At the end of 2014, the IRS finalized Treasury Regulations under Section 501(r) that clarify and elaborate on the requirements that hospitals must satisfy to qualify as tax-exempt charitable organizations. These requirements were enacted as part of the ACA in 2010, leading to the issuance of various notices and two sets of proposed regulations over several years and, eventually, one combined set of final regulations. Section 501(r) requires hospitals to engage in periodic community health needs assessments, to adopt and make widely available policies on financial assistance and emergency medical care, and to impose limitations on charges and billing and collection practices.
The ACA included a specific requirement that the IRS review compliance by tax-exempt hospitals. Ms. Hansberry and Ms. Von Lienen confirmed that the IRS has been conducting about 1,000 compliance reviews of tax-exempt hospital tax filings each year. They acknowledged that 30 IRS agents were reassigned from the Determinations to the Examinations function, commenting that many of these agents are very knowledgeable about exempt organizations tax law based on their Determinations experience and that some may be involved in hospital reviews.
Most of the stepped-up hospital reviews will be initiated on a non-contact basis; however, the discovery of compliance lapses or the need for clarification may elevate a taxpayer to a compliance-check contact or initiation of an examination. Examinations arising in this context likely will focus on the specific 501(r) issues identified as part of the compliance review of the hospital. At the same time, agents may expand the scope of the examination with approval of their manager if they become aware during the course of the examination of separate potential issues. Thus, an examination relating to Section 501(r) compliance may expand to touch a whole range of potential issues, such as those involving unrelated business income, excess benefit transactions, or political campaign intervention.
If you would like to discuss these developments or weigh your options if your organization receives communication from the IRS regarding Section 501(r) compliance, please reach out to a member of our Tax-Exempt Organizations team.