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:: Winds of Change
There definitely is a
breeze blowing through the halls of
nonprofit hospitals in the wake of an
IRS inquiry into the community benefit
standard. What remains to be seen is
whether that wind is a breath of fresh
air resulting from a new openness about
the good works that tax-exempt hospitals
do in their communities or the precursor
to a storm of heightened scrutiny by a
feared federal agency.
The issue gained
prominence in May when the Internal
Revenue Service sent a survey with
80-plus questions to 550 of the nation’s
largest nonprofit hospitals, asking
about uncompensated care, billing
practices for the uninsured, emergency
department policies, and salaries of top
executives. Hospitals were given a month
to complete the survey, but many asked
for an extension because of its complex
nature, said Melinda Hatton, chief
Washington counsel for the American
Hospital Association.
“We’re taking the IRS
at its word that it’s updating the 990
form to capture more information about
community benefits,” Hatton said of the
Return of Organization Exempt From
Income Tax that nonprofits file yearly.
“We understand that since the statute
was altered in 1969 to include more than
charity care to the community, there’s
only been anecdotal evidence on what’s a
community benefit. We believe it’s an
information-gathering exercise by the
IRS to update the 990 form.”
But why would a request
for information be coupled with a new
financial investigations unit to focus
on complex issues, wondered Alvin Brown,
a tax attorney and founder of the IRS
Forum, a nonprofit that aims to bring
transparency into how the agency deals
with taxpayers.
“It seems to me they’re
ramping up to do battle with the whole
industry,” said Brown, who worked for
the IRS for 27 years and believes the
agency is not fulfilling its mission. “I
regret to say this, but I don’t think
the agency is living up to its mandate
of integrity and fairness.”
Brown said complying
with an IRS request for activities
related to a nonprofit’s tax-exempt
status is not as easy as turning over a
few pieces of paper. If examining a
hospital, the IRS would look at the
governing body of the organization, the
privileges of the medical staff, the
qualifications of physicians, emergency
department practices, policies
surrounding the acceptance of patients,
any indirect benefit to employees, and
other practices.
And since audit
questions are open to interpretation,
“Examiners can be expected to raise lots
of issues and take aggressive positions
on those issues,” Brown said. “Strong
advocacy is important because many of
the issues are judgment issues. Just
because the IRS says something, that
doesn’t mean you can’t oppose them.”
If a hospital doesn’t
have an attorney with IRS-specific
experience, one should be retained,
Brown advised. He created the IRS Forum
so taxpayers can share their stories,
bringing transparency to dealings with
the federal agency.
“The IRS takes extreme
positions and gets away with stuff
because it can,” Brown said. “They’re
unbridled about what they do. They can’t
do the bad things they do in the
sunshine. I think it’s probably a good
idea for the industry to close ranks and
have a central place to report problems
and share information.”
Meeting the mission
While a nonprofit enjoys tax advantages
that a for-profit hospital doesn’t, part
of a nonprofit’s burden is investing the
time necessary to ensure that the
facility meets the letter of the law,
said Bill Rucci, a CPA and partner in
the 30-person CPA/business advisory firm
Rucci, Bardaro & Barrett in Malden, MA.
Rucci also sits on the board of Hallmark
Health System, which serves the northern
Boston suburbs with two acute-care
facilities.
“It comes down to a
nonprofit entity meeting its mission,”
Rucci said. “The IRS is the body that
determines whether a hospital is doing
that.”
When asked whether he
thought nonprofits were fulfilling the
community benefit provision of the tax
code, Rucci said he believed that most
hospitals have become sensitive to the
issue because of the past transgressions
of a few facilities that have been
publicized. Past issues included
overpaying for physicians’ practices,
paying more than fair value to
physicians for their services, and using
tax-exempt bonds in an inappropriate
fashion.
Sixteen states already
have some type of community benefit
provision, according to the Association
for Community Health Improvement,
founded in 2002 as a successor to three
other community health initiatives. The
association offers a wealth of community
benefit resources to hospitals,
including planning guides, IRS
guidelines, financial questionnaires,
and sample reports.
Hospitals, especially
those that already are reporting
community benefit information to state
agencies, should have few worries if an
audit is conducted, said Rucci.
Brown said the current
attention on community benefits for
tax-exempt hospitals can be attributed
to US Sen. Chuck Grassley (R-IA),
chairman of the Senate Committee on
Finance, the group responsible for tax
legislation and oversight. The
tax-exempt status of nonprofit hospitals
also was the focus of testimony last May
before the US House Ways and Means
Committee.
A Government
Accountability Office study presented at
the hearing found that government
hospitals generally devoted
“substantially larger” shares of patient
operating expenses to uncompensated care
than did nonprofit and for-profit
hospitals. While the nonprofit groups’
share was higher than that of the
for-profit groups in four of the five
states studied, the difference was small
relative to the difference compared with
the government hospital group, the GAO
found.
IRS records list about
7,000 nonprofit hospitals and healthcare
organizations. In the past decade, it
has audited 375 of them, a figure that
IRS Commissioner Mark Everson called too
low.
“The more hospitals use
(the questionnaire) to elaborate on
community health, the greater
understanding the IRS and the public
will have, and that’s a good thing for
everybody,” said AHA’s Hatton.
Tax attorney Brown from
IRS Forum has a very different
interpretation of IRS motives. “I think
this is a wake-up call to every
organization that provides tax-exempt
care,” said Brown. E
Grayson Walker,
grwalker@mindspring.com, is a freelance
writer based in Atlanta.
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