United States: IRS Agrees To Timetable For Its Tax-Exempt Hospital Compliance Project

IRS officials have agreed to prepare an interim report that will include an assessment of how nonprofit hospitals are providing community benefit in exchange for tax-exemption. The report, due this summer, also will outline any actions the IRS determines necessary to address the community benefit standard. The IRS also has discussed the status of its audits of executive compensation at nonprofit hospitals.

Recently, the Treasury Inspector General for Tax Administration (TIGTA) issued a report of its review of the IRS' tax-exempt hospital compliance project and how the IRS intends to use the results of the project to address potential noncompliance in the industry. The IRS began its hospital compliance project in May 2006 with a questionnaire sent to 544 tax-exempt hospitals soliciting information on community benefit and compensation practices. The IRS generally agreed with TIGTA's recommendations for how the hospital compliance project will proceed this year and into 2008.

Executive Compensation

Since receiving responses to its hospital questionnaire, the IRS has initially focused the hospital compliance project on the practices and procedures tax-exempt hospitals use to compensate executives and other insiders. The IRS has indicated that it is now selecting hospitals and starting examinations related to executive compensation. These examinations are scheduled for completion by January 2008.

Still under analysis are the hospital responses to the IRS's community benefit questions. The IRS hopes to determine:

• "How tax-exempt hospitals believe they provide a community benefit in exchange for tax-favored status."

• "Whether the community benefit standard is still applicable in today's industry environment if these organizations operate in the same manner as for-profit hospitals."

• "Whether a legislative action would improve the IRS's ability to administer tax laws in the tax-exempt hospital industry."

The IRS indicated that if it finds that "hospitals are performing only minimum actions to meet the community benefit standard" in exchange for tax-exemption, the IRS will consider initiating examinations of hospitals.

The IRS also stated that information from the project could assist them in differentiating tax-exempt hospitals from for-profit hospitals. IRS recommendations could include regulatory changes or additional ruling guidance. It is possible that the IRS could issue a new revenue ruling promulgating a revised standard to differentiate nonprofit hospitals from for-profit hospitals.

The IRS agreed to provide an interim report on the progress of the community benefit portion of the compliance project, a description of the community benefit activities undertaken by hospitals that responded to the questionnaire, and an outline of its immediate next steps based on an assessment of the data. It is not known whether the IRS's interim report, scheduled for issuance in July 2007,

will be made public.

A final public report on the IRS's hospital compliance project is scheduled for issuance in September 2008. This report is expected to provide:

• an update on the community benefit standard since the issuance of the interim report
• a summary of the examination results related to excess compensation
• possible recommendations to improve future compliance by tax-exempt hospitals
• possible recommendations related to education and outreach efforts needed
• possible additional training for IRS personnel in compensation analysis for tax-exempt hospitals
• possible other compliance initiatives/projects for the tax-exempt hospitals industry.

TIGTA also requested that the IRS develop plans to prepare a separate final report on community benefit if the IRS's community benefit review and actions will not be completed in time for inclusion in the final report. Although the IRS noted that it is too early in the process to determine if a supplemental report will be needed or what the precise next steps will be, it agreed to issue a supplemental report on community benefit, if necessary.

The TIGTA report is available online at the U.S. Treasury Department web site.