In a first-of-its-kind action, the Internal Revenue Service (IRS) revoked the tax exempt status of a hospital for failing to comply with the Affordable Care Act.

The hospital, a “dual status” 501(c)(3) organization (i.e., its income is excluded from tax under § 115 as a governmental unit) was informed of the adverse determination in February 2017 via an IRS letter, a redacted copy of which was made public last month.

Legal Requirements to Maintain Tax Exempt Status

The unnamed hospital at issue was a local, county-run facility that, according to the IRS letter, did not want to continue making the effort or spending the resources needed to comply with Internal Revenue Code §501(r)(3). §501(r)(3) requires tax-exempt hospitals to conduct a Community Health Needs Assessment (CHNA) every three years, which includes assessing the health needs of the community and making the assessment widely available on the hospital’s website. The CHNA must then be adopted by the hospital and an implementation strategy created.

Penalties for non-compliance with §501(r)(3) include a $50,000 excise tax and the possibility of temporary taxation of income and revocation of tax-exempt status. In the case of compliance failures determined to be neither “willful” nor “egregious”, hospitals are given the chance to cure the failure through correction and disclosure procedures established in agency policy instructions. In this case, the violation was considered “willful.”

In making its adverse determination, the IRS stated that, “Consequently, [Hospital’s] failure to meet the requirements of §1.501(r)-3 is considered willful. Especially in light of the fact that the organization expressed on several occasions that they did not need to be exempt under IRC §501(c)(3) and that their status at times actually got in the way of the ability to be involved in various Medicare reimbursement programs.”

Implications of the Action

Given the fact that the hospital (i) “had neither the will, the financial resources, nor the staff to follow through with the CHNA process,” (ii) was a dual-status hospital also exempt from income taxation as a governmental entity, and (iii) freely relinquished its §501(c)(3) status, this action is unique. However, there are implications that other tax-exempt hospitals should take note of.

The first is that the IRS is, in fact, actively auditing nonprofit hospitals for compliance with §501(r), including requirements to perform a CHNA and, importantly, to make sure that assessments are coupled with implementation plans that are adopted and acted upon. Hospitals that conduct CHNAs also must make them widely available by, among other things, prominently displaying them on their websites. Finally, dual-status hospitals - despite enjoying tax-exemption as a governmental entity - must also closely adhere to the requirements of §501(r) if they wish to maintain their 501(c)(3) status.