October 26, 2017 IRS officials provide update on Section 501(r) examinations of charitable hospitals At an American Health Lawyers Association (AHLA) event on October 19, IRS officials discussed current IRS exam activity with respect to the Section 501(r) charitable-hospital requirements and provided some guidance to help hospitals prepare. 501(r) regulations compliance In a panel moderated by EY's Steve Clarke, Geoff Campbell, an IRS TE/GE Exempt Organizations tax law specialist, explained that IRS exam activity around Section 501(r) is expanding to review compliance with the corresponding regulations. While the IRS has already been examining compliance with Section 501(r) statutory requirements, which have been in place for several years, it is ramping up exam activity around the specific regulatory requirements. The final Section 501(r) regulations are generally effective for tax years beginning in 2016 (see Tax Alert 2015-29). Campbell added that IRS EO Exam agents have examined exempt hospitals for tax years before the effective date of the final Section 501(r) regulations — for instance, exams for tax years 2013 or 2014. He explained that some agents have asked about compliance with the final regulations for those years, not because hospitals were required to comply with the final regulations for those years, but because the agents sought to educate the hospitals on how to comply with the final regulations currently and prospectively. EO exam results and IRS guidance Campbell reported that the IRS has opened more than 400 Section 501(r) exams of hospital organizations, over 200 of which have closed. Campbell noted that the IRS has made 33 assessments under Section 4959, which imposes a $50,000 excise tax for violations of the Section 501(r)(3) community health needs assessment (CHNA) requirements. He stated that some of the CHNA reports that the IRS has reviewed were essentially "written with crayon on a cocktail napkin." Speaking at the same panel, Stephanie Robbins, an attorney-advisor in the IRS TE/GE Office of Associate Chief Counsel, reported that the IRS TE/GE Chief Counsel welcomes requests for Section 501(r) guidance, including private letter ruling (PLR) requests. She noted that the IRS has not yet received any Section 501(r)-related PLR requests. Financial assistance policies (FAPs) In response to a question from the moderator, Campbell noted that a reference in the IRS TE/GE Work Plan (see Tax Alert 2017-1643) on using compliance checks to determine compliance with financial assistance policy (FAP) requirements means that the IRS will be scrutinizing FAP issues more closely. It does not mean, however, that the IRS won't be examining all elements of Section 501(r). Campbell and Robbins both highlighted the importance of following the rules requiring a FAP to list both hospital providers covered by the FAP and those not covered, in accordance with the regulations and Notice 2015-46 (see Tax Alert 2015-1252). They stated that it is not sufficient to just state that all providers or that no providers are covered, nor to merely list those providers who are covered and state that any provider not listed is not covered. Campbell also emphasized that it is not sufficient for an exempt hospital to merely state in its FAP that it uses the look-back method to calculate amounts generally billed (AGB) and that the AGB percentage and calculation can be obtained on request. Rather, the hospital must either include the percentage and show the calculation in the FAP or describe in the FAP how that percentage and calculation can be accessed online. Implications Tax-exempt hospitals should take note of the IRS's continued dedication to reviewing and enforcing compliance with the Section 501(r) regulations, which are generally effective for tax years beginning on or after December 29, 2015. TE/GE has switched gears from modifying Form 990 Schedule H and helping tax-exempt hospitals understand the new rules. It is now using data from Form 990 Schedule H as a tool in exam case selection, identifying noncompliance or potential noncompliance and opening examinations based on that Schedule H data. This is evidenced by the 400 Section 501(r) exams of hospital organizations, and the 33 assessments of the $50,000 excise tax under Section 4959 for violating Section 501(r)(3)'s CHNA requirements. The IRS identifies Section 501(r) noncompliance based on reviews of hospitals' Forms 990 Schedule H and those hospitals' websites. Accordingly, exempt hospitals should ensure that their websites include: (1) their two most recent CHNA reports; (2) their FAP, FAP application, plain language summary of the FAP, and translations of those documents into the primary language of any significant populations with limited English proficiency; and (3) any other information required to be included in those policies or elsewhere on their websites. Exempt hospitals should also ensure that both the documents on their websites and the information in their Forms 990 Schedule H reflect compliance with the final Section 501(r) regulations. Please contact your Ernst & Young LLP professional for further information. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg. ———————————————
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