What is inurement? How to avoid risks to your 501(c)(3)

It’s one of those terms that sounds complicated but is actually really important to understand, especially if you want to protect your 501(c)(3) status and stay compliant with tax laws.

Inurement basically means someone on the inside, like a board member or founder, is getting personal benefits from the nonprofit’s money or resources. And that’s a big no-go with the IRS. The tricky part? Sometimes it doesn’t even feel like a big deal at first, like giving a little bonus or letting someone use office space. But those “small” things can lead to serious consequences, including losing your nonprofit’s tax-exempt status.

What is inurement and how does it affect your 501(c)(3) organization?

Let’s start with the basics. Inurement is when someone on the inside of a nonprofit, like a founder, board member, or even a close family member, gets a benefit from the organization’s money, assets, or resources. The key thing to remember? Nonprofits exist to serve the public, not private individuals. So when benefits “inure” (or flow) to one person, the IRS sees that as a red flag.

The rule comes straight from IRS Section 501(c)(3). It says that no part of the net earnings of a nonprofit can inure to the benefit of any private shareholder or individual. That means your nonprofit can’t be used to make someone rich or give them perks just because they’re connected to the organization.

This doesn’t mean you can’t pay people. Reasonable salaries for staff or contractors are totally fine. The issue comes up when payments are too high or when someone gets personal perks, like using nonprofit property, getting reimbursed for things they shouldn’t, or hiring family without clear oversight.

In simple terms: if it feels like a “hookup” or a personal favor, it might be inurement. And if the IRS finds out, it could mean serious trouble for your nonprofit, including fines, audits, or losing your 501(c)(3) status.

How inurement differs from private benefit and self-dealing

These three terms, inurement, private benefit, and self-dealing, get mixed up a lot. They all sound similar, but they’re not quite the same thing. And understanding the difference really matters, especially when you're making decisions about spending or partnerships.

Inurement always involves someone on the inside. Think: board member, founder, officer, or anyone who has control or influence in your nonprofit. If any of the nonprofit’s money or assets are used in a way that gives these insiders a personal gain, that’s inurement. It doesn’t matter if it was a one-time thing or if the person “earned it.” The IRS doesn’t allow any inurement, ever.

Private benefit is a little broader. It happens when any person, insider or not, gets a benefit from your nonprofit that’s more than just incidental. So let’s say your organization gives a contract to a local company, but that company gets way more value than your nonprofit does from the deal. That’s private benefit, even if the company isn’t connected to your board or staff.

Self-dealing is mostly about private foundations. It’s when someone like a board member uses the nonprofit’s money to do business with themselves or their family. That might mean selling something to the foundation, loaning it money, or hiring their own company. It’s similar to inurement, but it’s handled under different IRS rules.

Here’s a simple way to remember it:

Even small things can cause big problems if they cross the line. That’s why it’s so important to have clear policies, open records, and a board that knows the difference between helping your mission and helping themselves.

Real-world examples of inurement and who is at risk

Sometimes the best way to understand inurement is by looking at real examples. These aren’t just made-up “what-ifs.” These kinds of situations happen more often than you’d think, and often by accident.

Let’s say a nonprofit hires its founder’s spouse as a consultant, and pays them way more than what’s considered fair for the work. That’s a classic case of inurement. The organization is using its income to excessively benefit someone with a close, personal connection.

Or imagine a board member who uses the nonprofit’s office space for their private business, rent-free. Even if they think of it as a “perk” or something small, it still counts as personal gain. That’s not okay under 501(c)(3) rules.

We’ve even seen situations where a nonprofit buys equipment or property, and then an insider uses it for personal use. That includes things like letting family stay in nonprofit-owned housing, driving an org-owned car for vacations, or funneling contracts to a business they secretly own.

The people most at risk? Founders, board members, officers, and even directors. Basically anyone who can influence how the nonprofit spends its money or uses its assets. Sometimes it’s done intentionally, but more often, it’s just a lack of understanding or oversight.

That’s why good governance matters. Clear rules, outside reviews, and open discussions can keep small missteps from turning into IRS problems down the road.

Legal consequences: intermediate sanctions and loss of 501(c)(3) status

When inurement happens, the consequences aren’t just a slap on the wrist. The IRS takes it seriously, and so should your board.

The biggest risk is losing your nonprofit’s 501(c)(3) status. That’s your tax-exempt status, and once it’s gone, it’s hard (and expensive) to get it back. Without it, donations aren’t tax-deductible, and your nonprofit could owe taxes like a for-profit business. That alone can shut down a mission for good.

But before the IRS goes that far, they often issue what are called intermediate sanctions. That’s a fancy way of saying financial penalties. If the IRS thinks an insider got an unfair benefit, they’ll calculate the amount and charge a fine, not just to the person who received the benefit, but possibly to board members who approved it, too.

The person who received the benefit might have to pay 25% of the excess amount. If they don’t fix it quickly, that jumps to 200%. And if the board didn’t take “reasonable steps” to stop it, they could each be fined 10%, up to $20,000.

These penalties aren’t theoretical, they happen. And they’re often the result of sloppy recordkeeping, unclear policies, or well-meaning decisions made without enough review.

That’s why catching inurement early, and showing the IRS you’re serious about fixing it, is a much better path than ignoring it or hoping it goes unnoticed.

Common scenarios that trigger inurement risks

Inurement doesn’t always show up in obvious ways. It often hides in the everyday decisions nonprofits make, especially when there aren’t clear checks and balances in place. Here are some common situations where things can go sideways fast.

