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IRS Provides Correction and Disclosure Procedures for Tax-Exempt Hospitals

IRS Provides Correction and Disclosure Procedures for Tax-Exempt Hospitals

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The Internal Revenue Service (“IRS”), with the release of Revenue Procedure 2015-21, provides guidance for tax-exempt hospital organizations with respect to correction and disclosure procedures to follow so that certain failures to meet the requirements of Internal Revenue Code (“IRC”) §501(r) may be excused for purposes of IRC §501(r)(1) and §501(r)(2)B). The Revenue Procedure is effective on and after March 10, 2015.


The Patient Protection and Affordable Care Act (“Affordable Care Act”), Pub. L. No. 111-148, 124 Stat. 119, enacted March 23, 2010 created IRC §501(r) which applies to tax-exempt hospital organizations and their hospital facilities. IRC § 501(r) established the following four requirements:

  1. Community health needs assessment;
  2. Financial assistance policy;
  3. Limitation on charges; and
  4. Billing and collection practices.

IRC §501(r)(1) provides that unless a hospital organization meets all of the requirements of IRC §501(r)(3) through §501(r)(6) that it will not be treated as an IRC §501(c)(3) tax-exempt organization. Additionally, IRC §501(r)(2)(B)(ii) states that “a hospital organization will not be treated as described in §501(c)(3) with respect to any such hospital facility for which the requirements of §501(r) are not separately met”.

Revenue Procedure Scope

Sections 6 and 7 of the Revenue Procedure specifically address the procedures which a hospital organization must follow in order to correct and disclose any failures  involving any omissions or errors with respect to IRC §501(r) compliance. As noted in the Revenue Procedure “A failure that is willful includes a failure due to gross negligence, reckless disregard, or willful neglect.  An egregious failure includes only a very serious failure, taking into account the severity of the impact and the number of affected persons. Whether a failure is willful or egregious will be determined based on all of the facts and circumstances. A hospital organization’s correction and disclosure of a failure in accordance with sections 6 and 7 of the Revenue Procedure is a factor tending to show that the failure was not willful.”

Section 6: Correction

Section 6 provides guidance with respect to the correction principles that must be followed by a hospital organization in these circumstances.  These principles include the following:

  • Restoration of affected individuals: the hospital organization should make the correction with respect to all affected individuals and should restore any affected individual to the position in which he or she would have been had the failure not occurred;
  • Reasonable and appropriate correction: the correction should be reasonable and appropriate for the failure;
  • Timing: the correction should occur as promptly after discovery as is reasonable given the nature of the failure; and
  • Implementation/modification of safeguards: if the hospital organization has not established practices or procedures (formal or informal) for its hospital facility that are reasonably designed to promote and facilitate each facility’s overall compliance with the requirements of IRC §501(r), the hospital organization should establish such practices or procedures as part of its correction.

Section 7: Disclosure

Section 7 provides guidance with respect to disclosures required to be reported by a hospital organization on its Form 990, Return of Organization Exempt from Income Tax, in the tax year in which the particular failure is discovered.  The disclosure must include a description of the failure, including type of failure, the cause of the failure, the hospital facility or facilities where the failure occurred, the date(s) of the failure and its discovery, and the number of occurrences. In addition, a description of the correction of the failure, including the method of correction, the date of the correction, and a description of how affected individuals were restored to the position they would have been in had the failure not occurred is also required as part of the disclosure.

In the event a hospital organization is not required to file a Form 990, it will be considered as having met the disclosure requirements associated with a failure discovered in a tax year if the organization makes such information widely available on a website by the date its Form 990 would have been due had the hospital organization been required to file one.


As outlined in the Revenue Procedure, the IRS will not treat a hospital organization’s failure to meet the requirements of IRC §501(r) as long as the failure(s) are not willful or egregious and are corrected as provided for under the Revenue Procedure.  Tax-exempt hospitals should utilize the guidance provided in this Revenue Procedure should they encounter any failures to meet the requirements outlined in IRC §501(r).

A copy of Revenue Procedure 2015-21 can be accessed at the following:


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Please contact a member of Withum’s Healthcare Services Group at healthcare@withum.com for further questions or assistance.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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