Erasing the Hospital Community Benefit Fudge Factor

Years ago, when life was simpler, I did my own taxes. So did a good friend of mine. During tax season, we would compare notes on any changes in the tax code that we heard or read about that could affect how we filled out our respective Form 1040s. 

I’m not a choir boy, but when it comes to the federal tax code and the Internal Revenue Service, I played it by the book.  If anything, I errored on the side of caution and didn’t claim things that I probably could. 

My friend, on-the-other-hand, played it a little fast and loose. Not over the top fast and loose but just a tiny bit outside of the lines in a few gray areas where the IRS’ instructions were open to interpretation—his interpretation. He called it the “fudge factor.”

He may not have reported a few things he should have. He may have claimed a few things he shouldn’t have. It was all in his favor and all plausible. If he was audited, which he wasn’t, his plan was to declare innocence and pay back whatever he owed. 

It was a lot like how businesspeople fill out their employee expense forms. Some lose a little money on a business trip. Some make a little money on a business trip. It’s probably a wash in the end.

I took this trip down memory lane as I read a new report from the Government Accountability Office on how well the IRS oversees the tax-exempt status of not-for-profit hospitals and health systems. (It was the General Accounting Office when we were doing our taxes by hand.)

The GAO published the 40-page report on Sept. 17 and released it publicly on Oct. 19. You can download your own copy here. 

As you know, the federal government requires a hospital to provide certain benefits to its community in exchange for the hospital qualifying as a 501 (c)(3) tax-exempt public charity under the federal tax code. The Patient Protection and Affordable Care Act subsequently required tax-exempt hospitals to report their community benefits on Schedule H of the Form 990s that they file each year with the IRS. The ACA also required tax-exempt hospitals to conduct regular community health needs assessments and have a formal patient financial assistance policy on hand that they follow.

The ACA required the IRS, in turn, to review each hospital’s community benefits activities at least once every three years to ensure that the hospital is holding up its end of the preferential tax status bargain. 

U.S. Sen. Chuck Grassley (R-Iowa) and U.S. Rep. Kevin Brady (R-Texas) asked the GAO to assess the IRS’ oversight of tax-exempt hospitals and its enforcement of the ACA’s community benefits requirements on tax-exempt hospitals. 

In polite GAO-speak, the report said the IRS has room to improve oversight and enforcement. The report largely blamed how hospitals report community benefits to the IRS, which the report said makes it hard for the IRS to do its job. 

For example, hospitals define the IRS’ community benefit standard differently and what activities count toward that community benefit standard differently. 

“The lack of clarity makes it difficult for IRS to ensure that hospitals receiving a tax exemption undertake services and activities that provide benefits to the communities in which they operate,” the GAO said.

Hospitals also report their community benefits inconsistently on their Schedule H because the schedule itself is inconsistent and gives hospitals too much leeway in what and how to report what they do with their money, according to the report. That, again, makes it tougher for the IRS to enforce the law.

“Schedule H, as it is currently structured, does not enable tax-exempt hospitals to demonstrate clearly for the public the extent to which they provide community benefits,” the GAO said.

As a result, the GAO made four recommendations to the IRS in its report:

1. Update Form 990, Schedule H and their related instructions to “ensure that the information demonstrating the community benefits a hospital is providing is clear and can be easily identified by Congress and the public, including the community benefit factors.”
2. Consider requiring hospitals to report community benefit expenses at the individual facility level versus the system level to get a clear picture of what benefits are flowing to what communities.
3. Create a process for identifying hospitals at risk of noncompliance with the community benefit standard to help the IRS know what hospitals to review.
4. Create specific audit codes for identifying hospitals that aren’t complying with the community benefit standard.

In short, what the GAO is telling the IRS do is eliminate the fudge factor that gives hospitals too much wiggle room to claim community benefits in exchange for the tax exemptions. That will make it easier for the IRS to determine who is and who isn’t doing right by patients and taxpayers. 

I’m cool with that, although I’m not sure my friend would agree. Either way, neither of us do are own taxes anymore. 

Thanks for reading.

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