Several months ago Senate Finance Committee members Chuck Grassley, R-Iowa, and Chair Orrin G. Hatch, R-Utah, stirred the hornets’ nest again for nonprofit hospitals by asking the IRS for answers regarding its oversight of nonprofit hospitals. This request for information is expected to lead to additional IRS scrutiny of nonprofit hospitals’ nationwide; additional scrutiny that comes at a time when nonprofit hospitals are already scrambling to comply with the tax law changes under the 2017 Tax Cuts and Jobs Act.
Requirements Under IRC Section 501(r)
In 2010, the Patient Protection and Affordable Care Act (the “ACA”) implemented additional reporting and operational requirements for nonprofit hospitals under Section 501(r) of the Internal Revenue Code. For a nonprofit hospital to maintain its tax-exempt status it must:
- Conduct a community health needs assessment (“CHNA”) once every three years and adopt and implementation a strategy to meet the community health needs identified in the assessment;
- Adopt and implement a written policy with respect to the hospital’s financial assistance and emergency medical care;
- Limit charges for emergency or other medically necessary care to patients who qualify for financial assistance under the hospital’s financial assistance policy; and
- Refrain from taking extraordinary collection actions before the hospital has used reasonable efforts to determine whether the patient qualifies for financial assistance under its financial assistance policy.
IRS Audits of Nonprofit Hospitals
The ACA mandates that the IRS examine each nonprofit hospital once every three years to ensure compliance with Section 501(r). According to the American Hospital Association, based on its 2016 sampling there were 2,849 nonprofit hospitals in the United States. In 2017, the IRS examined 1,193 of those hospitals and referred 388 hospitals for further field examinations. The issues for which referrals were made included: (i) the lack of a CHNA; (ii) failure to put in place a financial assistance and/or emergency medical policy; and (iii) failure to meeting billing and collection requirements. Generally, a nonprofit hospital that fails to meet the CHNA requirement is subject to a $50,000 excise tax. However, since the enactment of the ACA the IRS has already revoked the tax-exempt status of at least one hospital.
Based on these statistics and the recent political interest, nonprofits hospitals should confirm that the required policies have been adopted and a process is in place that continuously monitors compliance with the CHNA requirements, proper application of the financial and emergency care policies, and conformity to the billing and collection restrictions. Failing to adopt and implement the proper policies and procedures may cause a nonprofit hospital to be at a higher risk for an IRS audit which may result in the payment of excise tax or even worse, the loss of its tax-exempt status.
The Health Law Gurus will continue to monitor the IRS’ audit behavior. Be sure to check back for updates.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.
Pauline Markey, Esq. is a Partner in the Business & Finance Department’s Tax Group at Obermayer Rebmann Maxwell & Hippel LLP. She focuses her practice on United States federal income tax – including corporate and partnership tax, tax-exempt entities, tax controversy, and executive compensation. She has significant experience translating complex tax issues for general business application and providing practical tax advice to CFOs and other stakeholders. She specifically provides tax advice and planning for small to mid-sized companies, as well as sophisticated tax memorandums, opinions, and private letter rulings.