February 20, 2018 Senate Finance Committee members ask IRS for information on tax-exempt hospitals In a recent press release, the Senate Finance Committee has published a letter sent to the IRS requesting information about the IRS's monitoring and enforcement practices relating to tax-exempt hospitals. Background Hospitals exempt under Section 501(c)(3) are subject to the general Section 501(c)(3) rules and Section 501(r), which was enacted as part of the Affordable Care Act (ACA) in 2010. While the Section 501(r) statute was effective upon ACA enactment, its corresponding regulations did not become final until 2014. Since the finalization of the Section 501(r) regulations, the IRS has committed significant resources to examination and compliance efforts in this area. The Section 501(r) regulations are generally effective for tax years beginning in 2016 (see Tax Alert 2015-0029), and impose a variety of requirements on Section 501(c)(3) hospitals, including: — Conducting a community health needs assessment (CHNA) at least once every three years — Making the CHNA publicly available on a website — Adopting an implementation strategy to meet the needs identified in the CHNA — Adopting a financial assistance policy and publicizing it, including posting it on a website — Limiting the amounts charged to individuals eligible for financial assistance — Making individuals aware of the financial assistance policy before engaging in certain collection actions Failure to comply with these requirements can result in revocation of a hospital's Section 501(c)(3) status, temporary taxation of the income from the hospital facility, and a $50,000 excise tax specific to CHNA failures. In determining whether to revoke Section 501(c)(3) status or impose tax, the IRS will consider all relevant facts and circumstances, including the significance of the failure, the reason for the failure, and any practices and procedures the organization had in place before the failure or safeguards it implemented afterwards. Minor errors or omissions that are: (1) either inadvertent or due to reasonable cause, and (2) corrected, are not treated as Section 501(r) failures. If an error or omission is more than minor, but not willful or egregious, it will be excused for purposes of revocation or facility taxation (but not the CHNA excise tax) if the hospital corrects the error or omission and discloses the issue on its annual information return (Form 990) in accordance with Revenue Procedure 2015-21. The IRS has publicly discussed Section 501(r) examination training and developments in recent panels (see Tax Alert 2017-1781), and the area is one of heightened focus for the IRS Exempt Organization exam function in recent years. The IRS TE/GE Work Plans for both FY 2017 and 2018 each make explicit mention of Section 501(r) being an exam priority and part of IRS Exempt Organization's compliance program focus (see Tax Alerts 2016-1742 and 2017-1643). Senate Finance Committee request The recent request to the IRS from Senate Finance Committee Chairman Orrin Hatch and US Senator Chuck Grassley focuses on several areas: — IRS evaluation of compliance with the CHNA requirement under Section 501(r)(3) — IRS guidance (or reasons for the lack thereof) to help hospitals define the community served and determine what needs are significant based on all the facts and circumstances — Specific Section 501(r)-related examination activity to date, including the number of exams to date and the corresponding results — Reasons for the revocation of the hospital described in PLR 201731014 (see Tax Alert 2017-1316) — Request for an update on the annual IRS report to Congress on private tax-exempt, taxable and government-owned hospitals Implications The Senate Finance Committee questions indicate that lawmakers continue to closely monitor IRS examination and enforcement activity relating to tax-exempt hospitals. Similarly, the IRS continues to dedicate examination resources to encourage and enforce Section 501(r) compliance by tax-exempt hospitals. All Section 501(c)(3) hospitals should continue to review their compliance with the Section 501(r) requirements, particularly those in the final regulations that require posting of documents on hospital websites. When conducting a review, hospitals should not look just at what their policies say, but should also examine whether they are being followed in practice (e.g., whether amounts generally billed (AGB) and provider list information are being updated according to prescribed schedules). The IRS reviews the Section 501(r)-related community benefit activities of each Section 501(c)(3) hospital at least once every three years. These compliance reviews include looking at the hospital's website and other publicly available information in addition to Form 990 data (see Tax Alert 2017-1035). If the IRS sees evidence of noncompliance with Section 501(r) as part of this review, it increases the likelihood that the organization will be referred for examination or a compliance check. Section 501(r) compliance remains a top-of-mind issue both in Congress and at the IRS. Continued internal review of related policies and procedures, as well as routinely monitoring compliance with Section 501(r), is vital for tax-exempt hospitals to maintain compliance with these provisions. 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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