IRS Publishes Guidance for Tax-exempt Hospitals on How to Avoid, Remedy and Disclose IRC 501(r) Failures
The IRS recently issued two notices for tax-exempt hospitals and the for-profit companies that enter into joint ventures with these institutions. Of note, Notice 2014-2
provides that hospitals can rely on previously-issued proposed 501(r) regulations, and Notice 2014-3
provides a proposed revenue procedure (Procedure) that outlines how a hospital can correct and disclose 501(r) failures.
Failure to comply with the 501(r) rules puts a hospital’s tax exemption at risk.
Currently, the IRS reviews hospitals every three years for compliance with the 501(r) rules, which cover financial assistance policies, charge policies, billing and collections policies and the community health needs assessment and implementation requirements. Not meeting the requirements can result in taxation of all the hospital’s income as if it were unrelated business income.
Fortunately, for those hospitals that are still working to ensure compliance, previously-issued proposed regulations may help mitigate some risk. Certain proposed regulations provide that minor, inadvertent and not willful or egregious noncompliance may not result in revocation of exemption as long as there is disclosure and correction in accordance with IRS guidance. The Procedure provides such guidance and indicates that the failures must: 1) be due to reasonable cause, and 2) must be corrected as quickly after discovery as is reasonable given the nature of the omission or error. In other words, hospitals must begin correction and must disclose before being contacted by IRS. If the Form 990 for the year in which the failure is discovered is not yet due (with extensions), then the hospital needs to only have begun correcting the failure before the hospital is first contacted by the IRS for an exam.
For the time being, in order to gauge the effectiveness and practicality of the proposed Procedure, the IRS has requested comments, which it plans to consider and incorporate into future updates.
So, what are the takeaways here? In keeping with its own long-standing positions, the IRS is seeking compliance. In general, it tends to be more lenient when organizations show that they are taking measures to comply. If there is a reasonable basis for an organization’s redemptive efforts, and correction is made promptly, these transparent actions will likely go a long way toward helping organizations maintain their exemption. This means that hospitals should have their policies and implementation procedures reviewed and corrected where appropriate. Hospitals can start with a simple checklist; they may also want to have an outside group perform a “mock” audit, just to err on the side of caution.
Moving forward, what questions does your organization have surrounding its compliance to these new guidelines?
“IRS Publishes Guidance for Tax-exempt Hospitals on How to Avoid, Remedy and Disclose IRC 501(r) Failures,” originally appeared on The Nonprofit Standard, the blog of BDO’s Nonprofit & Education practice, that offers thought leadership on the accounting, tax, and management challenges faced by nonprofit organizations, along with commentary on sector trends and developments.