For the first time, the IRS has publicized the revocation of a hospital’s Section 501(c)(3) status for failing to comply with Section 501(r). The revocation came after the hospital failed to conduct a community health needs assessment (CHNA), did to make a CHNA widely available to the public and failed to adopt an implementation strategy.
Section 501(r) Regulations
For some background on Section 501(r), here are the regulations it requires Section 501(c)(3) hospitals to make in order to maintain 501(c)(3) status:
- Conduct a CHNA at least once every three years
- Make the CHNA publicly available on a website
- Adopt a financial assistance policy and publicize it
- Adopt an implementation strategy to meet needs identified in the CHNA
- Make individuals aware of the financial assistance policy prior to engaging in certain collection actions
- Limit the amounts charged to individuals eligible for assistance policy before engaging in certain collection actions
Hospitals that fail to comply with these regulations can have their 501(c)(3) status revoked. Other potential penalties include a $50,000 excise tax specific to CNHA failures and temporary taxation on the facility’s income. Before deciding on any penalty, the IRS considers all relevant facts and circumstances, including how significant the failure was, why it occurred and any practices or procedures the organization had in place before the failure.
Provisions to mitigate these consequences can be found in the regulations and Revenue Procedure 2015-21. Minor errors and omissions are not being treated as Section 501(r) errors if they are inadvertent or due to reasonable cause and corrected. Errors and omissions that are not willful or egregious, but are more severe than minor are excused from revocation and facility taxation. This occurs only if the hospital corrects its error or omission and discloses the issue on its annual Form 990 information return, by Revenue Procedure 2015-21.
Governmental hospitals and those with separate IRS recognition of Section 501(c)(3) status may be exempt from taxation. These “dual-status” hospitals must comply with Section 501(c)(3) requirements, including Section 501(r), to maintain their Section 501(c)(3) status. Under the provisions of Revenue Procedure 95-48, they may not need to file the Form 990.
Facts of the Case
The revoked hospital, in this instance, was a dual-status hospital; and it obtained tax-exempt status under Section 501(c)(3) and is controlled by a local county governmental agency, which took control of the facility after the management company which had previously overseen the hospital ran into difficulties. The hospital prepared a CHNA to meet Medicare requirements rather than to comply with Section 501(r). The hospital’s CHNA was not widely available to the public via a website; however, paper copies were available on request. The hospital told the IRS it might have implemented some of the recommendations in the Implementation Strategy Report, but no implementation policy was drafted or adopted. The hospital, being a small and rural facility, said it did not have enough staffing to comply with Section 501(r) regulations. The hospital also said it “really did not need, actually have any use for, or want their tax-exempt status under Section 501(c)(3).” The hospital also claimed its tax-exempt status prevented it from becoming involved in Medicare reimbursement or payment arrangements. According to the hospital, it only kept its Section 501(c)(3) status in case of liabilities connected to the prior management company, which had initially obtained dual-status from the IRS.
The IRS Ruling
In concluding the hospital failed to meet the requirements of Section 501(r) and corresponding regulations, the IRS cited the facility’s failure to adopt an implementation strategy as required by Section 501(r)(3)(A)(ii). The hospital also failed to make the CHNA report widely available to the public, which is required by Section 501(r)(3)(B)(ii). The IRS said these failures were egregious and willful because the hospital said it lacked both the resources and will to follow the CHNA requirements.
Implications From the Ruling
The revocation letter is an example of Section 501(r) failures the IRS considers willful and egregious and not “excusable” under Revenue Procedure 2015-21. The lack of an implementation strategy and the inability to post the CHNA on a website were considered egregious and thus not eligible for forgiveness under Revenue Procedure 2015-21.
With the help of a tax expert, all Section 501(c)(3) hospitals should review their compliance with the Section 501(r) requirements, taking special notice of final regulations requiring facilities to post documents on hospital websites. At least once every three years, the IRS reviews the community benefit activities of each Section 501(c)(3) hospital. Those reviews include looking at the hospital’s website and other public information in addition to Form 990 data. If the IRS sees evidence of noncompliance with Section 501(r) in its review, this will likely cause the hospital to be referred for examination. As a part of this process, the IRS has identified over 300 hospitals for examination.
Dual-status hospitals must be aware the IRS is examining them for Section 501(r) compliance as well and may impose sanctions despite their status and absence of Form 990 data. This specific hospital’s self-professed lack of interest in retaining its Section 501(c)(3) status likely had a role in the IRS’s revocation. Some dual status hospitals often look to retain that status for employee benefits. Those facilities should review their compliance just like other Section 501(c)(3) hospitals.
Conducting thorough reviews and ensuring Section 501(r) compliance is crucial. When a hospital loses its Section 501(c)(3) exemption, it loses its ability to use certain employee benefit plans and can be subject to income, property and other taxes, while also unable to receive tax-deductible contributions or utilize tax-exempt bonds.
Contact Caroprese & Company today and have a Caroprese tax expert answer any questions you may have regarding Section 501(c)(3).