There is nothing necessarily improper about a nonprofit organization hiring a board member or family member to serve the organization for pay. The key legal question for 501(c)(3) public charities and 501(c)(4) civic associations is whether they are being reasonably compensated for real services or whether they have engaged in an excess benefit transaction. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)

 

Another legal question, and real public relations issue, is whether the organization is being used for the private benefit of a few insiders. Even where such activity is not improper, it can create a serious public relations problem, as your question suggests.

 

The Internal Revenue Service now asks organizations filing a Form 1023 Application for Recognition of Exemption or the Form 990 tax information return if they have a conflict of interest policy in place. Although the IRS has no power to require one, it is clearly a good policy to assure that any insider transaction is approved as fair by an independent group within the organization. (See Ready Reference Page: "Conflict of Interest Policies Help Avoid Problems.”)

 

If you have a relationship with anyone in the organization, you might want to inquire about the basis for their activity. If you think the tax law has been broken, you can complain to the IRS. If you think state or local law has been broken, you can complain to the state Attorney General (for a list of state charity regulators, visit the National Association of State Charity Officials website), or perhaps a local district attorney or other prosecutor. Be sure of your facts, however. What you think is a bad practice may be entirely legal.