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Nonprofit Status Section 501r Presentation Speaker Laptops

The IRS has assembled a list of hospitals that appear to be out of compliance with 501(r) regulations and will soon begin in-depth audits of them.

Navigating health reform

IRS Audits Nonprofit Hospitals for 501(r) Compliance

  • Kurt Bennion
  • 4/6/2016

The Affordable Care Act requires an IRS audit at least every three years to ensure 501(c)(3) hospitals comply with section 501(r).

Compliance may require some costs, but preserving a hospital’s entire tax-exempt status is obviously of greater importance. These audits are on the way.

Several years ago, the IRS created a small group to conduct these initial compliance reviews. The group would review information already available via Form 990, Schedule H, and the hospital’s website. The IRS would only contact a hospital if there appeared to be noncompliance. 

During the annual meeting of the Tax-Exempt/Government Entities (TE/GE) Joint Councils on February 26, 2016, two high-ranking IRS employees indicated that the IRS has assembled a list of hospitals that appear to be out of compliance and will soon begin in-depth audits of them. Margaret Von Lienen, director of exempt organization (EO) examinations, and Tom Kane, TE/GE division counsel, provided the following information: 

  • In early March 2016, the IRS began training approximately 30 agents to conduct in-depth field audits of hospitals for 501(r) compliance. 
  • Hospitals will be chosen for field audits based primarily on the results of the initial compliance review. 
  • Whistleblower referrals will be considered when deciding whether to audit a hospital. 
  • Tax years that began in 2014 and after are eligible for field audits. 
  • During these audits, the IRS agent can expand the examination to include any other areas of potential non-compliance (e.g., unrelated business income taxes (UBIT), excess benefit, payroll tax issues).

This announcement coincides with the 501(r) final regulations that were issued in late 2014 and that take effect for fiscal years beginning after December 28, 2015. The final regulations provide the detailed requirements related to a hospital’s procedures, policies, and other documentation. Much of this information must be disclosed in Form 990 or on a hospital’s website, so a lack of compliance is fairly easy for the IRS to identify. 

Every 501(c)(3) hospital should invest the time and resources to make sure the organization is in complete compliance with 501(r). Compliance may require some costs, but preserving a hospital’s entire tax-exempt status is obviously of greater importance. These audits are on the way. 

How we can help 

CLA can help you correct compliance issues connected to Section 501(r). We offer a full range of 501(r) services, and can review and modify your policies, documents, and procedures for compliance. We can also help educate your board of directors on a variety of 501(r) issues, provide customized training, and recommend best practices so you can educate your personnel on day-to-day compliance requirements.