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:: IRS Putting Nonprofit Hospitals Under Microscope
IRS Putting Nonprofit Hospitals Under Microscope
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BY TRACY STATON
The IRS has lately been
asking hundreds of
nonprofit hospitals some
tough questions.
Over the summer, more
than 500 nonprofit
hospitals received
questionnaires that
delved deep into their
operations and executive
compensation.
The questions included:
How many individuals
received uncompensated
care? How much did the
hospital spend on such
care? If an insurer pays
less than the hospital
charges, is the
difference counted as
uncompensated care? Did
the hospital charge
higher prices to
uninsured patients than
to those with Medicare,
Medicaid or private
insurance? Did the
hospital’s emergency
room deny services to
any individuals who
request such services?
The survey landed on
hospital administrators’
desks just as the tax
agency has signaled a
desire to start auditing
more of the nonprofits
on their compliance with
tax regulations. At the
same time, some
Congressional leaders
have been pressing for a
new, more rigorous
definition of
“nonprofit,” one that
they say should weed out
hospitals that use
questionable accounting
practices to qualify for
special tax status.
“Too many do little to
nothing. Too often, it
seems that tax-exempt
hospitals offer less
charitable care and
community benefit than
for-profit hospitals,”
Iowa’s Sen. Charles
Grassley, a Republican
and chairman of the
Senate Finance
Committee, recently told
reporters.
With Sen. Grassley
urging on the IRS at
every step, says tax
expert Alvin Brown, you
can expect to see agents
respond by getting
overaggressive in
targeting nonprofit
hospitals.
“They take extreme
positions, not fair and
partial,” contends
Brown, a tax attorney
who has worked in the
office of the IRS Chief
Counsel. “These guys are
looking to put notches
in their gun belts.”
Up until the late 1960s,
hospitals were required
to provide charity care
as a way to qualify for
nonprofit, tax-exempt
status by the IRS. But
then the standards were
changed to a “community
benefit standard.” A
hospital could qualify
for the favored tax
status by offering up
community health fairs,
free disease screening
and medical training or
research activities. But
even hospitals have
disagreed on what should
be included or excluded
from the list.
Hospitals also have had
varying standards
regarding what would
qualify for charity
care. The Catholic
Health Association, for
example, does not
believe that hospitals
should be able to
include either bad debt
or losses on Medicare
services in their tally
of community benefits.
Medicare losses, notes
the CHA, can easily be a
reflection of a
hospital’s inefficiency.
The American Hospital
Association, meanwhile,
believes that both
qualify as legitimate
indications of a
community benefit
intended by the law.
For now, though, the
ball is in the IRS’s
court, and the level of
official activity has
been picking up
noticeably. A year ago
IRS commissioner Mark
Everson told a
congressional committee
that nonprofit hospitals
were one of a range of
nonprofit areas that
would be under increased
scrutiny from tax
officials. In
particular, he said, the
IRS was concerned about
the proliferation of
joint ventures between
nonprofit and for-profit
groups, which raised
serious issues about how
profits and losses were
accounted for. And the
IRS also intended to put
more executive
compensation packages
under the microscope as
well.
“We at the IRS are now
faced with a healthcare
industry in which it is
increasingly difficult
to differentiate
for-profit from
nonprofit healthcare
providers,” Everson said
in a May 2005 statement
to the United States
House of
Representatives’
Committee on Ways and
Means. “We regularly
find ourselves engulfed
in paper as we attempt
to discern whether those
in control of a
particular nonprofit
healthcare provider are
acting more as investors
for their own account or
as stewards of
charitable assets.”
Until now, nonprofit
hospitals have operated
largely free of IRS
oversight. As Everson
pointed out to Congress,
between 1995 and 2005
only some 375 audits
were conducted on
nonprofit hospitals ––
out of approximately
7,000 organizations with
that label.
That, he added, was
about to change.
With that forewarning,
Brown says that any
sensible nonprofit
should move fast to get
ahead of the
investigations now
headed their way.
“The first thing they
have to do is look at
their operations,” he
says. “The hospital
administrator is a
business person, not a
tax person. Doctors are
not tax lawyers. I’m
going to assume that
there’s an enormous
abuse of the standards.
That’s not derogatory …
people just don’t know.
What I would do is do a
checklist of issues and
go through those issues
and bring somebody in to
consult with them to
give them an opinion,
some idea of the
standards they should be
using.”
Then they should beef up
their community benefits
to make sure they can
pass an IRS audit.
Brown has also posted a
Web site —
www.irsforum.org — that
he hopes hospitals will
use to help share their
experiences.
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