Since Internal Revenue Code (IRC) Section 501(r), Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return, was added to the IRC with the enactment of the Patient Protection and Affordable Care Act (ACA) in 2010, the IRS sought comments from the hospital community and issued numerous guidance in the form of notices, proposed regulations and final regulations. Since final guidance has been issued, the IRS has shifted its focus to enforcement.
In its Tax Exempt and Government Entities FY 2017 Work Plan, the IRS indicated that it continues to review hospitals for compliance with §501(r) as the ACA requires. The Work Plan also states that, as of September 30, 2016, the IRS completed 968 reviews of Schedule H filings and hospital websites and referred 363 of those hospitals (37.5 percent of hospitals reviewed) for field examination. In our experience, this enforcement trend has continued through the past nine months.
What’s Triggering These Exams?
There are a number of documents required by §501(r) to be made available on a tax-exempt hospital’s website, including the community health needs assessment (CHNA), financial assistance policy (FAP), financial assistance application, plain language summary of the FAP and billing and collection information. IRS agents are reviewing hospital websites and Schedule H filings from the Form 990, Return of Organization Exempt From Income Tax, for information relating to these documents. Any missing documents or red flags might trigger an examination.
What Questions Might the IRS Ask Under Examination?
Sample requests from the IRS are as follows:
- Provide a sample application and instructions for applying for financial assistance.
- Provide the basis for calculating the amounts charged to patients under the FAP.
- Provide written documentation supporting what actions the hospital organization may take in the event of nonpayment.
- Provide committee minutes describing the hospital organization’s actions in regard to widely publicizing the FAP as well as documentation supporting the publicity and plain language summary.
- Describe how the hospital notifies and informs patients of the FAP’s availability.
- Provide a copy of a representative billing statement provided to a patient after discharge.
- Describe the methodology used to ensure limited English proficiency populations served by the hospital organization have access to translated documents.
- Provide documentation that the hospital is in compliance with the final regulations under IRC §501(r)(3) regarding making the CHNA available on your website.
What Are the Potential Costs of an IRS Exam?
Even an IRS examination resulting in no changes can be a stressful process that absorbs internal resources gathering information and crafting responses to inquiries. We all know that agendas for board meetings or finance committee meetings are often lengthy. Adding another agenda item, such as an IRS exam, can take valuable time away from other strategic discussions at these meetings. Professional fees will be incurred if you engage professional advisors, such as accountants or attorneys.
Exams that don’t go well can lead the IRS to examine other areas of the hospital, such as payroll, employee benefits and unrelated business income. While exempt hospitals don’t pay income tax, with the exception of unrelated business income, failures to meet the CHNA requirements can result in a $50,000 excise tax. The most severe punishment for failing to meet the §501(r) requirements is revocation of exempt status.
How Can My Hospital Avoid a 501(r) Exam?
Every hospital should monitor compliance with §501(r) on an ongoing basis. This may be accomplished by self-assessments, internal audit procedures or consulting with an external advisor. At the very least, hospitals should ensure the appropriate documents are made available on their websites and the appropriate URLs are provided in the Schedule H of Form 990. Download our free checklist below to assist with an internal assessment of whether the appropriate documents have been made available.
For more detailed information regarding the content required in the various 501(r)-related documents and policies, contact your BKD advisor.