The IRS Is Checking Hospitals for Compliance with Section 501(r)

The IRS is hard at work reviewing hospitals for compliance with new requirements imposed by section 501(r) of the Internal Revenue Code. A recently released work plan of the IRS Tax Exempt and Government Entities Division reveals that as of June 30, 2016, the IRS had completed 692 reviews and referred 166 hospitals for field examination and that the agency will continue its section 501(r) compliance checks throughout the 2017 fiscal year. The issues for which exam referral have been made include failure to meet the requirements related to:

• Community Health Needs Assessments under section 501(r)(3).
• Financial assistance or emergency medical care policies under section 501(r)(4).
• Billing and collection under section 501(r)(6).

The final regulations implementing the section 501(r) requirements apply to a charitable hospital’s first taxable year beginning in 2016, meaning that hospitals have yet to complete a taxable year in which they are required to comply with these regulations. Nonetheless, the questions in the Information Document Requests (IDRs) that tax-exempt hospitals have been receiving from the IRS have been fairly granular in nature and appear to implicate the regulatory requirements. For example, with respect to financial assistance policies (FAPs), the IDRs have requested, among other items of information:

• An on-site tour of all signage and publications that are present in all hospital facilities regarding the FAP.
• A representative billing statement provided to a patient after discharge (which is presumably being checked for notifications about the FAP).
• A copy of any translated FAP documents and a description of the methodology used to ensure that any limited English proficiency populations served by the hospital organization have access to these translated documents.

The regulations under section 501(r) are very detailed, which means compliance “foot faults” can easily occur. Fortunately, the regulations allow hospitals to self-correct minor errors and omissions, and a hospital that promptly self-corrects is treated as never having failed to comply with section 501(r) at all. Hospitals that have identified and self-corrected compliance issues before receiving an IDR from the IRS are in a much better position to avoid an exam referral.