TIGTA, Vague and Outdated Guidance Creates Challenges for Tax-Exempt Hospital Oversight

While tax-exempt hospitals appear (so far) to escaped serious direct congressional attention in that there are no provisions in the House reconciliation bill that directly target them, the U.S. Treasury Inspector General for Tax Administration (TIGTA) recently published a report titled Vague and Outdated Guidance Creates Challenges for Tax-Exempt Hospital Oversight. From the Highlights section:

What TIGTA Found

Revenue Ruling 69-545 outlines the community benefit standard applicable to tax-exempt hospitals and provides examples of six factors that may demonstrate a tax-exempt hospital’s community benefit. However, the vague definition of community benefit makes it difficult for both hospitals and the IRS to determine if hospitals are providing sufficient community benefits to justify their tax exemption. IRS management stated that the community benefit standard provides flexibility, but the lack of clarity makes oversight challenging.

Additional factors, such as whether a hospital provides financial assistance to those unable to pay, are relevant in determining whether a hospital is providing a benefit to the community. However, the Internal Revenue Code does not specify what eligibility criteria or level of assistance provided is adequate for a financial assistance policy to meet the statutory requirements. Vague or unclear eligibility criteria could potentially cause confusion for patients and inconsistent application of the requirements across hospitals.

In April 2022, the IRS revised the scope of its CBARs [Community Benefit Activity Reviews] to focus solely on the PPACA’s [Patient Protection and Affordable Care Act’s] statutorily required community benefit standard. As a result, examination referrals dropped 98 percent from Fiscal Years 2022 through 2024. To address the reduced oversight the streamlined CBAR process provides, the IRS implemented a compliance strategy that is intended to identify potential noncompliance by tax-exempt hospitals.

Using the IRS’s data, we performed an analysis of available filing information to identify tax-exempt hospitals potentially subject to the CBARs and compared it to the IRS’s population of tax-exempt hospitals. We identified 142 missing tax-exempt hospitals that the IRS should have included in its population but were not identified or reviewed. In addition, the IRS excluded 14 governmental unit and 13 church-affiliated hospitals from the population for other reasons.

What TIGTA Recommended

We made four recommendations including that the Commissioner, Tax Exempt and Government Entities Division, share this report and recommendations with the Department of the Treasury Office of Tax Policy to consider a legislative proposal to amend Internal Revenue Code § 501 and any other required provisions of law to define the community benefit standard and establish baseline criteria for tax-exempt hospital financial assistance policy eligibility. We also recommended that the IRS update guidance to include reasons for excluding dual status governmental unit and certain church-affiliated hospitals from the CBARs because they are statutorily mandated.

The IRS agreed with all four recommendations and plans to implement corrective actions.

Lloyd Mayer