IRS Begins Compliance Examinations Related to Affordable Care Act Provisions
In his letter, Koskinen noted that final regulations have been issued which will implement statutory reforms and that compliance activities have already begun which will help ensure whether or not tax-exempt hospitals are complying with these reforms. In addition, Koskinen reminded Grassley that, pursuant to the Affordable Care Act (“ACA”), the IRS is required to review, at least once every three years, the community benefit activities of all tax-exempt hospitals. To date the IRS has completed 2,482 of these compliance reviews for the three-year period 2014 through 2016.
Background
On December 29, 2014 the IRS released final regulations for Internal Revenue Code (“IRC”) §501(r) entitled “Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for Charitable Hospitals; Requirement of a §4959 Excise Tax Return and Time for Filing the Return”. IRC §501(r) was introduced under the ACA and includes requirements that hospital facilities must follow in order to maintain tax-exempt status under IRC §501(c)(3).
The ACA, signed into law by President Obama on March 23, 2010, introduced IRC §501(r) which includes the following four requirements that tax-exempt hospital facilities are required to comply with:
- Community Health Needs Assessment (IRC §501(r)(3));
- Financial Assistance Policy (IRC §501(r)(4));
- Limitation on amounts charged, to individuals eligible under the organization’s financial assistance policy, for emergency or other medically necessary care (IRC §501(r)(5)); and
- Billing and collection practices (IRC §501(r)(6)).
The final regulations were published in the Federal Register on December 31, 2015 and apply to a tax-exempt hospital facility’s taxable years beginning on or after December 29, 2015.
Current Developments
As outlined above, the IRS must review, at least once every three years, the community benefit activities of approximately 3,000 tax-exempt hospitals for compliance with IRC §501(r) which equates to approximately 1,000 reviews annually. In his letter to Senator Grassley, Koskinen noted that the IRS has completed 2,482 of these tax-exempt hospital reviews for the three-year period. During these reviews the IRS analyzed information including information returns filed by the tax-exempt hospitals, content included on hospital websites and other information that the IRS believes would help in identifying those tax-exempt hospital facilities with the highest likelihood of noncompliance with IRC §501(r).
Additionally, as noted in the Tax Exempt and Government Entities FY 2017 Work Plan issued on September 28, 2016, the IRS is continuing its review of hospitals for compliance with IRC §501(r). As of June 30, 2016 the IRS has reviewed 692 tax-exempt hospitals of which, as indicated by Koskinen in his letter, 163 have been referred for field examination as a result of these reviews. Reasons for the assignment of a field examination include, but are not limited to, the following:
- Lack of a Community Health Needs Assessment under IRC §501(r)(3);
- No Financial Assistance or Emergency Medical Care Policy under IRC §501(r)(4); and
- Lack of compliance with Billing and Collections Policy requirements under IRC
§501(r)(6).
Conclusion
In order for a tax-exempt hospital to be compliant with IRC §501(r) there is a significant amount of information that is required to be included on the hospital’s website and reported on its annual Form 990, Return of Organization Exempt from Income Tax, filing thereby making easier for the IRS to identify tax-exempt hospitals that are not complying. A referral for a field examination does not necessarily indicate that a hospital is lacking compliance with IRC §501(r). In many instances the IRS is gathering information to make an informed decision with respect to compliance with IRC §501(r). In the event of a field examination, hospitals should be aware that the IRS could potentially expand the scope of its review to other areas unrelated to IRC §501(r).
Senator Grassley was quoted stating that, “hospitals must earn their tax-exempt status, and the IRS is right to make sure they hold up their end of the deal”.
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