Tax-Exempt Status Revoked: Is Your Hospital’s Tax-Exempt Status Safe?

The Internal Revenue Service (IRS) recently reported the first revocation of a hospital’s tax-exempt status under the Internal Revenue Code (IRC) Section 501(r) requirements of the Affordable Care Act (ACA).  This announcement may strike fear in the hearts of hospitals throughout the nation; however, an understanding of the facts and circumstances is critical.  The fact pattern that resulted in the hospital’s revocation is unique in that the hospital was exempt both under Section 501(c)(3) and as a governmental hospital.  Though its exempt status is revoked under Section 501(c)(3), as a governmental entity, the hospital should continue to be exempt from tax, which is good news for the community it serves.

The Hospital’s Missteps

The IRS did not name the affected hospital; however, it did release information about the fact pattern that resulted in the hospital’s loss of exemption.  Upon review of Form 990, the IRS noted noncompliance and, therefore, commenced a full Section 501(r) compliance review of the hospital.  During the review, the executive management emphasized that the organization is a small, rural hospital that lacks the resources to conduct and publicize a full-scale Community Health Needs Assessment (CHNA) and create an implementation strategy to comply with the requirements of the ACA.  Additionally, executive management indicated on more than one occasion that they did not have a need, or a desire, to preserve the tax-exempt status of the hospital under IRC Section 501(c)(3).

The entity did prepare a limited CHNA to achieve Medicare designation as a critical care access facility, but not with a specific aim to comply with 501(r) in accordance with the ACA.  The CHNA was not posted on the organization’s website, though paper copies were available upon request.  The hospital did not develop an implementation strategy.

The IRS’s decision to revoke the hospital’s tax-exempt status, rather than impose the $50,000 excise tax penalty for failure to properly conduct and publicize a CHNA, was based, in large part, on the executives’ assertions that they do not intend to achieve or maintain compliance with 501(r) provisions going forward.  The IRS determined that the violations were egregious and not likely to be corrected.

Is Your Hospital Compliant?

The IRS is certainly “making a statement” with this revocation and has indicated it will continue to focus on hospitals’ compliance with Section 501(r).  It may be time for your hospital to consider a Section 501(r) compliance assessment.  To help you take the first steps in safeguarding your hospital’s tax-exempt status, consider the following questions:

  • Is your hospital’s CHNA current and compliant?
  • Is the CHNA located on your hospital website in a clear and conspicuous place?
  • Did your hospital prepare a written implementation strategy in tandem with the CHNA?
  • Is your hospital’s financial assistance policy (FAP) compliant with final regulations?
  • Is the FAP conspicuously posted on your hospital’s website in plain language?
  • Is the FAP available in alternate languages (if there is a significant portion of the hospital’s community that speaks a language other than English)?
  • Is the FAP readily available in paper form throughout your hospital facility, including admissions and the emergency department?

This list is not all-inclusive, and each hospital’s situation is unique.  If you have any questions about the recent IRS revocation, would like to perform a Section 501(r) compliance assessment for your tax-exempt hospital, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.

Debbie Ernsberger

Debbie Ernsberger


Amy DeLong

Amy DeLong

Senior Manager

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