Insights: Article

IRS Audits: Is Your Hospital Compliant with IRC Section 501(r)

By   Kim Hunwardsen

September 22, 2016

All hospitals exempt under 501(c)(3) are subject to the Internal Revenue Code (IRC) Section 501(r) rules. Hospitals must be in compliance with the final regulations by their tax year beginning after Dec. 26, 2015. As such, all hospitals (other than those with fiscal year ends between September and November) now need to be in compliance with the final regulations. 

These rules require them to:

  • Conduct a Community Health Needs Assessment (CHNA) every three years.
  • Adopt and widely publicize a financial assistance policy.
  • Ensure they do not charge individuals under financial assistance more than what is charged to individuals covered by other payers.
  • Adopt billing and collection processes.

The Internal Revenue Service (IRS) is in the process of auditing hospitals' compliance with these 501(r) rules. The audits are being conducted by a small group of agents who are looking at the hospital's Form 990 and website. If the IRS finds what appears to be noncompliance, they will contact the hospital for a more in-depth review of the requirements. These audits are part of the requirements Congress enacted in 2010 to measure compliance. Most of these audits will be conducted as desk audits rather than field audits. 

A number of hospitals have received notice of an audit to review compliance with the CHNA requirements. In many situations, these notices are occurring when the hospital does not have a CHNA report or associated Implementation Strategy easily accessible on their website. In some situations, the review has been limited to questions surrounding the community health needs requirements, and in others, they have extended to other components of 501(r). It's possible agents will look for financial assistance policies, financial assistance applications and plain language summaries of financial assistance policies on the hospital website as part of the review since all of these documents are required to be made publicly available on the hospital website (in addition to in the hospital facility). 

It should be noted that any hospital exempt under 501(c)(3) can be chosen for these reviews. As such, governmental hospitals who have "dual status" (e.g., they are exempt under both 115 and 501(c)(3)) are not excluded from these reviews, as the 501(r) rules do apply to them. Some governmental hospitals assume they are not subject to the 501(r) rules because they don't file Form 990. However, filing of Form 990 is not a determining factor of 501(c)(3) exemption since dual-status hospitals can obtain exemption from the filing requirements and still be exempt under 501(c)(3) and thus subject to the 501(r) rules.

All hospitals should ensure they have their CHNA report(s) and Implementation Strategy(ies) available on their website. For many hospitals, a second CHNA has either been conducted or is in the process of being conducted. The rules require a hospital to have reports from two assessments available on the website and in the hospital facility. In addition, hospitals should ensure their website has a copy of their financial assistance policy, financial assistance application and plain language summary. 

Governmental hospitals should confirm whether or not they have "dual status" and have obtained exemption under 501(c)(3). If they have dual status, they need to ensure compliance with the final regulations as discussed above. If they are not currently complaint, they should determine how to either become compliant with the rules or consider voluntarily terminating 501(c)(3) status. In order to make this decision, such elements as impact on donors, impact on benefit plans and benefit of the status must be considered. 

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