IRS Revokes Hospital's Tax-Exempt Status for Noncompliance with Affordable Care Act
Earlier this year, the Internal Revenue Service (IRS) revoked the tax exempt status of an unidentified hospital for failing to comply with the Affordable Care Act (ACA).
The hospital was a “dual status” hospital, meaning that it had both charitable tax-exempt status and governmental status. The hospital was informed of the adverse determination in February 2017 via an IRS letter, a redacted copy of which was recently made public.
Legal Requirements to Maintain Tax Exempt Status
The unnamed hospital at issue was a local, county-run facility that, according to the IRS letter, did not want to continue making the effort or spending the resources needed to comply with Internal Revenue Code Section 501(r)(3). Section 501(r), which was added to the Internal Revenue Code by the ACA in 2010, introduced four new sets of requirements each hospital must meet in order to maintain its 501(c)(3) tax exemption. Section 501(r)(3) requires a tax-exempt hospital to conduct a community health needs assessment ("CHNA") every three years and to adopt an implementation strategy to meet the community health needs identified in the CHNA. The hospital must also make the assessment widely available on the hospital’s website. Here is a link to our previous article that summarizes the CHNA requirements.
Penalties for non-compliance with §501(r)(3) include a $50,000 excise tax and the possibility of temporary taxation of income and revocation of tax-exempt status. In the case of compliance failures determined to be neither “willful” nor “egregious”, hospitals are given the chance to cure the failure through correction and disclosure procedures established in agency policy instructions. In this case, the IRS considered the violation to be “willful.”
In making its adverse determination, the IRS stated that “[Hospital’s] failure to meet the requirements of §1.501(r)-3 is considered willful. Especially in light of the fact that the organization expressed on several occasions that they did not need to be exempt under IRC §501(c)(3) and that their status at times actually got in the way of the ability to be involved in various Medicare reimbursement programs.”
Implications of the Action
Although this situation is somewhat unique, given that the hospital was a dual-status hospital, other nonprofit hospitals should take note that the IRS is actively auditing for compliance with §501(r). This includes requirements to perform a CHNA and, importantly, to make sure that assessments are coupled with implementation plans that are adopted and acted upon. Hospitals that conduct CHNAs also must make the CHNAs widely available by, among other things, prominently displaying them on their websites. Finally, dual-status hospitals must closely adhere to all of the requirements of §501(r) if they wish to maintain their 501(c)(3) status.
If you have any questions about this IRS action, or the requirements of §501(r) generally, please contact a member of our health care practice group.
This article has been updated from its previous version.
Jennifer has particular expertise in health law and she represents providers with emphasis in the areas of physicians, hospice, home care and long term care, including one of the country’s largest long-term care organizations. She has a vast array of experience in teaming with providers in the areas of regulatory compliance and contracts.View All Posts by Author ›
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Best Lawyers® 2020
Congratulations to the attorneys of the Health Care practice group at Foster Swift Collins & Smith, PC for their inclusion in the Best Lawyers in America 2020 edition. Firm-wide, 42 lawyers were listed. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation and as lawyers are not required or allowed to pay a fee to be listed; inclusion in Best Lawyers is considered a singular honor. Health Care practice group members listed in Best Lawyers are as follows:
- Gilbert M. Frimet, Southfield
- Richard C. Kraus, Lansing
- Gary J. McRay, Lansing
- Jack A. Siebers, Grand Rapids/Holland
- Jennifer B. Van Regenmorter, Holland
To see the full list of Foster Swift attorneys listed in Best Lawyers 2020, click here.