TIGTA Highlights Tax-Exempt Hospital Oversight

Tax-exempt hospitals continue to undergo scrutiny regarding whether they provide sufficient community benefit to justify their tax-exempt status under Section 501(c)(3). Over the past year, IRS audits of tax-exempt hospitals have intensified this focus by evaluating whether not-for-profit hospitals are meeting their Section 501(r) obligations to demonstrate that they provide sufficient community benefit to justify the considerable advantages of tax-exempt status. Failure to meet the community benefit requirements could lead to loss of tax-exempt status under Section 501(c)(3).

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report on the IRS’ oversight of tax-exempt hospitals. TIGTA found significant oversight challenges, including outdated IRS guidance and a lack of clear standards, as factors that make consistent oversight and enforcement difficult.

TIGTA report

TIGTA’s review of IRS oversight of tax-exempt hospitals, initiated at the request of concerned U.S. Senators, examines whether not-for-profit hospitals are meeting the requirements tied to their tax-exempt status. To qualify as tax-exempt, hospitals must satisfy three sets of requirements:

• General Section 501(c)(3) organizational and operational requirements
• The community benefit standard
• Additional requirements imposed by the Patient Protection and Affordable Care Act (PPACA)

The PPACA mandates that the IRS review each tax-exempt hospital’s community benefit activities at least once every three years. TIGTA concluded that, while hospitals largely are striving in good faith to comply with these rules, the lack of clarity of definitions and IRS guidance makes consistent compliance and IRS oversight difficult. The report recommends improvements in IRS oversight and guidance, as well as legislative changes.

Community benefit standard: Flexibility vs. clarity

The federal community benefit standard has not been clearly defined since its introduction in 1969. Revenue Ruling 69-545 provides examples of factors that demonstrate a hospital’s community benefit, but it does not explicitly define what level or type of community benefit is sufficient for tax exemption. While there have been calls to update the standard, TIGTA’s report cautions that imposing strict quantitative thresholds could be a one-size-fits-all approach that risks redirecting hospital efforts away from the most-needed community services and toward simply meeting the narrow metrics that count for tax purposes.

Ambiguity in financial assistance policies (FAPs)

Financial assistance for patients in need is a key component of community benefit. Section 501(r) requires tax-exempt hospitals to have a written FAP explaining eligibility criteria and how the hospital calculates charges for patients eligible for free or reduced-cost care. Beyond requiring hospitals to establish a FAP, however, the law does not specify income thresholds or minimum levels of charity care that hospitals must provide. TIGTA found that this ambiguity in eligibility criteria can lead to confusion for patients and inconsistent application of charity care across hospitals. TIGTA notes that any eligibility criteria should be clear, specific, and easily understandable to the average patient and that more explicit standards would not only benefit patients but also enable the IRS to more readily evaluate whether a hospital’s FAP meets legal requirements during its reviews.

IRS oversight changes and gaps in coverage

TIGTA’s report also examined how the IRS monitors hospital compliance with community benefit rules. Under the PPACA’s mandate, the IRS must review each tax-exempt hospital at least once every three years, a process the agency carries out through community benefit activity reviews (CBARs). In 2022, however, the IRS narrowed the scope of the CBAR process to focus only on the core community benefit standard requirement. As a result of this streamlining, the number of cases referred for further examination dropped by 98% between fiscal year 2022 and fiscal year 2024. To compensate, the IRS developed a new data-driven compliance strategy to flag at-risk hospitals using analytics. Using this approach, the IRS selected 45 hospital organizations for deeper examination as of late 2024.

TIGTA recommendations

TIGTA recommended that Treasury and the IRS consider a legislative proposal that would amend Section 501 to clearly define community benefit and consider legislation or regulations to establish minimum eligibility criteria for financial assistance policies for all tax-exempt hospitals. TIGTA further recommended that Treasury and the IRS update internal procedures to ensure all tax-exempt hospitals are identified and reviewed in the CBAR process or to require documentation of the reasons why certain hospitals might be excluded from the CBARs.

The IRS agreed with TIGTA’s recommendations and has committed to implementing corrective actions. Hospital leaders can expect to see the IRS and possibly Congress taking steps in the future to refine definitions, adjust reporting requirements, and bolster the oversight process.

Crowe observation

Some of these changes could include changes to Form 990, “Return of Organization Exempt From Income Tax,” Schedule H, “Hospitals,” that were identified in earlier studies by the U.S. Government Accountability Office.

Looking ahead

Hospitals should prepare for potential changes by continuing to document and demonstrate the substantial community benefits their organizations provide under the existing framework. Policymakers should consider a nuanced approach to the implementation of any corrective action – one that improves clarity and accountability while still allowing flexibility to meet diverse community needs.