Taxation and health care.

• Author: Dietrich, Mark O.

IRS releases new audit guidelines The IRS has released new guidelines (the Manual)for tax-exempt hospitals aimed at instructing revenue agents on how to identify situations that might affect the hospitals' tax exemptions. Though the immediate focus of the guidelines is this tax-exempt status, substantial attention is devoted to the relationship between a hospital and its physician staff.

Tax exemption issues

To qualify as exempt under Sec. 501(c)(3), a hospital must meet a community benefit standard. Among the factors comprising this standard are (1) a governing board comprised of "prominent civic leaders," rather than hospital administrators and physicians, (2) an open medical staff admission policy, consistent with size and operations; (3) operation of a full-time emergency room available to all, regardless of ability to pay, and (4) provision of nonemergency care to those able to pay, including Medicare and Medicaid recipients.

Reflecting the Service's increasing focus on physician relationships, the Manual promptly launches into a discussion of medical staff privileges. Agents are advised to review staff qualification requirements in the bylaws, looking for evidence of a closed staff. Agents are further advised to review census data to see if use of the hospital facilities is limited to certain physicians. Reference is also made throughout the Manual to the Fraud and Abuse Regulations issued by the Office of the Inspector General (OIG) of Health and Human Services.

Of particular import to exempt entities is the private inurement issue. The first example cited is excessive compensation, followed by excessive rent and inadequately secured loans. Inurement occurs when insiders receive any of the benefit of a hospital's exempt status. The Manual notes "that even a minimal amount of inurement results in disqualification for exempt status." It further states that physicians are considered to be insiders with respect to this inurement prohibition. Particular attention is to be paid to contracts with physicians who serve as department heads or board members.

Examples of inurement

Unreasonable compensation:

Whether the compensation paid an individual is reasonable must be based on the facts and circumstances of each situation; there are no hard and fast rules. (For an indepth discussion of the issue of reasonable compensation for professionals and planning for an IRS exam, see Dietrich, "Unreasonable Compensation For Employee-Stockholders of a...