IRS ACA Compliance Checks Give Nonprofit Hospitals ‘Nudge'

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By Colleen Murphy

Oct. 4 — The Internal Revenue Service's continued spotlight on Affordable Care Act compliance is a good wake-up call for tax-exempt hospitals.

The agency completed 692 reviews of hospitals and nearly a quarter of those—166—were referred for field examination in fiscal year 2016. The scrutiny specifically related to the tax code Section 501(r) requirements imposed in the ACA, according to a Tax Exempt and Government Entities Division work plan released Sept. 29. The IRS is likely to keep up the focus for the next several years, and hospitals should check their own compliance now that the regulations are in full force, several attorneys with experience in nonprofit health care told Bloomberg BNA.

“We've entered into the enforcement phase now,” said Donald B. Stuart, a partner at Waller Lansden Dortch & Davis LLP. “We've just moved into this new phase and new stage of 501(r), which is going to be a little bit of a wake-up call for a lot of people.”

Hospitals were flagged for a field exam if they lacked a community health needs assessment, financial assistance and/or emergency medical care policy or necessary billing and collection requirements—several of the provisions hospitals must meet to comply with Section 501(r). The IRS will continue to review tax-exempt hospitals's 501(r) compliance going forward, according to the work plan (190 DTR G-2, 9/30/16).

“I think the IRS efforts here will give a nudge to some like ‘Uh oh, we could get that knock on the door, it could be us being audited next time around, and let’s go back and look,' ” said Linda S. Moroney, a partner at Drinker Biddle & Reath LLP. “The IRS has acknowledged again and again ‘Look, we don't have the resources to audit every organization out there,' so they appropriately publicize what it is they're doing with the hope it gets the maximum bang for the buck.”

New Phase

The IRS released final regulations (T.D. 9708) on community health needs assessments and financial assistance requirements on Dec. 29, 2014, solidifying two sets of proposed rules on the ACA requirements. The final regulations became effective for tax years beginning on or after Dec. 29, 2015, meaning calendar-year-end hospitals had to be in compliance on Jan. 1, 2016, and tax-exempt hospitals with a different fiscal year end had to be in compliance by Oct. 1 (249 DTR G-5, 12/30/14).

Because failing to comply could cost an organization its tax-exempt status, the requirements go to “the heart of the hospital,” said Stuart, who has trained IRS auditors conducting 501(r) reviews. And while some organizations may have hoped the rules would be repealed, “if anything, it looks like they're going to be here for awhile,” he said.

An audit could mean the IRS puts its microscope on other areas, like unrelated business income or excess benefit transactions—a reality hospitals must accept, he said.

Hospitals should also know they can make corrections for mistakes, which will put them “in a better light,” with the IRS, Stuart said. Certain failures won't be considered to violate 501(r) if the hospital properly corrects and discloses them, the IRS said in Revenue Procedure 2015-21, which builds on Notice 2014-3.

‘Still Learning.'

Being referred for an exam doesn't necessarily suggest noncompliance, but rather shows the IRS reviewer needed additional information from the organization, Exempt Organizations Director Tamera Ripperda said during a Sept. 29 press call.

Hospitals are also likely “still learning” the ins and outs of what it means to comply with the regulations, Sunita B. Lough, the Tax Exempt and Government Entities Division commissioner, said on the call.

“It sometimes takes awhile for folks to really get in the groove and learn what it means and start following,” she said.

‘Matter of Fairness.'

While some attorneys said the numbers of reviews and referrals seemed high, the agency's focus is in line with ACA requirements and is something Sen. Charles E. Grassley (R-Iowa) has specifically championed.

The IRS must review, at least once every three years, the community benefit activities of about 3,000 tax-exempt hospitals, according to the ACA. The agency reviews one-third of the population annually so the entire population is reviewed over a three-year period. As of June 27, the IRS had completed 2,482 compliance reviews for the three-year period including 2014, 2015 and 2016, according to a letter IRS Commissioner John Koskinen sent that day to Grassley.

In a review, the agency analyzes information returns, hospital websites and “other information designed to identify the hospitals with the highest likelihood of non-compliance,” Koskinen said in the letter. The agency would home in on Schedule H of the Form 990, Return of Organization Exempt from Income Tax, which requires hospitals to answer myriad questions about their financial assistance policies and community health needs assessment, attorneys said.

Hospitals must earn their tax-exempt status, and the IRS is right to make sure they “hold up their end of the deal,” Grassley said in an Oct. 4 statement to Bloomberg BNA.

“It’s a matter of fairness to the many individuals and businesses that pay taxes. There have been some serious abuses at tax-exempt hospitals, such as aggressively suing low-income taxpayers instead of helping them with health care. The IRS needs to pay attention to problems that are contrary to the spirit and letter of the law,” Grassley said.

Possible Pitfalls

The different elements of Section 501(r) all pose challenges for hospitals, the attorneys said.

The detail of the regulations and their prescriptive nature could mean “risk of foot faults on the part of many organizations,” though they have had several years to prepare, said Douglas Mancino, a partner at Seyfarth Shaw LLP.

“The threshold for levels of permitted noncompliance is really, really low in the eyes of the IRS, according to what they’ve published,” Mancino said.

Mancino has one client, a large health system, under an audit where 501(r) was raised as an audit term, though it was for a year prior to when the regulations were finalized, making it more of a “check list item” than a substantive review.

And even when the guidance seems straightforward, like with the community health needs assessment requirements, it is still labor-intensive, Stuart said. Hospitals must develop an implementation strategy and consistently document their actions, he said. A hospital could face a $50,000 tax for failing to meet the community health needs requirement, according to Section 4959.

Complying with the requirements is also a “public relations exercise,” which puts pressure on hospitals, Stuart said. Hospitals must make their community health needs assessment reports and financial assistance policies widely available online, according to the rules. Thus, watchdog groups, lawmakers, community members and unions will be watching to see how organizations comply, he said.

“They really need to understand that, because a lot of people are looking for this now,” Stuart said. “It's not just the IRS” that may come knocking on the door.

To contact the reporter on this story: Colleen Murphy in Washington at

To contact the editor responsible for this story: Meg Shreve at

For More Information

Text of the letter from Koskinen to Grassley is at

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