A bipartisan group of senators recently called for the IRS to investigate the tax-exempt status of nonprofit hospitals. What does this mean for hospitals, and what should you do to prepare?
Call for Investigation
In an open letter, Senator Dr. Bill Cassidy (R-La), along with Elizabeth Warren (D-Mass), Chuck Grassley (R-Iowa), and Raphael Warnock (D-Ga.). called for the Treasury Inspector General for Tax Administration (TIGTA) and the IRS to investigate the tax-exempt status of hospitals. The Senators cited reports that some care centers withheld essential care from those within their communities and therefore fail to meet the “community benefit” standard required of tax-exempt hospitals. Their letter called for the Treasury Department to not only evaluate the requirements of obtaining and maintaining tax-exempt status, but also to examine the IRS’ effectiveness of oversight.
Providing a Community Benefit is Required to Maintain Tax-Exempt Status
According to the US Government Accountability Office (GAO), the following three things are required for hospitals to maintain their tax-exempt status:
- Meet certain organizational and operational requirements
- Provide community benefits
- Meet patient protection and Affordable Care Act requirements
The “community benefit” standard is what the Senators have called into question.
In Revenue Ruling 69-545, the IRS identified six factors that they believe demonstrate when a hospital provides a community benefit:
- Operate an emergency room open to all, regardless of ability to pay.
- Maintain a board of directors drawn from the community.
- Maintain an open medical staff policy that is not limited to certain physicians.
- Provide care to all patients able to pay, including those who do so through Medicare and Medicaid.
- Use surplus funds to improve facilities, equipment, and patient care.
- Use surplus funds to advance medical training, education, and research.
Hospitals do not need to have all six characteristics to be considered tax exempt, as the IRS considers all the facts and circumstances to determine if a hospital provides enough of a benefit to the community to meet this standard. No one factor is determinative of the whole status.
Problem With the Community Benefit Standard
According to the Senators, reports suggest that due to the subjective nature of these standards, some hospitals engage in practices that may not be in the best interests of their patients or their communities. Some reports found that low-income patients’ wages were garnished, homes foreclosed on, or they were denied medical care based on payment history. In another report, researchers found that 77% of nonprofit hospitals spent less on charitable work than the estimated value of their tax breaks.
In 2020, the GAO investigated this problem. GAO analyzed IRS data and found that the IRS failed to provide adequate oversight of hospitals’ adherence to tax-exempt requirements, specifically to the community benefit standard. In this 2020 report, the GAO found that on the 2016 tax returns, 30 hospitals reported no spending on community benefits whatsoever, which could indicate noncompliance. Additionally, the GAO found the IRS lacked a well-documented process to ensure hospitals’ community benefit activities are even being reviewed.
In response to the GAO survey and their subsequent calls to action, the IRS made a few changes.
- The IRS made minor adjustments to the Schedule H instructions of Form 990 that reminds taxpayers to list all their activities that benefit the community.
- The IRS updated their guidance for performing compliance reviews. Employees performing these reviews must now document what facts and circumstances they considered when reviewing whether a hospital satisfied the community benefit standard.
- The IRS added audit codes that specify when a hospital is being audited for their compliance with the community benefit standard.
Unfortunately, these changes only touched the surface of a much larger issue. As an oversight and enforcement organization, the IRS does not have the authority to make changes to the tax law; only Congress can make those changes. In its current form, the community benefit standard is so broadly defined that it could be challenging for the IRS to provide adequate oversight to verify the community benefit standard is being met.
In their 2020 report, the GAO called for Congress to make changes. They urged Congress to draft new tax laws that specify what services and activities they consider sufficient to meet the community benefit standard. As of April 2023, Congress had not yet enacted legislation or provided clarity to help the IRS improve oversight.
Hospitals Going Forward
In their open letter, in addition to calling on TIGTA, the Senators encouraged the Treasury Department to evaluate the oversight of nonprofit hospitals’ tax-exempt statuses. If these agencies respond as we predict, it’s likely the IRS will pay closer attention to hospitals’ nonprofit compliance in the coming years. To get ahead of the curve, we suggest all hospitals document the ways in which your hospital provides a community benefit, aligning your activities with one of the six factors from Revenue Ruling 69-545. If you have any questions, contact a leader in LaPorte’s Healthcare Industry Group, and we can help guide you in ways to document your community activities on your tax return.