When the Affordable Care Act became law in 2010, Congress added IRC Code Section 501(r) to codify how tax-exempt hospitals should be held accountable in their pursuits to improve the health of the communities that they serve. Many tax-exempt health care systems were already fulfilling the requirements set forth in Section 501(r), but the codification created the requirement to have formalized policies and procedures regarding billing and collections, emergency care and financial assistance, as well as conducting a community health needs assessment every three years. Each of these areas had very specific, nuanced requirements that, if you’re like most of Grant Thornton LLP’s health care clients, you’ve spent the better part of two years working through to make sure your organization is compliant.
One of the less focused-upon areas of Section 501(r) was that each tax-exempt health care system would be audited at least once every three years with regards to these Section 501(r) requirements.
Those audits have begun. We want to help you get ready.
The audit determination process starts with IRS agents conducting a compliance check.IRS audits seek compliance, publicly available information, board involvement
The audit determination process starts with IRS agents conducting a compliance check. During this phase, the agents review the organization’s website, Schedule H (Form 990), and other publicly available information to learn what they can about the organization’s compliance with Section 501(r). After these compliance checks, the agents select which health care system will be subject to a field or desk audit of their Section 501(r) compliance. We believe the agents will pick health care systems where compliance with Section 501(r) is more difficult to ascertain from these publicly available documents — those that require additional inquiries.
What is particularly interesting about the audits we are currently seeing is that they are not for fiscal years beginning after Dec. 28, 2015 (the time period specified in the final IRS regulations as to when compliance is required). The audits are for time periods going back as early as 2014; however, the IRS regulations were not in their final form until very late in 2014. While many tax-exempt health care organizations were familiarizing themselves with the rules and readying themselves to fulfill the Section 501(r) requirements, many tax-exempt health care organizations did not achieve full compliance until 2015 or 2016.
What we have found by reviewing IRS Information Document Requests is an emphasis on two areas: (1) the public availability of information, and (2) the involvement of an organization’s board of directors in Section 501(r) compliance. For example, the IRS seems particularly interested in not only seeing the organization’s Community Health Needs Assessment (CHNA) on the website, but the IRS wants to see the CHNA Implementation Policy posted as well. Further, the IRS is reviewing health care systems’ websites to see if financial assistance information is posted in plain language (preferably in multiple languages) so patients know how they can get help paying their bills or what programs are available to them.
With regards to the board, the IRS is interested in how involved the board was with instituting the policies required by Section 501(r), not just that the polices were eventually implemented. While representing our clients during these audits, Grant Thornton has been asked to provide board minutes documenting the discussion surrounding Section 501(r) implementation and CHNA development and results. IRS officials have gone on record repeatedly in the not-for-profit space that they believe there is a strong correlation between board involvement and compliance with the income tax laws. This correlation also seems to impute to the Section 501(r) space as well.
Make sure your health system is ready for an audit.What can a tax-exempt health care system do to make sure they are ready for their audit?
First and foremost, the system should ensure that they are in compliance with the current law. This is usually affirmed through a gap analysis that compares the current policies against the final regulations of Section 501(r). Any areas that need to be adjusted should be updated as soon as possible. Failure to comply with Section 501(r) can result in the hospital’s activities being taxable, or even losing overall tax-exempt status. After the gap analysis, organizations should go back in their records for the years 2014, 2015 and 2016 to prepare a package of information documenting compliance with Section 501(r). This includes not just the policies themselves, but areas showing compliance with the policy — copies of financial assistance pamphlets, printouts of websites showing information, photographs of signage around the hospital describing financial assistance options, contracts with collection agencies, scripts used by collections agents, sample mailings of billings sent to patients, etc. Further, for each of the policies, the organization would be wise to obtain copies of board meeting minutes indicating the board’s review and acceptance of these policies. If these minutes do not exist for prior years, develop policies that ensure that such minutes will be taken in the future.
Publish on your website information showing your organization’s fulfillment of its Section 501(r) responsibilities.Be visible with your compliance
We also believe it prudent to go on the offensive and put as much information as possible showing your organization’s fulfillment of its Section 501(r) responsibilities on your website and Schedule H. In this way, it may convince the IRS to keep the organization’s review at a compliance check or perhaps limit the scope of the audit. If your organization has gone to the trouble to ensure its compliance with Section 501(r), it should take advantage of the opportunity to make this information publicly available so that everyone knows that the organization is compliant.
Tax-exempt hospitals and their related health care systems would be wise to ready their documentation so that they are prepared for a Section 501(r) audit, the arrival of which is not a matter of if, but when.
Principal and Leader, Tax Services, Not-for-Profit Health Care
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Senior Manager, Tax Services, Not-for-Profit Health Care
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