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By Laura Davison and Diane Freda
March 10 — Charitable hospitals committing and correcting minor errors and omissions don't need to disclose such mistakes using the reporting procedures required under the Affordable Care Act, the IRS said in new guidance.
The Internal Revenue Service clarified in Revenue Procedure 2015-21 that a willful and egregious failure “includes only a very serious failure, taking into account the severity of the impact and the number of affected persons.”
Organizations failing to comply with tax code Section 501(r)(3), which requires hospitals to annually assess community health needs and implement changes, will be subject to an excise tax under Section 4959, the IRS said.
Tax-exempt hospitals will still be required to correct and disclose the failure, the revenue procedure said.
The IRS considers minor and inadvertent errors—such as a financial assistance policy that is online only temporarily, or a policy that is obstructed temporarily—outside the parameters of the revenue procedure, if they are corrected upon discovery.
Practitioners took issue with the examples provided in the guidance, saying they are so trivial as to be useless to hospitals.
“They strike me as being ridiculously nitpicking,” Doug Mancino, partner with Seyfarth Shaw LLP, told Bloomberg BNA March 10. “If this is what the threshold for noncompliance is, it's not a lot of relief.”
Mancino said he expects a more realistic understanding of the complexity of the institutions the IRS is dealing with in formulating the examples, saying those given can't be the best examples the agency could have come up with.
Even the smallest hospital is a complex organization, he said, whether it's a 15-bed critical access care hospital or a large academic medical center.
“You can't have police walking up and down the hallways to enforce trivial things,” he said. “Stuff happens, people steal signs. People do things they aren't supposed to, inadvertently. Technological failures go on all the time.”
Mancino said the IRS may have been reacting to complaints from practitioners that previous guidance was overbearing and can now say it responded to the industry's concerns by adopting an example that was suggested by a practitioner.
Michael Regier, Atlantic Health System Inc.'s vice president for legal affairs, said he is sympathetic to the task given to the IRS in implementing Section 501(r). But he told Bloomberg BNA March 10 the revenue procedure will lead to an overabundance of disclosure.
“There's a danger zone here for exempt organizations, between what's a minor omission and what is something that is a willful failure,” he said. “The revenue procedure says that whether a nonprofit hospital has disclosed an error as specified in the guidance is going to go to the determination of whether the error is willful. What that will drive is a whole bunch of disclosure by exempt organizations of things the IRS wouldn't otherwise have thought is useful information or data.”
He also said the examples that have been provided are so minor that they may not even have needed to be stated. The “minor omission” definition could have addressed some situations that were a little more substantive, Regier said.
The revenue procedure says “sufficient disclosure” means disclosing omissions on the Form 990, he said. It must be done in the tax year the failure was discovered, and the failure must be described— including what type it was and how it was caused, as well as what facilities it affected and when they occurred.
The date the failure was discovered must also be disclosed, as well as how many occurrences and a description of the correction, the method and date of the correction and what procedures have been undertaken to ensure the omission won't happen again.
The revenue procedure did have one fan.
T.J. Sullivan, partner with Drinker Biddle & Reath LLP, said the procedure overall is helpful. “Whatever else the IRS may have clarified, they made it pretty clear that if you fail to conduct a community health needs assessment and adopt an implementation plan, you will not be able to escape the $50,000 excise tax under Section 4959, even if you subsequently correct and disclose.”
He also said it is good to have the clarification that dual-status hospitals—those that are public and recognized under Section 501(c)(3)—that are excused from filing Form 990 can disclose their failures and corrections on their website.
On financial assistance policies, the guidance said hospitals failing to meet financial assistance policy requirements must refund individuals the extra amount they were charged, “regardless of whether the harm suffered by the individual occurred in a prior year and regardless of whether such prior year is a closed taxable year,” the IRS said.
After a hospital commits a failure, it must determine whether the policies were in compliance under Section 501(r) and if they need to be modified to reduce the likelihood of that issue in the future.
If additions are needed to make the financial assistance policies or community health needs assessment compliant, the hospital should “widely publicize” the corrected version through community outreach or an “e-mail blast,” the IRS said.
Multiple errors of the same type should be reported in aggregate and estimate the cost and number of people involved.
Hospitals not required to file a Form 990, Return of Organization Exempt From Income Tax, should disclose failure on a website by the date the form is due. Section 501(r), added to the code by the ACA, required 501(c)(3) hospitals to meet new financial assistance standards and comply with assessed community health need requirements.
The revenue procedure is effective March 10.
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