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Senator Grassley, Chairman of the Senate Finance Committee, has sent the IRS Commissioner a letter seeking additional information on the agency's enforcement of the tax-exemption requirements applicable to charitable hospitals. The letter follows a similar request sent by the Senator last year and expands the scope of the inquiry.

Background

Section 501(r) requirements

Hospitals that are exempt from taxation under Section 501(c)(3) are subject to the additional requirements of Section 501(r), which was enacted as part of the Affordable Care Act (ACA) in 2010. Although the Section 501(r) statute was effective upon enactment, the corresponding regulations were not finalized 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 (FAP) and publicizing it, including posting it on a website

 — Limiting the amounts charged to individuals eligible for financial assistance

 — Making individuals aware of the FAP before engaging in certain collection actions

Failure to comply with these requirements can result in revocation of a hospital's tax-exempt status, temporary taxation of the income from the hospital facility, and/or a $50,000 excise tax (specifically applicable to failures to complete a CHNA). In determining whether to revoke the hospital's tax-exempt 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.

2018 letter

In February 2018, Senator Grassley and then Senate Finance Committee Chairman Orrin Hatch sent a letter to the IRS requesting information about the IRS's monitoring and enforcement practices relating to tax-exempt hospitals. The 2018 letter focused on several areas, including IRS evaluation of compliance with the CHNA requirement under Section 501(r)(3) and specific Section 501(r)-related examination activity to date. For additional discussion, see Tax Alert 2018-0372.

New letter and expanded information request

The new letter notes that the IRS Commissioner responded to the 2018 letter. The response explained that the IRS annually reviews one third of the approximately 3,000 tax-exempt hospitals in the US by reviewing the organizations' Forms 990, websites and other information to assess the likelihood of noncompliance. Based on the assessed risk of noncompliance, the IRS may then subject the hospitals to either a compliance check or an examination.

Seeking "to ensure the Internal Revenue Code is enforced vigilantly," the new letter asks seven new questions (some of which include specific sub-questions).

1. How many tax-exempt hospitals has the IRS reviewed since the Commissioner's response to the 2018 letter?

 — Regarding this question, the letter asks for specific numbers of total reviews completed, various actions taken in each case (i.e., no action, compliance check, examination), and the number of cases of noncompliance for each of the various Section 501(r) requirements (e.g., CHNAs, FAPs).

2. How many cases that resulted in examinations has the IRS closed, and what were the results?

3. How many reviewed hospitals engaged in debt-collection practices involving patients eligible for FAPs?

 — Of such hospitals, the letter further asks, how many failed to publicize their FAPs widely, how many were engaged in extraordinary collection activities, and what specific actions did the IRS take with respect to noncompliant hospitals?

4. How did the IRS monitor compliance with the requirement for hospitals to make a reasonable effort to determine if a patient is qualified to participate in a FAP before taking extraordinary collection actions?

 — Specifically, the letter asks how many hospitals the IRS reviewed in this area, what the results of those reviews were, what kinds of efforts the IRS determined to be reasonable and which it considered unreasonable, and what corrective actions were taken by the IRS.

5. How has the IRS handled the 99 written advisories to non-profit hospitals about potential noncompliance that the IRS stated that it had issued in its earlier response to the 2018 letter?

 — Specifically, the letter asks if the IRS has followed up on the inquiries, how many of the hospitals the IRS has determined to actually be noncompliant, and what corrective actions were taken by the IRS.

6. The IRS reported in a May 2018 report to Congress that the total percentage of unreimbursed Medicaid expenses increased 20.6% over 2011–2014 while charity-care expenses decreased 16.5% over the same period: has this trend appeared to continue based on the 2015 data, and what explains this trend?

7. What is the status of the IRS's 2019 report to Congress on private tax-exempt, taxable, and government-owned hospitals?

The letter asks the IRS Commissioner to respond to the Senate Finance Committee regarding these questions by April 1, 2019.

Implications

The Senate Finance Committee Chair's new questions indicate that lawmakers continue to closely monitor IRS examination and enforcement activity relating to tax-exempt hospitals. Lawmakers appear especially concerned with the relative decrease in charitable care expenses despite an upward trend in healthcare expenses generally.

This second letter from Senator Grassley in as many years is evidence of the Senate Finance Committee's continued effort to oversee the implementation of Section 501(r), including questioning how the IRS plans to review and determine compliance with the various requirements of Section 501(r). The subject matter of the questions in this letter indicates a renewed focus on FAPs and the collections process for qualified patients. Hospital facilities subject to Section 501(r) should be certain that reasonable efforts are made to determine if a patient qualifies for assistance under the FAP and that any subsequent collection actions comply with Reg. Section 1.501(r)-4.

The letter also questions why the unreimbursed Medicaid expenses from tax-exempt hospitals have increased, while charity care expenses have decreased. The focus on charity care and Medicaid reimbursement is new for the Senate Finance Committee, and tax-exempt hospitals should monitor accordingly. This includes an awareness of the hospital's percentage of charity care and community benefit expenses as reported on Schedule H, Part I, Line 7 of Form 990.

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.

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