The Internal Revenue Service is reviewing the community benefit activities of 3,377 tax-exempt hospitals to determine if they are in compliance with the requirements for tax-exempt status.

According to the American Hospital Association’s 2012 Fast Facts, there are a total of 5,754 registered hospitals in the U.S., of which 2,904 are non-profit, 1,013 are for-profit and 1,068 are state or local community government hospitals, meaning most of the remaining hospitals will likely fall within the IRS’ secret list of 3,377 hospitals to be reviewed.

According to an IRS official, the reviews will be conducted in waves, with each hospital being reviewed in one of three annual periods. As a result of the Affordable Care Act, the IRS must review the community benefit provided by hospitals at least once every three years.

Garrett Gluth, an IRS official, recently told attendees at the American Health Lawyers Association conference that the IRS Review of Operations Unit will be looking at the hospitals’ IRS Forms 990, including Schedule H, which is applicable to hospitals, as part of the review. In addition, other returns in the possession of the IRS and public records will also be used. Because hospitals under review will not be notified that they are under examination, some have referred to the process as “stealth reviews.” The IRS apparently identified hospitals to be reviewed from a Medicare/Medicaid website, as well as from the IRS’s internal systems.

Practical Tip #1: This IRS project illustrates that it is important for hospitals to be vigilant in ensuring that they are complying with the tax law requirements for section 501(c)(3) status and in particular the five factors used by the IRS in assessing the community benefit standard.

Practical Tip #2: Tax-exempt hospitals undertaking their first "community health needs assessment", now required for tax years beginning after March 23, 2012, should be mindful of the community benefit aspects of that report and implementation strategy.