Congress and the IRS Heat Up on Hospital Tax Exemption

Following the adoption of the Section 501(r) standards by Congress in 2010 and the IRS promulgation of final regulations in 2014, federal tax exemption issues for hospitals have been relatively quiet for several years.  The IRS implemented Schedule H to the Form 990 and hospitals have developed 501(r) compliance and reporting strategies.  The IRS has carried out its statutory mandate to assess compliance with 501(r) once every three years.  Hospitals have gone through IRS compliance audits, some more detailed than others and some with knowledgeable agents and others with agents new to such audits.

But there appear to be changes on the horizon as indicated by the following:

1. The Non-Profit Hospital Tax Exemption Transparency Act (H.R. 9080) was introduced in September 2022. It would create an expenditure threshold for each hospital based on the value of its federal, state, and local exemptions and require, as a condition for federal tax exemption, that hospitals spend an amount in excess of such expenditure threshold for training, education, or research to improve patient care; certain improvements to facilities and equipment; and free or discounted care pursuant to a financial assistance policy.
2. The House held a Hearing on Tax-Exempt Hospitals and the Community Benefit Standard on April 26, 2023.  In general, the focus of the oversight hearing was on ensuring that hospitals provide a level of community benefit commensurate with the tax savings.  At that hearing, the GAO noted the lack of standards for the IRS to oversee tax-exempt hospitals and presented a recommendation that Congress consider amending the Code to specify services and activities that Congress believes would provide sufficient community benefits.  The GAO also recommended that the IRS make adjustments to the Form 990 so that the information demonstrating the community benefits a hospital is providing are clear and can be easily identified by Congress and the public.  The GAO reported that the IRS agreed with this recommendation. 
3. On October 10, 2023, the Senate Committee on Health, Education, Labor & Pensions issued a Majority Staff Report titled “Executive Charity—Major Non-Profit Hospitals Take Advantage of Tax Breaks and Prioritize CEO Pay Over Helping Patients Afford Medical Care”. The report compared charity care to CEO salaries at several large health systems.  The report concluded:

“Non-profit hospitals are given tax-exempt status so they can serve the public good—not price gouge patients in dire need of health care. These hospitals cannot be permitted to continue to hide the availability of financial assistance programs or ignore patients’ eligibility for fundamental care while ruthlessly pursuing collections in favor of their bottom line. The disparities between the paltry amounts these hospitals are spending on charity care and their massive revenues and excessive executive compensation demonstrates that they are failing to live up to their end of the non-profit bargain.”

4. The IRS added the following compliance strategy to its Compliance Programs and Priorities webpage in March 2024:

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.”

5. In a letter dated April 4, 2024, nine Democratic House members asked the IRS for new regulations and guidance to clarify and strengthen 501(r). In addition, it requested increased enforcement efforts and issuance of a revenue ruling clarifying that hospitals are expected to provide charity care commensurate with their financial resources and providing guidance on the level of charity care hospitals must provide.   

What does all this mean for tax-exempt hospitals? 

• Hospitals can expect more changes to the Form 990 and more frequent and sophisticated 501(r) audits with broader data requests.
• Hospitals should evaluate programs to assure that all community benefit activities are included on Schedule H and that all such activities are properly quantified.
• Hospitals should evaluate and strengthen 501(r) compliance programs in order to be ready for IRS audits. But hospitals should also recognize that this isn’t just an IRS issue and the concerns at the federal level carry over to state taxes and public scrutiny of hospitals.
• Hospitals should assure that 501(r) compliance oversight is integrated into the hospital’s broader compliance program with executive and Board level reporting and oversight. This shouldn’t just be a finance function.