Senate Finance Committee members Elizabeth Warren and Chuck Grassley have asked the IRS, in a letter dated November 19, 2024, to increase its enforcement efforts to ensure nonprofit hospitals are providing an adequate amount of community benefit to justify their tax exemption under IRC Section 501(r).

According to the letter, the senators are concerned that some nonprofit hospitals are falling short of the requirement to "primarily benefit the community" to justify their tax exemption. The senators cited several recent studies that have found some nonprofit hospitals are "shirking their responsibility to provide charity care and engaging in abusive collections practices that harm their patients and communities."

Suggested areas of focus

Senators Grassley and Warren suggested four ways the IRS should strengthen and enforce regulations under IRC Sections 501(c)(3) and 501(r).

Increasing oversight of tax-exempt hospitals. The senators called on the IRS to increase its oversight of tax-exempt hospitals by enforcing existing community benefit requirements and enhancing enforcement mechanisms to ensure there are consequences for negligent noncompliance.

In particular, the senators recommend that the IRS increase the number of audits and reviews of tax-exempt hospitals, impose penalties on noncompliant hospitals and re-evaluate the tax-exempt status of hospitals that do not offer sufficient financial assistance, hinder access to financial assistance, or engage in aggressive collection actions.

The senators also called on the IRS to issue reports examining problems with nonprofit compliance and to partner with other state and federal enforcement agencies when audits identify potential violations of other state and federal laws.

Clarifying requirements for financial assistance policies. The IRS should establish clear standards for nonprofit hospitals' financial assistance policies and practices to ensure those patients who qualify for assistance under existing policies receive it, the senators said.

Prohibiting nonprofit hospitals from using aggressive collections practices. The senators also recommended that the IRS prohibit nonprofit hospitals' use of aggressive debt collections by requiring them to make comprehensive efforts to determine patient eligibility for financial assistance before initiating collections proceedings, while also conducting outreach to eligible patients in a clear and reasonable manner.

For instance, the senators suggest requiring nonprofit hospitals to screen patients for financial assistance eligibility before engaging in "extraordinary collection actions" (and not merely provide the opportunity to apply, as currently required by IRC Section 501(r)). They also recommend the IRS prohibit delaying or denying medically-necessary care due to outstanding medical bills.

Eliminating the community benefit standard and restoring the financial ability standard. The senators also recommend that the IRS reinstate previous guidance (Revenue Ruling 56-185), which required nonprofit hospitals to provide charity care to the extent of their financial ability. The financial ability standard was rescinded in 1969 and replaced with the current "community benefit standard" set forth in Revenue Ruling 69-545.

Such a change is needed to address the significant need for charity care from nonprofit hospitals, the letter said. The senators also recommend that the IRS issue guidance on when hospitals should assume patients are unable to pay and qualify for charity care.

IRS actions

Before this letter, the IRS had already increased its oversight and examinations of tax-exempt hospitals. Partly in response to continued 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 this 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 are conducting on-site exams at the hospitals with teams of multiple agents. Senators Warren and Grassley commended the IRS's plan to audit 35 nonprofit hospitals this year.

Implications

The letter from senators Warren and Grassley continues a years-long congressional effort to increase pressure on the IRS to crack down on nonprofit hospitals that some members of Congress believe are not providing enough charity care to justify their tax-exempt status. For instance, Senators Warren, Grassley and several of their peers on the Senate Finance Committee wrote the IRS in August 2023 expressing concerns about its enforcement of requirements for tax-exempt hospitals. In that letter, the senators asked the IRS to answer a list of questions so the committee could better understand the IRS and Treasury Department's oversight of nonprofit, tax-exempt hospitals.

The senators sent a similar letter in August 2023 to the Treasury Inspector General for Tax Administration (TIGTA) about the role of nonprofit hospitals and rising medical debt among American citizens (see Tax Alert 2023-1425). In response to this letter, TIGTA announced in its 2024 Annual Audit Plan that it intends to assess IRS oversight of tax-exempt hospitals to ensure "they are compliant with providing community benefits and other requirements."

The senators' letter reflects their concern with rising medical debt in the United States, and their belief that tax-exempt hospitals should take action to reduce this debt as a condition of retaining their tax-exempt status. The senators have also called for replacement of the existing community benefit standard with a new standard that would require exempt hospitals to provide more financial assistance. As stated in the letter, "the crisis of medical debt owned by hospitals in this country shows that the current standard is not working."

The increasing scrutiny by Congress, the press and state regulators places more pressure on the IRS to ensure that tax-exempt hospitals comply with applicable tax-exemption standards and increases pressure on those hospitals to provide more community benefit and financial assistance. It also highlights the opportunity for exempt hospitals to more fully and accurately capture and report on Form 990, Schedule H, the myriad types of community benefit they provide to their communities. Mock audits and community benefit process reviews can help exempt hospitals strengthen their processes for reporting community benefit, their compliance with existing tax law, and the community benefit story they convey to regulators, the press, watchdog groups and the general public.

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