Industry Insights

IRS Provides Correction & Disclosure Procedures for 501(r) Compliance Failure

March 2015
Author:  Brian Todd

Brian Todd



Health Care

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P.O. Box 1190
Springfield, MO 65801-1190 (65806)


The IRS recently issued Revenue Procedure 2015-21, which provides guidance regarding correction and disclosure procedures for tax-exempt hospitals so that certain failures to meet the Internal Revenue Code (IRC) Section 501(r) requirements will be excused. This revenue procedure made several changes to the draft revenue procedure provided in Notice 2014-3. It took effect March 10, 2015. 


IRC Section 501(r)(1) states hospital organizations will not be treated as exempt under Section 501(c)(3) unless they meet the following requirements:

  • 501(r)(3) – Community health needs assessment requirements
  • 501(r)(4) – Financial assistance policy requirements
  • 501(r)(5) – Limitation on charges requirements
  • 501(r)(6) – Billing & collection requirements

Final regulations under Section 501(r)(2) delineate what constitutes a failure to satisfy the requirements of Section 501(r). The IRS indicates a hospital facility’s omission of required information from a policy or report or an error in the implementation or operational requirements will not be considered a failure to meet a requirement of Section 501(r) if two conditions are met. First, the omission or error must be minor and either inadvertent or due to reasonable cause. Second, the hospital facility must correct the omission or error as promptly after discovery as is reasonable given the nature of the omission or error.

The final regulations also indicate compliance failures that are neither willful nor egregious will be excused if the hospital corrects and makes disclosures in accordance with future rules to be set forth. Revenue Procedure 2015-21 provides this guidance.

Revenue Procedure 2015-21

Revenue Procedure 2015-21 allows tax-exempt hospitals to follow certain procedures to correct and disclose any failure to meet a requirement of Section 501(r) that’s not willful or egregious.

It clarifies a tax-exempt hospital failing to satisfy the community health needs assessment (CHNA) requirements will be excused from the $50,000 excise tax under IRC Section 4959 only if the failure involves a minor omission or error corrected as discussed above. A more serious error that’s not willful or egregious and is corrected and disclosed under this Revenue Procedure may be excused for purposes of maintaining 501(c)(3) status, but not for purposes of the $50,000 excise tax. The Revenue Procedure provides two examples of minor omissions or errors.

Correction procedures under the Revenue Procedure include the following:

  • The hospital should restore all affected individuals to the position they would have been in had the failure not occurred.
  • The correction should be reasonable and appropriate for the failure.
  • The correction should occur as promptly after discovery as is reasonable.
  • The hospital should establish practices and procedures reasonably designed to facilitate Section 501(r) compliance.

Disclosure procedures under the Revenue Procedure include disclosing the following information on the hospital’s Form 990:

  • A description of the failure, including the type and cause of the failure, the facility where the failure occurred, the date of the failure and discovery and the number of occurrences
  • A description of the correction of the failure
  • A description of the practices or procedures revised or established to promote compliance

BKD has issued a series of Alerts on Section 501(r):

You also may watch these archived webinars for more information:

If you have questions regarding the final 501(r) regulations or this Revenue Procedure, contact your BKD advisor.

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