Tax Administration: Opportunities Exist to Improve Oversight of Hospitals' Tax-Exempt Status
Fast Facts
Nonprofit community hospitals can be tax-exempt if they:
Provide community benefits, e.g., run an emergency room that is open to all, regardless of ability to pay
Meet legal requirements in the Patient Protection and Affordable Care Act, e.g., set billing and collection limits
While the IRS can easily verify whether the legal requirements are met, it is harder to verify community benefits because the law isn't specific about which services qualify. Also, IRS can't demonstrate that it is consistently reviewing hospitals' community benefits.
We suggested that Congress consider clarifying the law and recommended ways to improve IRS oversight.
Highlights
What GAO Found
Nonprofit hospitals must satisfy three sets of requirements to obtain and maintain a nonprofit tax exemption (see figure).
Requirements for Nonprofit Hospitals to Obtain and Maintain a Tax-Exemption
While PPACA established requirements to better ensure hospitals are serving their communities, the law is unclear about what community benefit activities hospitals should be engaged in to justify their tax exemption. The Internal Revenue Service (IRS) identified factors that can demonstrate community benefits, but they are not requirements. IRS does not have authority to specify activities hospitals must undertake and makes determinations based on facts and circumstances. This lack of clarity makes IRS's oversight challenging. Congress could help by adding specificity to the Internal Revenue Code (IRC).
While IRS is required to review hospitals' community benefit activities at least once every 3 years, it does not have a well-documented process to ensure that those activities are being reviewed. IRS referred almost 1,000 hospitals to its audit division for potential PPACA violations from 2015 through 2019. However, IRS could not identify if any of these referrals related to community benefits. GAO's analysis of IRS data identified 30 hospitals that reported no spending on community benefits in 2016, indicating potential noncompliance with providing community benefits. A well-documented process, such as clear instructions for addressing community benefits in the PPACA reviews or risk-based methods for selecting cases, would help IRS ensure it is effectively reviewing hospitals' community benefit activities.
Further, according to IRS officials, hospitals with little to no community benefit expenses would indicate potential noncompliance. However, IRS was unable to provide evidence that it conducts reviews related to hospitals' community benefits because it does not have codes to track such audits.
Why GAO Did This Study
Slightly more than half of community hospitals in the United States are private, nonprofit organizations. IRS and the Department of the Treasury have recognized the promotion of health as a charitable purpose and have specified that nonprofit hospitals are eligible for a tax exemption. IRS has further stated that these hospitals can demonstrate their charitable purpose by providing services that benefit their communities as a whole.
In 2010, Congress and the President enacted PPACA, which established additional requirements for tax-exempt hospitals to meet to maintain their tax exemption.
GAO was asked to review IRS's implementation of requirements for tax-exempt hospitals. This report assesses IRS's (1) oversight of how tax-exempt hospitals provide community benefits, and (2) enforcement of PPACA requirements related to tax-exempt hospitals.
Recommendations
GAO is making one matter for congressional consideration to specify in the IRC what services and activities Congress considers sufficient community benefit. GAO is also making four recommendations to IRS, including to establish a well-documented process to ensure hospitals' community benefit activities are being reviewed, and to create codes to track audit activity related to hospitals' community benefit activities. IRS agreed with GAO's recommendations.
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should consider specifying in the IRC what services and activities it considers sufficient community benefit. (Matter for Consideration 1) | As of March 2024, Congress has not enacted legislation to clarify community benefit under the IRC. Additional clarity in the IRC about specific services and activities Congress believes would provide sufficient community benefits could improve IRS's ability to oversee tax-exempt hospitals. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should update Form 990, including Schedule H and instructions where appropriate to ensure that the information demonstrating the community benefits a hospital is providing is clear and can be easily identified by Congress and the public, including the community benefit factors. (Recommendation 1) |
As of March 2024, IRS has made minor adjustments to Form 990 Schedule H instructions to indicate that responses should include all of the community benefit factors. However, the changes are not sufficient to ensure that community benefit information is clear and can be easily identified by Congress and the public, as we recommended. For example, three of the factors are addressed through open-ended, narrative responses that are not part of the quantitative, machine-readable files that IRS releases to the public. A revised Form 990, Schedule H that enables tax-exempt hospitals to present community benefit information clearly, consistently, and comprehensively could help IRS, Congress, and the broader public better understand the full scope of the community benefits a hospital provides and whether the benefits sufficiently justify a tax exemption.
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| Internal Revenue Service | The Commissioner of Internal Revenue should assess the benefits and costs, including the tax law implications, of requiring tax-exempt hospital organizations to report community benefit expenses on Schedule H by individual facility rather than by collective organization and take action, as appropriate. (Recommendation 2) |
In August 2021, IRS qualitatively assessed the benefits and costs of requiring community benefit reporting on a facility-by-facility basis. The Exempt Organizations Director signed a memorandum accepting IRS's assessment of the advantages and disadvantages and the ultimate decision not to proceed. IRS provided additional information about this assessment in June 2022 that described its decision process. According to IRS's assessment, such reporting would impose greater burdens on tax-exempt hospitals and IRS with no tax administration benefit. Specifically, IRS determined that because the exemption is granted at the organization level, reporting community benefits at the facility level will provide no additional tax administration benefit.
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| Internal Revenue Service | The Commissioner of Internal Revenue should establish a well-documented process to identify hospitals at risk for noncompliance with the community benefit standard that would ensure hospitals' community benefit activities are being consistently reviewed. (Recommendation 3) |
In April and July 2021, IRS updated the guidance for reviews under the ACA Hospital Review group. This group performs compliance reviews of tax-exempt hospital organizations at least once every three years to determine if they are compliant with community benefit standard of Rev. Rul. 69-545 in addition to the requirements outlined in § 501(r). Those updates add instructions for employees to document case files with relevant facts and circumstances considered during their review that determine whether the hospital organization satisfies the community benefit standard for exemption. These actions will help IRS ensure it is effectively reviewing hospitals' community benefit activities.
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| Internal Revenue Service | The Commissioner of Internal Revenue should establish specific audit codes for identifying potential noncompliance with the community benefit standard. (Recommendation 4) |
In May 2021, IRS established an audit code in its Case Management System under Healthcare Issues 18010.000 for "Healthcare - Community Benefit Standard for Exemption." This will allow the IRS to identify cases in which compliance with the community benefit standard is an audit issue.
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