Hospital loses federal tax exemption after failure to conduct CHNA

The IRS recently revoked the tax exemption status of a hospital for failing to fully meet all the requirements to complete a community health needs assessment (CHNA), demonstrating that Internal Code section 501(r) requirements have teeth. The hospital was not identified by name but described as a rural critical access hospital which had dual standing as a tax-exempt organization and government hospital.

While this is the first revocation of a tax-exempt status that we have seen, there have been a number of instances of excise tax assessments of $50,000 for incomplete CHNAs. 

Requirements imposed on hospitals under IRC 501(r)

IRC section 501(r) regulations mandated by the Affordable Care Act added new criteria for not-for-profit hospitals to adhere to in order to maintain their tax-exempt status under IRC section 501(c)(3). The requirements under 501(r) include conducting a CHNA, having a compliant financial assistance policy, having policies limiting charges for emergency or medically necessary care and not engaging in extraordinary collection actions. The tax alert from March 2015 provides an overview of the new requirements imposed by the final regulations. Last year, the IRS Exempt Organization office completed 692 reviews and referred 166 hospitals for field examination.

In its revocation letter, the IRS stated to the unidentified hospital that they “failed to comply with the requirements of IRC section 501(r) to conduct a community health needs assessment, adopt an implementation strategy and make it widely available to the public.” In stepping up its enforcement actions, the IRS is sending a message to other tax-exempt hospitals not to overlook the compliance requirements under section 501(r).

The IRS is sending a message to other tax-exempt hospitals not to overlook the compliance requirements under section 501(r).

Hospitals may have overlooked final rules

Since the final regulations were released in December 2014, many hospitals have overlooked specific requirements imposed by these rules. With regard to a CHNA, the new rules require that a complete and comprehensive CHNA include the following components:

  • Solicit and take into account input received from persons who represent the broad interests of that community—including  those with special knowledge of or expertise in public health, representatives of medically underserved, low income and minority populations—in assessing and prioritizing the health needs of the community
  • Include an evaluation of the impact of any actions that were taken since the hospital facility finished conducting its preceding CHNA to address the significant health needs identified in the hospital facility’s prior CHNA
  • Make the most recent and subsequent CHNA reports widely available to the public by posting to the hospital’s website and providing a paper copy upon request
  • By the 15th day of the fifth month following the close of the taxable year in which the CHNA is conducted, adopt an implementation plan that (1) describes the actions the hospital facility intends to take to address the health needs, the anticipated impact of these actions and the plan to evaluate such impact; (2) identify the programs and resources the hospital facility plans to commit to address the health need; and (3) describe any planned collaboration between the hospital facility and other facilities or organizations in addressing the health need

Midcycle is an excellent time to review reporting compliance

While tax years 2017-18 are midcycle for most hospitals’ CHNA reporting requirements, hospitals are required to annually disclose on their Form 990s how they are addressing the significant health needs identified through their CHNAs. Now is an excellent time to review implementation plan strategies to ensure you are appropriately capturing outcomes to report on Schedule H and in the next CHNA.

Further supporting a midcycle review is the ongoing scrutiny of state and local municipalities of hospitals’ community benefit reporting. A number of high profile cases have demonstrated that local property tax exemption can also be revoked if hospitals cannot satisfactorily demonstrate their community benefit.

Baker Tilly’s recommendations          

Hospital personnel should review their compliance with section 501(r) and consider the following recommendations:

  • Work with a qualified consultant that has deep knowledge of CHNA requirements and tax laws
  • Be prepared to report community benefit outcomes in your next CHNA report
  • Revisit your CHNA process and community benefit reporting to ensure compliance and support of your tax-exempt status

The Baker Tilly CHNA team brings the experience of conducting CHNAs for more than 80 hospitals. Our team has deep healthcare industry experience in not-for-profit healthcare tax and includes seasoned professionals with outstanding credentials and significant experience in community health planning and community benefit reporting and an understanding of the rules under IRC 501(r) that articulate the tax implications of noncompliance. We’ll help you review your past reporting for a potential audit and ensure you’re well positioned to support your tax-exempt status.

For more information on this topic, or to learn how Baker Tilly CHNA specialists can help, contact our team.