Exempt Organizations Advisory - IRS Releases Hospital Compliance Project Interim Report

By: Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com) 

On July 19, the IRS released an interim report on its tax-exempt hospital compliance project, which was initiated in May, 2006 with a questionnaire sent to nearly 600 hospitals.  (See Steptoe’s 5/25/06 EOA for details regarding the IRS’s compliance checks.)  The interim report summarizes data gathered from the survey regarding hospitals’ activities, governance, and expenditures.  (Executive compensation practices will be addressed in a later report.)

The report focuses on whether hospitals are meeting the community benefit standard, which is a requirement for hospitals to receive and retain tax-exempt status under section 501(c)(3).  According to the IRS summary, there is “considerable variation” in how hospitals report uncompensated care.  The accumulated data will be analyzed by the IRS to determine the extent to which it includes amounts for free or discounted care across various demographics.  

An IRS project team, which compiled the data, reviewed responses, and prepared the interim report, recommended a separate Form 990 schedule to report community benefit expenditures.  A draft Form 990 (released for public comment on June 14, 2007) includes a Schedule H, Hospitals, which would require reporting of charity care and other community benefits provided, along with information regarding charity care policies, revenue profile, bad debt expenses, and collection practices.  (Public comments on the redesigned Form 990 are due to the IRS no later than September 14, 2007.)  

The IRS team will continue to analyze the accumulated data, obtain additional research, and test the data.  This preliminary information is “an important first step in our ongoing review of community benefit and tax-exempt hospitals,” said Lois G. Lerner, director of the IRS Exempt Organizations division.