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The IRS released new details on its process for reviewing and reporting the community benefit activities of nonprofit hospitals.

Navigating health reform

New Details on IRS Reviews of the Community Benefit Activities of 501(c)(3) Hospitals

  • 10/29/2012

New Details on IRS Reviews of the Community Benefit Activities of 501(c)(3) Hospitals

An IRS official has provided new details on the process being used to review the community benefit activities of all hospitals subject to Section 501(r). After much speculation, we now understand more about how this IRS process works, and what it means for nonprofit hospitals.

The Patient Protection and Affordable Care Act of 2010 (PPACA) requires hospitals exempt under Section 501(c)(3) to comply with several new provisions under Section 501(r). These requirements relate to community health needs assessments and financial assistance policies and procedures. The same provision of PPACA require the IRS to review the community benefit activities of qualifying hospitals every three years and to report its findings to Congress annually. The first IRS report is due by March 23, 2015.

What is covered?

In its fiscal year 2012 Work Plan, published in February 2012, the IRS announced that it had already formed and trained a group dedicated to completing the community benefit reviews. The reviews include such topics as:

  • Compliance with the provisions of Section 501(r)
  • Levels of charity care provided
  • Bad debt expenses
  • Unreimbursed costs for services provided with respect to means-tested and non-means-tested government programs
  • Presence of a board of directors made up of a broad base of community members
  • Accessibility of the medical staff
  • A full-time emergency room that is open to all, regardless of ability to pay

Beginning in March 2011, the IRS has been using Form 990 and its Schedule H, other IRS returns, and public records to gather the desired information on nonprofit hospitals. One-third of applicable hospitals (currently 3,377 in total) will be reviewed each year. There is no indication of how the relevant information will be gathered from dual-status governmental hospitals that do not normally file a Form 990 or Schedule H.

No news is good news

These are being called “stealth” reviews because the IRS says no notice will be provided when the process will begin or end. The reviews are normally conducted at IRS facilities, rather than at hospitals, making planning and recordkeeping essential. A hospital will be notified if the IRS determines that further examination is warranted. As the old adage goes, “no news is good news.”

At this point it seems likely that the information gathered by the IRS will be used by the federal government in the future to further modify the tax-exemption standards for hospitals. If the government’s summary of hospital information is also released to the public, state governments could use it to modify their laws on exemption from income tax, property tax, and sales and use tax.

How we can help

Contact your CliftonLarsonAllen advisor if you are uncertain about your hospital’s compliance with Section 501(r). We can review and evaluate your policies and procedures, provide recommendations where appropriate, and assist in implementing any changes. You can also contact your advisor if you are uncertain about whether your community benefit activities are being optimally reported on Form 990 and Schedule H. We are even available to discuss your options for terminating your hospital’s 501(c)(3) status so Section 501(r) requirements would no longer apply.

Kurt Bennion, Health Care Engagement Director or 612-397-3072