TIGTA concluded in a recent audit report that the IRS's definition of "community benefit" in Revenue Ruling 69-545, for purposes of the community benefit standard tax-exempt hospitals must meet to qualify for federal tax exemption, is too vague for the IRS to enforce and doesn't include sufficiently specific types or levels community benefit that must be provided.

Background

Tax-exempt hospitals are subject to the community benefit standard set forth in Revenue Ruling 69-545, and the requirements of IRC Section 501(r), enacted as part of the Affordable Care Act (ACA). (For background, see Tax Alert 2015-0029.) Tax-exempt hospitals must annually report both their community benefit and IRC Section 501(r) compliance to the IRS on Form 990, Schedule H, and their uncompensated care to the Centers for Medicare and Medicaid Services (CMS) on the Medicare Cost Report. These reporting requirements promote transparency; both Form 990 and the Medicare Cost Reports are available to the public and have subjected tax-exempt hospitals to heightened scrutiny.

Under the Affordable Care Act (ACA), the IRS must review the community benefit activities of each tax-exempt hospital at least once every three years. The Compliance, Planning, and Classification (CP&C) function of the IRS conducts these tri-annual community benefit activity reviews (CBARs). TIGTA reported that CP&C previously used a 207-question CBAR survey to identify noncompliance with the community benefit standard and/or IRC Section 501(r); based on these reviews, it referred 64 tax-exempt hospitals for examination in FY2022. Since CPYC condensed this survey to 17 questions in FY2023, it only referred one tax-exempt hospital for examination in FY2023 and 2024. In FY2024, the IRS developed a data-driven compliance strategy that it used to identify 45 tax-exempt hospitals for community benefit standard/IRC Section 501(r) examinations. As of November 2024, the IRS had started 36 of these examinations.

On August 7, 2023, a bipartisan group of Senators sent a letter to TIGTA requesting an evaluation of whether the IRS is effectively ensuring that tax-exempt hospitals comply with tax-exempt requirements and provide sufficient community benefit (See Tax Alert 2023-1425).

TIGTA explained in its report that the community benefit standard is laid out in Revenue Ruling 69-545 and consists of six criteria:

1. Operating an emergency room that is open to all, regardless of ability to pay
2. Maintaining a board of directors that is drawn from the community
3. Maintaining an open medical staff
4. Caring for all patients able to pay, including those who pay through Medicare and Medicaid
5. Using surplus funds to improve facilities, equipment and patient care
6. Using surplus funds to advance medical training, education and research

TIGTA explained in its report that the IRS weighs all of these facts and circumstances in considering whether a tax-exempt hospital meets the community benefit standard, and no single factor is controlling. Additional factors, such as whether a hospital provides financial assistance to those who are unable to pay, are also relevant in determining whether a hospital provides a benefit to the community.

TIGTA findings and recommendations

TIGTA found that the community benefit standard outlined in Revenue Ruling 69-545 lacks clarity and fails to explicitly define community benefit or include clear and specific criteria for what services and activities are sufficient to meet the standard. According to the report, the IRS stated that the standard's flexibility makes identifying noncompliance difficult because it does not specify any activity or level of charity care that is required. TIGTA also found that the IRS does not maintain a complete, accurate list of hospitals for which it conducts tri-annual CBARs.

The May 2025 TIGTA report makes the following recommendations for corrective action.

1. Treasury's Office of Tax Policy (OTP) should suggest a legislative proposal to amend IRC Section 501(r) to more clearly define "community benefit," and the level/amount of community benefit tax-exempt hospitals must provide.

TIGTA suggests that the IRS and OTP should revisit and update the community-benefit standard set forth in Revenue Procedure 69-545 — along with IRC Section 501(r) financial assistance policy requirements - to both update the definition of community benefit and establish a more specific level of charity care that hospitals must provide.

TIGTA recommended that the IRS Commissioner share the TIGTA report and recommendations with OTP, so that OTP may suggest a legislative proposal to amend IRC Section 501(r) "and any other required provisions of law" to clearly define community benefit and what level of community benefit is needed to meet the community benefit standard.

2. Treasury's OTP should suggest a legislative proposal to establish baseline criteria for financial assistance eligibility at tax-exempt hospitals.

While tax-exempt hospitals must maintain a written financial assistance policy (FAP) that includes certain information (see IRC Section 501(r)(4)(A)), IRC Section 501(r) does not explicitly outline eligibility criteria or the extent of assistance necessary to comply with the ACA. According to TIGTA, establishing specific requirements for financial assistance eligibility, such as using Federal Poverty Guidelines as a baseline, would reduce confusion for patients and enable the IRS to more effectively assess hospital compliance during compliance checks and examinations. Accordingly, TIGTA recommended that the IRS Commissioner share the TIGTA report and recommendations with OTP, so that OTP may suggest a legislative proposal to amend IRC Section 501(r) "and any other required provisions of law" to establish baseline criteria for financial assistance eligibility that tax-exempt hospitals would be required to use.

3. Update processes to ensure the proper identification and review of all tax-exempt hospitals subject to a CBAR

TIGTA determined that the IRS's list of hospital organizations to be reviewed as part of its CBARs was incomplete, as the list did not include 142 tax-exempt hospitals that must comply with IRC Section 501(r) and the community benefit standard. For instance, the IRS had excluded some newly merged or acquired hospitals, governmental hospitals recognized by the IRS as tax-exempt under IRC Section 501(c)(3), and certain church-affiliated hospitals from the CBAR list. The TIGTA report highlighted the importance of the IRS appropriately identifying all tax-exempt hospitals in order to comply with the ACA's CBAR requirement.

IRS actions

Following the release of this report, the IRS agreed with all of TIGTA's recommendations. The IRS plans to share TIGTA's recommendations with OTP to clearly define community benefit and establish baseline criteria for determining patients' eligibility for financial assistance. The IRS has also agreed to update its processes to ensure proper identification of hospital organizations subject to CBARs and to update its list of such organizations.

Implications

While TIGTA's report will have no immediate impact on tax-exempt hospitals, the IRS is likely to conduct more tri-annual community benefit reviews once it updates the CBAR list. TIGTA's recommended changes to the community benefit standard could take years to implement, assuming OTP and Congress follow the recommendations. TIGTA recommends the IRS ask OTP to submit a legislative proposal to Congress that would redefine community benefit and provide more specific requirements, rather than adding the community benefit standard update to the IRS's annual priority guidance plan. Whether Congress would be willing to wade into the murky waters of minimum community benefit requirements is unclear. Tax legislation recently passed by the House (the "One Big Beautiful Bill") and currently under consideration in the Senate, does not include any updates to the community benefit provisions or any other requirements specific to tax-exempt hospitals.

In the meantime, it is unlikely that the IRS would discontinue examining or performing compliance checks of tax-exempt hospitals while the IRS, OTP and Congress consider TIGTA's recommendations. It is also unlikely, given the IRS's own admission that it has difficulty identifying compliance with the community benefit standard, that hospitals' tax exemptions will be in jeopardy from potential noncompliance with the community benefit standard. The IRS is more likely to find noncompliance with IRC Section 501(r) requirements on examination.

The TIGTA report highlights the need for tax-exempt hospitals to ensure compliance with IRC Section 501(r) requirements and the community benefit standard, and to substantiate that compliance. Internal audits, discussions with tax preparers, and proper record keeping can strengthen tax-exempt hospitals' processes for reporting community benefit, improve compliance, and minimize the risk of IRS examination and tax or penalty assessment for noncompliance.