled entity even though neither person individually crosses the line.

An annual conflict-of-interest questionnaire that asks board members and key employees to disclose outside business interests and family affiliations is the most reliable way to catch these indirect connections before they show up as missed disclosures.

Donors Who Cross the Threshold

Substantial contributors count as interested persons, but the definition depends on the organization type.

For Schedule L Parts II through IV, a substantial contributor is anyone who donated at least $5,000 during the tax year and whose contributions must be reported on Schedule B.¹ This is a single-year test. A donor who gives $6,000 this year is an interested person for this year’s Schedule L, even if they gave nothing before.

For private foundations, the test is cumulative and much harder to shed. A person becomes a substantial contributor when their total lifetime donations exceed $5,000 and represent more than 2% of all contributions the foundation has ever received. Each spouse’s contributions are attributed to the other. The status can end only if three conditions are all met: the donor and all related persons have made no contributions to the foundation during the preceding 10 years, neither the donor nor any related person served as a foundation manager during that period, and the IRS determines the cumulative contributions are insignificant compared to those of at least one other single contributor.⁵ A founding donor whose gift still dwarfs later contributions probably never qualifies.

Private Foundations Face a Stricter List

Private foundations use a different insider definition under Section 4946. It overlaps with the Section 4958 rules for public charities, but the differences matter.

A disqualified person under Section 4946 includes substantial contributors under the cumulative test above; foundation managers (officers, directors, trustees, and any employee with authority over the specific act in question); anyone owning more than 20% of the voting power, profits interest, or beneficial interest of a corporation, partnership, or trust that is itself a substantial contributor; family members; and entities where the people above own more than 35% of the voting power, profits interest, or beneficial interest.⁶ Government officials are included only for purposes of the self-dealing rules under Section 4941.

Two details trip people up. The family definition here is narrower than the Section 4958 version — it covers spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of those descendants, but not siblings. And the 20% ownership threshold for individuals is lower than the 35% entity threshold used for public charities. A business owner with a 25% stake in a company that donates heavily to the family foundation is a disqualified person under the foundation rules even though the same stake would not trigger the public charity threshold.

Private foundations also face a near-total ban on financial transactions between the foundation and its disqualified persons. Unlike the excess benefit framework, which asks whether the price was fair, the self-dealing rules are essentially absolute. Prohibited acts include selling, exchanging, or leasing property between the foundation and a disqualified person; lending money or extending credit in either direction; providing goods, services, or facilities; paying compensation or reimbursing expenses (with narrow exceptions for reasonable compensation for personal services necessary to carry out the foundation’s exempt purposes); and transferring foundation income or assets to a disqualified person or for their benefit.⁷ Fair market value does not save the transaction.

What Must Be Reported on Schedule L

Schedule L has four parts, and each has its own trigger.

Part I: Excess Benefit Transactions

Any excess benefit transaction with a disqualified person under Section 4958 must be reported. That means transactions where the value of the economic benefit the organization provided exceeds the value of what it received in return.⁸

Part II: Loans

Any outstanding loan balance between the organization and an interested person must be reported, regardless of the amount, interest rate, or repayment terms. Report the original principal, the current balance at year-end (including accrued interest and penalties), and whether the borrower is in default.¹

Parts III and IV: Grants and Business Transactions

Business transactions with interested persons require disclosure when any of the following applies:¹

Aggregate payments during the tax year between the organization and the interested person exceed $100,000.
A single transaction exceeds the greater of $10,000 or 1% of the organization’s total revenue.
The organization paid more than $10,000 in compensation to a family member of a current or former officer, director, trustee, or key employee listed on Part VII of Form 990.
The organization has invested $10,000 or more in a joint venture with an interested person, and both parties hold profits or capital interests exceeding 10%.

Name the interested person and describe the transaction, whether it involves service payments, property sales, leases, or other arrangements.

Penalties When You Get It Wrong

Section 4958 imposes a first-tier excise tax of 25% of the excess benefit on the disqualified person who received it. The person pays the tax, not the organization.³

Organization managers face a separate penalty. Any manager who knowingly participated owes 10% of the excess benefit, capped at $20,000 per transaction. The tax applies only when the participation was willful and not the result of reasonable cause.⁹

If the disqualified person fails to correct the excess benefit within the taxable period, a second-tier tax of 200% of the excess benefit applies.³ A $50,000 excess benefit left uncorrected produces $100,000 in additional tax on top of the initial $12,500, a combined $112,500 exposure that explains why correction happens quickly once the IRS raises the issue.

Correction means putting the organization in the position it would occupy if the disqualified person had dealt under the highest fiduciary standards. In practice, the person repays the excess benefit in cash or cash equivalents, plus interest at the applicable federal rate from the month of the transaction, compounded annually.¹⁰ Promissory notes do not count.

How to Protect the Organization in Advance

Organizations can build a “rebuttable presumption” that a compensation arrangement or property transfer is reasonable. With the safe harbor in place, the IRS carries the burden of proving the transaction was an excess benefit rather than the organization having to prove it was not. Three steps are required:¹¹

The transaction is approved in advance by the governing body or a committee composed entirely of members with no conflict of interest in the transaction.
The approving body obtains and relies on appropriate comparability data before deciding. For compensation, that means surveys or data on what similarly situated organizations pay for comparable positions. For property, an independent appraisal.
The approving body records its decision-making at the time the decision is made, including the terms, the date of approval, who was present and how they voted, the comparability data relied on, and how that data was obtained.

Documentation must be complete by the earlier of the next board or committee meeting, or 60 days after the final action.¹¹ Skip any step and the presumption is lost. The common failure is procedural: the board approves the compensation but nobody records the comparability data, or the minutes are drafted months later from memory. Treat all three steps as standard procedure for every significant compensation decision and property deal involving anyone who could be classified as a disqualified person.

1
Internal Revenue Service. Instructions for Schedule L (Form 990)
2
Internal Revenue Service. Instructions for Form 990
3
Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
4
eCFR. 26 CFR 53.4958-3 – Definition of Disqualified Person
5
Office of the Law Revision Counsel. 26 USC 507 – Termination of Private Foundation Status
6
Office of the Law Revision Counsel. 26 USC 4946 – Definitions and Special Rules
7
Internal Revenue Service. Acts of Self-Dealing by Private Foundation
8
Internal Revenue Service. Intermediate Sanctions – Excess Benefit Transactions
9
Internal Revenue Service. Intermediate Sanctions – Excise Taxes
10
eCFR. 26 CFR 53.4958-7 – Correction
11
eCFR. 26 CFR 53.4958-6 – Rebuttable Presumption That a Transaction Is Not an Excess Benefit Transaction