Background
TIGTA’s review was initiated, at the request of four U.S. Senators, to assess the IRS’ oversight of tax-exempt hospitals to ensure that they are compliant with providing community benefits and satisfying the other requirements to maintain their favorable tax status.
Tax-exempt hospital requirements
In addition to satisfying the fundamental requirements for exemption under section 501(c)(3), tax-exempt hospitals must demonstrate that their promotion of health serves the community as a whole, rather than private individuals or parties. This community benefit standard is set out in Rev. Rul. 69-545, which provides the following six factors to consider, among other facts and circumstances:
- An open emergency room.
- A community board.
- An open medical staff policy.
- The provision of hospital care for all patients, regardless of their ability to pay.
- The use of surplus funds to improve facilities and advance medical care.
- The provision of financial assistance.
In addition, the Affordable Care Act (ACA), enacted in 2010, imposes four requirements on tax-exempt hospitals, as set forth in sections 501(r)(3) through (6):
- Conduct a community health needs assessment and adopt an implementation strategy every three years.
- Maintain a written financial assistance policy and an emergency medical policy.
- Limit charges for financial policy-eligible individuals for emergency and other medically necessary care.
- Set billing and collection limits and make reasonable efforts to determine if individuals are eligible for financial assistance before engaging in extraordinary collection efforts.
Monitoring hospital compliance
The ACA requires the IRS to review the community benefit activities of each tax-exempt hospital at least once every three years. The IRS fulfills this responsibility, in part, through conducting Community Benefit Activity Reviews (CBAR), where IRS agents complete a standardized survey designed to assess a hospital’s compliance based on publicly available data from Form 990 Schedule H, the hospital’s website, and other sources. CBAR surveys are completed without contacting the hospital and are used by the IRS to determine a subsequent compliance check or examination of the hospital is appropriate.
TIGTA’s findings and recommendations
The results of TIGTA’s review, which include the following four recommendations, underscore the impact of the current guidance’s limitations on the ability of hospitals and the IRS to ensure compliance with the statutory requirements.
Recommendation 1: Seek a legislative fix to clarify and modernize the community benefit standard
The report concludes that, despite the advantages of a flexible standard, the vague definition of community benefit makes it difficult for both hospitals and the IRS to determine if a hospital is providing sufficient community benefits to justify its tax-exemption. The report further expressed concerns that the health care industry has evolved significantly since Rev. Rul. 69-545 was issued and noted that the guidance could be modernized.
TIGTA recommended the IRS share the report with the Department of the Treasury Office of Tax Policy to consider a legislative proposal to amend relevant provisions of law to clearly and specifically define community benefit, including the level of services and activities that are sufficient to meet the community benefit standard in the current industry.
Recommendation 2: Seek a legislative fix to establish baseline criteria for tax-exempt hospital financial assistance policy eligibility
The report notes that while section 501(r)(4)(A) requires each tax-exempt hospital to have a written financial assistance policy with certain information regarding eligibility and methodology, the statute and regulations do not specify what constitutes adequate eligibility criteria or level of assistance. TIGTA notes that vague or unclear eligibility criteria can cause confusion for patients, result in inconsistent application of the requirements across different hospitals and make it difficult for the IRS to evaluate whether financial assistance policies meet the statutory requirements.
TIGTA recommended that the IRS Commissioner of the Tax Exempt and Government Entities (TE/GE) Division share its report with the Department of the Treasury Office of Tax Policy to consider a legislative proposal to amend relevant provisions of law to establish baseline criteria for tax-exempt hospital FAP eligibility.
Recommendation 3: Improve accuracy of selection procedures for IRS reviews of tax-exempt hospitals
The report notes that examination referrals from the CBAR process dropped 98% from fiscal year 2022 to 2024 as a result of the IRS significantly narrowing the focus of its CBAR survey questions in April 2022. TIGTA recognized that the IRS has implemented a compliance strategy for conducting examinations of tax-exempt hospitals to address the reduced oversight of the streamlined CBAR process. However, based on TIGTA’s own review of Form 990, Schedule H data, there were 142 tax-exempt hospitals that should have been included in the ACA-mandated review population, but were not so identified or reviewed.
TIGTA recommended that the IRS update its processes to ensure all tax-exempt hospitals subject to an ACA-mandated CBAR review are properly identified and reviewed.
Recommendation 4: Update IRS guidance regarding exclusion of certain governmental and church-affiliated hospitals
TIGTA found that not all hospitals subject to the requirements of section 501(r) were included in the IRS’s CBAR population. Specifically, certain hospitals that are not required to file Form 990–including governmental hospitals that have sought and obtained dual-status as an organization described in section 501(c)(3), as well as certain church-affiliated hospitals that are not required to seek formal recognition under section 501(c)(3)–were not evaluated by the IRS due to resource constraints.
TIGTA recommended that the IRS update its public guidance to include reasons for excluding dual status governmental units and certain church-affiliated hospitals from the statutorily mandated tri-annual reviews.
