IRS revokes nonprofit status from hospital under the ACA's 501(r) requirements for first time

The Internal Revenue Service has revoked the nonprofit status of a hospital for the first time since new charity care reporting requirements went into effect late last year.

The name of the hospital is redacted from the text of the tax status letter (PDF). The letter is dated Feb. 14 but was released on the IRS website earlier this month. An IRS spokeswoman also declined to name the hospital, according to an article from the Healthcare Financial Management Association (HFMA).

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The IRS deemed the hospital “egregious” for its failure to meet the requirements, concluding that it had “neither the will, the resources, nor the staff to follow through” with them. The reason for the revocation, according to the letter, is that the hospital did not make its community health needs assessment widely available to the public online, though it offered physical copies on request.

“The hospital indicated to the IRS that it might have acted on some of the recommendations included in the Implementation Strategy Report, but that a separate written implementation policy was neither drafted nor adopted,” according to the letter.

The hospital responded by saying that, as a small rural facility, it lacked the staff needed to keep up with the 501(r) requirements. It also said it had no need for the tax exemption and indicated that it believes it missed out on certain payment arrangements because of its 501(c)(3) status.

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The IRS reviewed 692 hospitals in fiscal 2016, which ended late last month, and of those, 166 were referred for a closer “field examination.” The increased scrutiny is specific to 501(r) mandates included in the Affordable Care Act, which require hospitals to formulate clear written financial assistance policies for patients and make reasonable efforts to determine whether patients are eligible for assistance prior to taking any collection actions.

The IRS is supposed to review each hospital every three years.

Although some industry experts are concerned that other hospitals may be vulnerable to IRS enforcement under the new requirements, Jan Smith, a tax senior manager in Crowe Horwath’s Healthcare practice, told the HFMA it's unlikely many hospitals will lose their nonprofit status. 

“If hospitals are making a good-faith effort to comply, I would be surprised if the IRS would revoke their tax status at this stage of 501(r) examinations,” Smith told the association.