IRS’ Stepped-Up Enforcement Efforts. The IRS recently posted its first published letter revoking the tax-exempt status of a hospital due to failure to comply with section 501(r) of the Internal Revenue Code. (Revocation 2017-31014 at https://www.irs.gov/pub/irs-wd/201731014.pdf.) This revocation is the IRS’ stark reminder that the multi-faceted compliance requirements of 501(r), enacted in 2010 as part of the Patient Protection and Affordable Care Act (P.L. 111-148), are mandatory for tax-exempt hospitals.
The IRS letter is not entirely surprising given that IRS’ 2017 Workplan included 501(r) as an emerging area of focus, and is a result of its recent step up in auditing nonprofit hospitals for compliance in this area. The facts of this case were particularly egregious, as the rural, cash-strapped hospital admitted during audit that it did not attempt to comply with 501(r).  Nonetheless, the revocation was a particularly strong message sent by the IRS, which took the position that the failure to comply with certain 501(r) requirements was “willful,” thus resulting in revocation of exemption. Under section 501(r), Section 501(c)(3) hospitals are required to perform mandatory assessments of the healthcare-related needs of a hospital’s communities every three years (Community Health Needs Assessments (“CHNAs”)), and to follow detailed rules governing financial assistance policies, limitations on charges, and billing and collection. In addition to these federal requirements, hospitals must also comply with state charity laws, which in some cases may be more restrictive than the 501(r) requirements.
 According to the ruling, the hospital told the IRS during audit that it was a “small rural facility” and “had neither the financial wherewithal nor the staffing to devote to the specific requirements of Treasury Regulation § 1.501(r)-3 for conducting a proper Community Health Needs Assessment every three years.”
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