Excessive compensation and perks

Paying staff is normal. But when someone on the inside, like a founder or executive director, gets a salary way above what’s typical for that role, the IRS may see that as inurement. The same goes for things like luxury travel, housing stipends, or bonuses that aren’t documented or approved.

Improper family employment and insider benefits

Hiring a board member’s cousin or giving contracts to a founder’s spouse? That’s risky territory. Even if they do great work, it has to be handled carefully. Without a competitive bidding process or a conflict-of-interest policy, these deals can look like personal gain.

Conflict of interest transactions

If someone on your board votes on a deal that benefits them, or their business or family, they’ve crossed the line. This kind of inside influence can easily trigger IRS concerns, even if no one meant to do anything wrong.

Using income or assets for personal gain

Letting someone borrow nonprofit property for free? Using your nonprofit’s credit card for personal expenses and calling it “admin”? These things happen more often than you’d expect, and they almost always raise red flags. It’s about more than just money, it’s about trust.

When in doubt, ask: Does this decision serve the public or someone private? If the answer is the second one, pause. Review. Get outside input. And document everything.

How to prevent inurement in your nonprofit organization

The good news? Inurement is totally avoidable. With the right systems in place, you can protect your organization, your people, and your mission. It’s not about making things harder, it’s about making them clearer.

Start with a conflict of interest policy. This should be a written document that every board member reads, signs, and follows. It spells out what counts as a conflict, what to do if one comes up, and how decisions should be made when someone has a personal stake.

Next, make sure compensation is reasonable. That means comparing salaries, consultant fees, and bonuses to what other similar organizations are paying. You can use salary surveys, job boards, or even outside experts to back it up. Document everything.

Keep good records. Meeting minutes, contract terms, who voted on what, all of that matters. If the IRS ever asks questions, you want to show that your decisions were thoughtful and well-documented.

Get help when you need it. That could mean asking a lawyer to review a contract, or working with a platform like Harness to streamline how your board and fundraising systems are run. You don’t have to do it all on your own.

Last tip: educate your team. Most inurement issues happen not because someone’s trying to cheat the system, but because they didn’t know the rules. A little training can save a lot of trouble later.

Best practices for your board to protect your 501(c)(3) status

Your board isn’t just there to give advice or approve big decisions, it plays a direct role in keeping your nonprofit compliant. When it comes to inurement, the board is often the first (and sometimes last) line of defense.

Here are some best practices to keep your board sharp and your 501(c)(3) status safe:

1. Know who counts as an insider

Make sure your board understands who qualifies as a “disqualified person” in the eyes of the IRS. That includes founders, officers, directors, key employees, and often their family members. If someone has control or influence over the nonprofit, they fall into this category.

2. Avoid voting on personal matters

If a board member stands to benefit from a vote, they should step out, literally. Leave the room, don’t participate in the discussion, and definitely don’t vote. This protects them and the organization.

3. Review compensation annually

Every year, take time to review how much your top leaders are paid. Look at market comparisons, write down the reasoning behind your decisions, and make sure the board votes on it, with no one voting on their own pay.

4. Set up a strong audit trail

Your board meetings should be well-documented. Keep minutes that show how decisions were made, especially when money or contracts are involved. If the IRS comes knocking, good notes can make a big difference.

5. Ask the tough questions

Sometimes, protecting your nonprofit means speaking up. Is this deal fair? Could it be seen as a personal favor? Have we looked at other vendors? These questions may feel uncomfortable, but they’re essential.

Smart boards don’t just avoid risk. They build a culture of trust, accountability, and clarity. That’s what keeps your mission strong, and your status secure.

Documentation, auditing, and reporting: Staying proactive with the IRS

If you ever find yourself asking, “What would the IRS think of this?”, you’re already on the right track. Being proactive is one of the best ways to protect your nonprofit.

Start with solid documentation. Every major decision, especially anything involving money, contracts, or insiders, should be written down. Meeting minutes should clearly show who was involved, what was discussed, and how the final call was made. If someone stepped out due to a conflict of interest, that should be recorded too.

Next, consider routine internal audits. These don’t have to be formal or expensive. A simple checklist that your team reviews quarterly can catch small issues before they grow. Look at who’s getting paid, who’s being hired, and whether any expenses feel “off.”

If something doesn’t sit right, don’t ignore it. The IRS actually allows organizations to fix mistakes, especially if you catch them early. That might mean adjusting a salary, ending a contract, or refunding a payment. What matters is that you act quickly and transparently.

You should also know what forms matter most. The IRS Form 990 is where most red flags show up. Be accurate, be honest, and double-check anything related to compensation, transactions, or insider benefits. If you’re unsure, ask someone who knows, your accountant, a lawyer, or even the Harness team.

Being careful isn’t about fear. It’s about being a responsible steward of your mission and your donors’ trust.

Staying on the right track

You don’t have to be a legal expert to protect your nonprofit from inurement, you just need to stay aware, ask the right questions, and put smart systems in place. Inurement isn’t usually about bad intentions. It’s about small decisions that slip through the cracks and grow into bigger issues.

When you keep your focus on your mission and make transparency a habit, you build trust with your donors, your board, and the communities you serve. And that’s what keeps your organization strong.

At Harness, we know how much work it takes to run a nonprofit, and how easy it is to miss the fine print when you’re focused on making an impact. That’s why we build tools and support systems that help you stay compliant, stay organized, and stay mission-first.

Want to make sure your fundraising and governance stay on the right track? Let’s talk.