Tax News Update    Email this document    Print this document  

October 27, 2020

GAO recommends making the standards for tax-exempt hospitals' community-benefit compliance more explicit

In a September 20, 2020 report to Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ways and Means Chairman Keven Brady (R-Texas), addressing whether tax-exempt hospitals are meeting their community-benefit requirements, the Government Accountability Office (GAO) makes one recommendation for congressional action and four recommendations for the IRS.

The GAO report recommends that Congress draft language for the Internal Revenue Code to specify "what services and activities Congress considers sufficient community benefit," because adding clarity to the Code "could improve IRS's ability to oversee tax-exempt hospitals."

Further, the GAO report recommends that the IRS:

  1. Update Form 990, including Schedule H (used to report community benefits provided by tax-exempt hospitals) and its instructions to help ensure that a hospital's information demonstrating the community benefits it provides is clear and can be easily identified by the public and Congress
  2. Assess the benefits and costs, including tax law implications, of requiring tax-exempt hospital organizations to report community-benefit expenses separately for each hospital facility on Schedule H, rather than reporting these expenses collectively for the whole organization (as is done now), and take action when appropriate
  3. Establish a well-documented process for the IRS to identify hospitals at risk for noncompliance with the community-benefit standard, thus ensuring that the IRS consistently reviews tax-exempt hospitals' community-benefit activities
  4. Establish audit codes for identifying potential noncompliance with the community-benefit standard.

"Ensuring hospitals are able to meet community health needs is especially important at this time," the GAO report emphasizes, "as the COVID-19 response strains many of the nation's public resources."


Hospitals that are exempt from taxation under Internal Revenue Code (IRC, or Code) Section 501(c)(3) are subject to the additional requirements of IRC Section 501(r), which was enacted as part of the Affordable Care Act (ACA) in 2010. Final regulations under IRC Section 501(r) are generally effective for tax years beginning in 2016 (see Tax Alert 2015-0029), and impose various requirements on IRC Section 501(c)(3) hospitals, including:

  • Conduct a community health needs assessment (CHNA) at least once every three years
  • Make the CHNA publicly available on a website
  • Adopt an implementation strategy to meet the needs identified in the CHNA
  • Adopt a financial assistance policy (FAP) and publicize it, including posting it on a website
  • Limit the amounts charged to individuals eligible for financial assistance
  • Make 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, taxation of the income from the hospital facility, and/or a $50,000 excise tax (specifically applicable to failure 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.

Chairman Grassley has long questioned whether tax-exempt hospitals actually comply with their obligations to fulfill community health needs. (For background, see Tax Alerts 2020-1805, 2019-2215, 2019-1887 and 2019-0460.) Between 2010 and 2020, the IRS has not recommended that a hospital entity lose its tax-exempt status, even if the group failed to meet the community-benefit standard, according to the GAO report.

GAO report

Although the ACA established a community-benefit standard for tax-exempt hospitals, the GAO report emphasizes, "the law is unclear about what [community-benefit] activities hospitals should be engaged in to justify their tax exemption." The IRS has identified certain "factors that can demonstrate community benefits [emphasis added]," but these are merely examples or indicia, not requirements. The IRS currently cannot require hospitals to undertake specific activities to meet the community-benefit standard, and bases its compliance determinations on facts and circumstances, the report explains. "This lack of clarity makes IRS's oversight challenging," the report states. To solve this problem, the GAO report recommends that Congress add specific community-benefit requirements to the Code.

Turning to the IRS's role, the report finds the agency lacks "a well-documented process to ensure that [community-benefit] activities are being reviewed." Despite having referred almost 1,000 hospitals to its audit division between 2015 and 2019 for potential ACA violations, the IRS couldn't identify which, if any, of the referrals related to community-benefit issues (as opposed to ACA/501(r) issues). Upon analyzing IRS data, the GAO identified 30 hospitals that reported no spending on community benefits in 2016, seemingly indicating a community-benefit problem. This led the GAO to recommend that the IRS establish a well-documented process for identifying hospitals at risk for noncompliance with the community-benefit standard, including clear instructions for addressing community benefits in its ACA reviews.

