Members of the US House of Representatives have called on Treasury and the IRS to strengthen and enforce financial assistance policy requirements and collections restrictions that apply to tax-exempt hospitals, just as the IRS appears to be increasing examinations in this area.

In a letter dated April 4, 2024, nine democratic members of the House ask the IRS for new regulations and guidance to clarify and strengthen Section 501(r) of the Internal Revenue Code. The Affordable Care Act introduced IRC Section 501(r) to protect low-income patients, increase the community benefit provided by tax-exempt hospitals, and distinguish exempt hospitals from taxable hospitals, by requiring exempt hospitals to:

1. Perform triennial community needs assessments
2. Adopt and widely publicize a financial assistance policy
3. Charge patients eligible for financial assistance no more than amounts generally billed to insured patients for medical services
4. Make reasonable efforts to determine a patient's eligibility for financial assistance before engaging in extraordinary collections actions (e.g., liens, garnishments, lawsuits, referrals to credit agencies) against that patient

In their letter, the lawmakers cite examples of tax-exempt hospitals that allegedly do not comply with IRC Section 501(r); for instance, hospitals that engage in aggressive collection practices and bill patients whose incomes are low enough to qualify for financial assistance.

Recommendations

The lawmakers make six recommendations for new regulations on, further guidance concerning, and stronger enforcement of IRC Section 501(r) and the community benefit standard for tax-exempt hospitals:

1. Make financial assistance policies more accessible and reduce the complexity of financial assistance applications
2. Prohibit the billing of "gross charges" to any patients
3. Ban harmful collections practices, such as wage garnishment or the denial of necessary care due to outstanding bills
4. Strengthen the "reasonable efforts" requirements for hospitals to determine financial assistance eligibility before pursuing collections activities
5. Increase enforcement activities, such as IRS audits and revocation of tax-exempt status, to increase accountability for non-compliant hospitals
6. Issue a revenue ruling clarifying that nonprofit hospitals are expected to provide charity care commensurate with their financial resources, and providing guidance on the level of charity care that tax-exempt hospitals must provide

The letter represents the latest in a series of letters from and reports by Congress over the past year calling for stricter standards and IRS enforcement of IRC Section 501(r) and the community benefit standard. For instance, in August of 2023, senators sent letters to the Treasury Inspector General for Tax Administration (TIGTA) and the IRS (see Tax Alert 2023-1425) urging evaluation and increased IRS oversight of tax-exempt hospitals, and expressing concerns about hospitals' compliance with the community benefit standard and IRC Section 501(r). Two months later, the Senate HELP Committee's report recommended that Congress establish a minimum level of charity care that all tax-exempt hospitals must provide, and require tax-exempt hospitals to provide charity care to all patients under a certain income threshold (e.g., 400% of Federal Poverty Guidelines).

Possibly in response to this congressional scrutiny and calls for increased enforcement of IRC Section 501(r) and the community benefit standard, IRS Tax-Exempt and Government Entities (TE/GE) added the following compliance strategy to its Compliance Program and Priorities webpage in March 2024:

"We will verify whether tax-exempt hospitals are complying with their statutory obligations under Internal Revenue Code Section 501(c)(3), including the community benefit standard, and Section 501(r). The treatment stream for this strategy is examinations."

Following the release of the new compliance strategy, EY has observed that IRS TE/GE Examinations agents have launched widespread and wide-ranging 501(r) and community benefit standard-related examinations of tax-exempt hospitals. The IRS's information document requests (IDRs) for these exams are extensive, including requests such as "Provide all Worksheets (1 to 8) and supporting records (financial and non-financial) used in the preparation of Schedule H" and "Provide a schedule (or other documentation) listing all financial assistance applications filed during the tax year." For at least several of these examinations, IRS agents have indicated that they plan to conduct on-site exams at the hospitals with teams of multiple agents.

Implications

This congressional scrutiny and increasing IRS enforcement of IRC Section 501(r) underscores the need for tax-exempt hospitals to evaluate and strengthen their compliance with IRC Section 501(r) and ensure they have adequate supporting documentation for the 501(r) information reported on Form 990, Schedule H.

The IRS has conducted triennial reviews of the community benefit provided by each tax-exempt hospital, as required by the Affordable Care Act, for nearly 10 years, by reviewing hospitals' Forms 990 Schedule H, websites, and other publicly available information. But until recently, the examinations and compliance checks triggered by these reviews have focused on 501(r) issues, not compliance with the community benefit standard of Revenue Procedure 69-545. Since IRS TE/GE established a new tax-exempt hospital compliance strategy focusing on both 501(r) and community benefit in March 2024, that approach has changed substantially. Now, IRS TE/GE Examinations agents are asking comprehensive community benefit-related questions and requesting detailed supporting documentation.

Given the possibility of increased examination around the community benefit standard, exempt hospitals should ensure they have adequate supporting documentation for their community benefit expense data reported on Schedule H. In addition, exempt hospitals should consider conducting a detailed review of their community benefit data reporting process to ensure they are capturing and reporting most if not all their community benefit. Increased community benefit numbers and percentages on Schedule H could minimize hospitals' risk of both being selected for an IRS examination and unwanted attention for not providing sufficient community benefit.

Despite the continued call for action to issue clarifying 501(r) guidance and strengthen the community benefit standard, it is unlikely the IRS will prioritize such additional guidance over the priorities identified in its Tax-Exempt and Government Entities Fiscal Year 2024 Program Letter issued in October 2023 (see Tax Alert 2023-1677) and its Accomplishments Letter released in January 2024 (see Tax Alert 2024-0350). It may take stronger congressional action (e.g., passage of legislation) to spur the IRS and Treasury to amend 501(r) regulations and/or modify or jettison its community benefit standard for tax-exempt hospitals.

———————————————

RELATED RESOURCES

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

———————————————