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The IRS Is Checking 501(r) Compliance!


The Affordable Care Act (“ACA”) became effective on March 23, 2010, and added new requirements that tax-exempt hospital organizations must satisfy in order to be described in Internal Revenue Code (“IRC”) §501(c)(3).

IRC §501(r) imposed requirements on 501(c)(3) organizations that operate one or more hospital facilities (hospital organizations). Each hospital organization was required to meet four general requirements on a facility-by-facility basis:

  1. Conduct a Community Health Needs Assessment (“CHNA”) and adopt an implementation strategy at least once every three years – IRC §501(r)(3);
  2. Establish written financial assistance and emergency medical care policies – IRC §501(r)(4);
  3. Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy – IRC §501(r)(5); and
  4. Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual – IRC §501(r)(6).

Most Recent IRS Compliance Checks & Audit Statistics

As a result of the ACA, the Internal Revenue Service (“IRS”) is required to perform a desk review of the Form 990, Schedule H of each hospital at least once every three years.  If found to be non-compliant, the desk reviews are referred for audit.

In March of 2018, the IRS Tax Exempt & Government Entities Division (“TE/GE”) released its Fiscal Year 2017 Accomplishments Report (“Report”). This report provides a summary of TE/GE’s accomplishments within the last year with respect to the 2017 Work Plan. The report noted that during FY 2017 (October 1, 2016 – September 30, 2017), the Exempt Organization (“EO”) Division completed 1,193 Schedule H and IRC §501(r) reviews and referred 388 hospitals for field examination.

Additionally, in October of 2017, Geoff Campbell, an IRS TE/GE Exempt Organizations tax law specialist, spoke at the American Health Lawyers Association Annual Tax Issues for Health Care Organizations Conference (“AHLA Conference”). Campbell reported that “the IRS has opened more than 400 Section 501(r) exams of hospital organizations, over 200 of which have closed.” In addition, he noted that the IRS had made 33 assessments under IRC §4959, which imposes a $50,000 excise tax for violations of the Section 501(r)(3) CHNA requirements.

What are the IRS Compliance Checks focusing on?

Based on information released by the IRS in its TE/GE Report, as well as information obtained by virtue of Withum’s experience in representing various hospitals during IRC §501(r) compliance checks, we believe the IRS is focusing primarily on the public availability of required information with respect to the following:

CHNA & Implementation Strategy

Many IRS Information Document Requests (“IDR”) have requested both the most recent and previously conducted CHNA, as well as the corresponding Implementation Strategies. In accordance with the final regulations, every hospital facility must have its two most recently conducted CHNA’s widely available on their website. If the IRS is unable to find these documents readily available on the organization’s website, this will likely generate a compliance check for the hospital organization.

Per IRC §501(r)(3), it is not mandatory that hospital organization make their Implementation Strategy widely available on their website, and alternatively hospital’s may to choose to attach the implementation strategy to their annual Form 990 filing. However, based on our experience, we have noted that many of the IDR’s received from the IRS have questioned why the Implementation Strategy is not made widely available. As a best practice (and to potentially eliminate the chance of this request from the IRS) we recommend that hospital organization’s consider making their two most recent Implementation Strategies widely available on their website as well.

In addition, the IRS IDR’s often request evidence of adoption of these documents by the organization within meeting minutes of the board of directors. Some IDR’s have also requested the name of the hospital employee who is most familiar with the organization’s CHNA documents and process. Each hospital facility should ensure this information is readily available.

Financial Assistance & Emergency Medical Care Policies

The IRS is checking to ensure that all required documents (Financial Assistance Policy (“FAP”), Plain Language Summary and Financial Assistance Application) are widely available on the hospital’s website and translated into any required Limited English Proficiency languages.

In addition, the IRS has shown a particular interest with respect to the FAP’s Provider Listing. At the AHLA Conference, Campbell specifically mentioned that hospitals should be cognizant of the specific rules outlined in IRS Notice 2015-46. He also stated that “it is not sufficient to just state that all providers or that no providers are covered, nor to merely list those providers who are covered and state that any provider not listed is not covered”.

Limitation on Charges

Many IDR’s have requested that the hospital facility explain the basis for calculating the amounts charged to patients, essentially requesting their Amounts Generally Billed (“AGB”) methodology and calculation. This is largely due to the fact that the final regulations allow the hospital facility to either (1) include the AGB % in their FAP or (2) indicate that this information can be obtained upon request.

Campbell emphasized at the AHLA Conference that it is not sufficient for a hospital to merely state in its FAP that it uses the look-back method to calculate AGB, and that the AGB percentage and calculation can be obtained on request. He noted that the hospital must either include the percentage and show the calculation in the FAP, or describe in the FAP how that percentage and calculation can be accessed.

Billing & Collection Policy

The Final Regulations did not require that the Billing & Collection Policy be made widely available. However, many hospital systems choose to combine the FAP and Billing & Collection Policy. Those that do not may be more likely to receive an IDR from the IRS. This is predominantly due to the fact that many FAP’s (that do not include the Billing & Collection Policy) do not include the required information per the Final Regulations with respect to the actions that may be taken in the event of non-payment.

If the organization maintains a separate Billing & Collection Policy, the hospital’s FAP must explicitly state that the actions the hospital may take in the event of non-payment are described in a separate Billing & Collection Policy. The FAP must also explain how members of the general public may readily obtain a free copy of that Policy.

Field Examinations

IRS auditors are also performing on-site field examinations at various hospital facilities. The request for a field examination may be included on the original IDR received, or may be requested throughout the IRS Compliance Check. While on-site, the auditors are checking the hospital facilities to ensure that the required signage regarding the availability of financial assistance is conspicuously posted in various areas throughout the facility.


It is imperative that all tax-exempt hospital facilities confirm their compliance with IRC §501(r), as these organizations were required to be compliant in 2016. Additionally, certain items of IRC §501(r) should be updated at least annually. Accordingly, we recommend that all tax-exempt hospitals perform an IRC §501(r) readiness compliance update by December 31, 2018 in order to ensure continued compliance with these requirements.

Author: Hayley Shulman, CPA | hshulman@withum.com

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