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Private inurement is an important part of private benefit and it happens when an insider — an individual who has significant influence over the organization — enters into an arrangement with the nonprofit and receives benefits greater than she or he provides in return. The most common example is excessive compensation, which the IRS condemns through Intermediate Sanctions, significant excise taxes. Insiders — referred to in IRS parlance as “disqualified persons” — can be high-level managers, board members, founders, major donors, highest paid employees, family members of the above, and a business where the listed persons own more than 35 percent of an interest.
Private inurement is an absolute term. There is no de minimis restriction. If a nonprofit is organized to benefit an individual — even while fulfilling its tax-exempt purpose — it cannot be a tax-exempt organization. Under the state law, an organization may lose its nonprofit status.