Tax-exempt hospital compliance with sec. 501(r): no violation is too small to ignore.

• Author: Michalowski, Michelle

On Dec. 29, 2014, the IRS issued final regulations under Sec. 501(r) regarding exemption requirements for nonprofit hospitals (T.D. 9708).The IRS supplemented the final regulations in early March 2015 by Rev. Proc. 2015-21, which provides guidance on correction and disclosure for certain failures to meet the Sec. 501 (r) requirements. Tax-exempt hospitals must generally be in compliance with the final regulations for tax years beginning after Dec. 29,2015, for their hospital facilities to remain exempt from federal income tax.

The final regulations establish detailed procedural and process requirements in four areas:

* Financial assistance policies (FAPs);

* Amounts charged to FAP-eligible individuals;

* Billing and collection practices; and

* Community health needs assessments (CHNAs).

These requirements affect almost every aspect of a tax-exempt hospital's operations, including patient intake, financial counseling, the emergency room, information technology, billing, collections, public relations, community outreach, finance and accounting, legal, and tax reporting. Noncompliance can trigger sanctions ranging from a simple correction of a minor error to, in the most extreme cases, revocation of exempt status. This item focuses on what a facility must do when a violation occurs.

With such detailed rules and so many hospital facility employees involved in their implementation, even at the most careful facility something can go wrong. The current guidance makes clear that no violation is too small to be ignored. Even violations some might consider trivial--such as signage briefly falling off a wall or a patient's accidentally being overcharged by $2--are significant enough to be addressed.

Responding to Violations

A tax-exempt hospital must identify every Sec. 501(r) violation and ensure that each violation is addressed by properly trained staff responsible for Sec. 501(r) compliance. The staff should classify violations into one of the three categories set forth in the final regulations:

* Minor errors or omissions, which are not considered "failures" if they are inadvertent or due to reasonable cause--but only if promptly corrected;

* Willful or egregious failures, which are subject to the full array of sanctions; and

* Any failure in between those two categories, which will be "excused" as long as it is "corrected and disclosed."

Proper classification requires knowledge of the specific incident and other similar incidents, past or...