IRS Signals Renewed Focus on Tax-Exempt Hospitals' Community Benefit and 501(r) Compliance

On March 18, the IRS Tax-Exempt and Government Entities Division (“TE/GE”) updated the Compliance Program and Priorities portion of its website. TE/GE added two new “Compliance Strategies,” issues that have been internally approved to identify, prioritize, and allocate resources, primarily through examinations. Of interest here is one under the heading “Exempt Organizations: Tax-Exempt Hospitals.” The new Strategy states:

“The focus of this strategy is on compliance with the Patient Protection and Affordable Care Act (PPACA). We will verify whether tax-exempt hospitals are complying with their statutory obligations under Internal Revenue Code Section 501(c)(3), including the community benefit standard, and Section 501(r). The treatment stream for this strategy is examinations.”

This renewed IRS focus is not surprising and is not occurring in a vacuum. In the last year, we have seen a few high-profile instances of state attorney general enforcement of charitable and community benefit expectations against nonprofit hospitals and health systems found not to be doing enough. This, in turn, has led to increased Congressional interest, and, at the state level, legislation clarifying standards for continued tax exemption.

For example, building on Senator Chuck Grassley’s (R-IA) long-time interest in this area, a bi-partisan group of four U.S. Senators (Warren D-MA, Warnock D-GA, Cassidy R-LA, and Grassley) wrote to the IRS last August complaining about hospital community benefit shortfalls, aggressive collection actions, and perceived lax federal oversight. In October, the Senate HELP Committee (Sanders I-VT, Chair) Majority Staff followed with a Report citing declining charity care and aggressive debt collection practices. For its part, the House Ways & Means Committee Subcommittee on Oversight held a hearing on April 26, 2023, at which a witness from the Government Accountability Office testified about their earlier report suggesting ways to improve oversight of hospitals’ tax-exempt status.

IRS oversight may have slowed after Treasury and IRS issued final regulations implementing Internal Revenue Code section 501(r) in 2015. IRS budget woes and challenges replacing experienced agents as they retire have been no secret. Compliance-minded hospitals and health systems should recognize the new IRS Compliance Strategy as inevitable--a renewed acknowledgement that enforcing community benefit and 501(r) requirements through examinations is a priority. Now would be an opportune time for Boards and executives to review their own level of compliance.

If you would like assistance in evaluating your compliance with community benefit and 501(r) expectations, contact T.J. Sullivan at 612-822-2306 or tsullivan@potomaclaw.com.

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