IRS Revokes Tax Exempt Status of "Small, Rural" Hospital: Five Reminders to Help Your Hospital Avoid the Same Fate
The IRS has revoked the 501(c)(3) tax-exempt status of a non-profit hospital for failure to comply with the requirements of 501(r) imposed by the Affordable Care Act in 2010. Specifically, the IRS stated that the hospital failed to complete and adopt an implementation strategy for its community health needs assessment (“CHNA”), and that it failed to make the CHNA widely available to the public. The IRS characterized these failures as “egregious” and “willful,” explaining that the hospital organization acknowledged during the audit process that it had neither the “will, financial resources, nor the staff to follow through with the CHNA process required under section 501(r) on a triannual basis.”
The revocation should serve as a wake-up call with respect to the IRS’s intent to enforce the requirements of 501(r). The IRS redacted the name of the hospital from the February 2017 Final Adverse Determination Letter it published on its website earlier this month, but the IRS’s Report of Examination indicates that the hospital is a “small, rural facility” and “Disproportionate Share Hospital” operated by a local county governmental agency and designated by Medicare as a “critical care access facility” for Medicare billings purposes. The hospital was no doubt serving an important public and charitable purpose, and had even conducted a CHNA. However, noble pursuits and half-measures are simply not sufficient to meet the requirements of 501(r) and maintain tax-exempt status. Before this revocation, Section 501(r) was generally enforced only by the imposition of a $50,000 excise tax for failure to meet the CHNA requirements. See 26 U.S.C. § 4959.
Most non-profit hospitals rely on the financial benefits of tax-exempt status, including exemption from income, property, sales and use taxes, as well as the ability to issue tax-exempt bonds. Further, tax-exempt status encourages charitable contributions to a hospital by making such donations tax-deductible. Accordingly, non-profit hospitals should ensure their continued qualification for tax-exempt status by taking the following actions:
Conduct a comprehensive, written CHNA with respect to each hospital facility every three years;
Formally adopt an implementation strategy to meet the community needs identified through the CHNA;
Make the CHNA report widely available to the public through the hospital website and on paper for public inspection upon request at the hospital facility;
Review the hospital’s financial assistance and emergency medical care policies for compliance with 501(r); and
Review the hospital’s billing and collection practices for compliance with 501(r).
See 26 U.S.C. § 501(r). For details on how to implement the 501(r) requirements, see the final regulations published by the IRS in 2014. 26 C.F.R. § 1.501(r)-0 et seq.