The IRS's website describes the community-benefit standard in terms of six factors that indicate a hospital organization meets the standard:

  1. Operates an emergency room open to all, regardless of ability to pay
  2. Maintains a board of directors drawn from the community
  3. Maintains an open medical staff policy
  4. Provides care to all patients who are able to pay, including through Medicare and Medicaid
  5. Uses surplus funds to improve facilities, equipment and patient care
  6. Uses surplus funds to advance medical education, training and research

The ACA added four additional requirements for tax-exempt hospitals, in new IRC Section 501(r):

  1. Conduct a CHNA every three years
  2. Maintain a written financial assistance policy
  3. Set a limit on charges to patients (don't charge patients who are eligible for financial assistance more than the amount patients with insurance are charged for the same medical services)
  4. Set billing and collection limits (don't take "extraordinary collection actions" like filing a lawsuit against a person before determining whether the person is eligible for financial assistance)

IRS Tax Exempt/Government Entity division (TE/GE) officials told the GAO that they use two methods to collect information about exempt hospitals and enforce compliance — analyzing annual information returns (Form 990 and Schedule H, Hospitals) and conducting regular reviews of hospitals' community-benefit activities.

The GAO interviewed several categories of stakeholders in preparing its report. Representatives of the health care industry stated that the "IRS's community benefit standard does not ensure that the community benefits that tax-exempt hospitals provide justify their tax exemptions," in part because the standard provides examples but no requirements. Further, health care industry representatives pointed out that:

  • Hospitals could address some community-benefit factors in ways that might benefit the industry as a whole without helping their surrounding communities
  • Some of the community-benefit standard's factors might no longer be relevant (e.g., maintaining an open medical staff policy and accepting Medicare and Medicaid patients are now common among all hospitals, both taxable and tax-exempt)
  • Additional factors that could demonstrate community benefit are not included in the standard

In contrast, tax-exempt hospital stakeholders noted that the current community-benefit standard offers needed flexibility, as community-benefit needs vary widely across the country.

The GAO report emphasizes that a good tax system must be transparent and administrable. Concluding that the current Form 990, Schedule H "does not enable tax-exempt hospitals to demonstrate clearly for the public the extent to which they provide community benefits," the GAO recommends revising the form to "help IRS, Congress, and the broader public better understand the full scope of the community benefits a hospital provides and whether the benefits sufficiently justify a tax exemption."

Acknowledging IRS officials' explanation that tax-exempt hospitals must report community benefit expenses at the organizational level "because the IRS provides a tax exemption at the organizational level, not the facility level," the GAO recommends considering collecting information at the facility level. "Without doing so, IRS may be missing an opportunity to collect information that would more clearly and transparently demonstrate the benefits tax-exempt hospitals provide to the communities in which they operate," the report states.

Finally, the GAO report recommends that the IRS update the instructions to its agents for conducting its community-benefit activity reviews "to more clearly direct revenue agents on how to identify and recommend for audit tax-exempt hospitals at risk of providing insufficient community benefits."


This report from the Government Accountability Office underscores that the IRS is not the only party with an interest in ensuring tax-exempt hospitals' compliance with the community-benefit standard and ACA/501(r) regulations. As the COVID-19 response continues to place a strain on the nation's public resources, other organizations may join the GAO and the IRS in scrutinizing the activities of tax-exempt hospitals. For example, the IRS released a report to Congress earlier this year outlining, among other things, costs incurred by tax-exempt hospitals for community-benefit activities. The scrutiny regarding tax-exempt hospitals' compliance with the community-benefit standard is also developing at the state level as several states consider basing property tax exemptions on the level of community benefit provided.

With this heightened focus on the community benefit provided by tax-exempt hospitals, these organizations should continue ensuring that they properly document and report their community benefit expenses on Form 990, Schedule H and closely monitor their compliance with the IRC Section 501(r) regulations.


— For more information about EY's Exempt Organization Tax Services group, visit us here.


Contact Information
For additional information concerning this Alert, please contact:
Tax-Exempt Organizations Group
   • Terence Kennedy (
   • Steve Clarke (
   • Melanie McPeak (
   • Kristen Farr Capizzi (
   • Jack Miya (