IRS Announces Stepped Up Reviews and Examinations for 501(r) Compliance

By Baker Newman Noyes April 9, 2016

The IRS Tax Exempt/Governmental Entities (TE/GE) Joint Council met on February 26, 2016. In this meeting the group confirmed:

• Tax-exempt hospitals will likely be targets of stepped up compliance checks and examinations as required by the Affordable Care Act.
• Annually, approximately 1,000 compliance reviews have been performed but this number will increase going forward.
• 30 IRS agents have been re-deployed to facilitate this function.
• Most of these stepped up reviews will be on a non-contact basis.
• The discovery of compliance lapses or the need for clarification may initiate direct contact or an actual examination.
• Examination of 501(r) compliance could potentially lead to examination of other unrelated issues.

Compliance with the 501(r) regulations was required for tax years beginning after December 29, 2015. It is important to note that the IRS gave hospitals a minimum of a year to transition to these new regulations. The proposed rules with which a reasonable good faith effort at compliance was to be made have been around a couple of years now and it does not appear that much leeway will be given if a hospital is not in compliance now, at least from the IRS perspective.

During the TE/GE meeting, Preston Quesenberry, Senior Technician Reviewer, IRS Office of Chief Counsel, was asked if hospitals that should currently already be 100% compliant but are scrambling to get there would be required to correct the deficiency and disclose the error or omission. His excerpted answer is as follows:

“…I think it’s going to depend on the particular circumstance or the particular non-compliance you’re talking about. You have to look at it and say is this a minor deal or is this a major deal? The fact that it’s the first year of implementation, I don’t think would really play into that analysis at all… just because it’s the first year of implementation that that automatically means you have reasonable cause or it’s inadvertent. There was more than a year transition period for the calendar year hospitals, longer for other hospitals…”

Because Schedule H of Form 990 requires affirmative answers to many of the procedures required by these regulations, red flags may occur if the answers indicate non-compliance. If Schedule H is the starting point for the referenced “non-contact’ reviews noted earlier, the answers might result in an actual contact review.

Hospitals should continue to work diligently to meet the compliance deadline for their tax year, taking into consideration the many requirements of 501(r). Remember there is a requirement to correct and disclose deficiencies as well as potential imposition of facility level excise taxes and, ultimately, loss of tax-exempt status.