Collected here are federal and state developments relating to duties of tax-exempt organizations, especially tax-exempt hospitals, to maintain the tax exemption and threats to their tax-exempt status.

IRS Developments
Congressional Developments
Ohio Developments
Other Developments and Resources

IRS Developments

September 6, 2007
AHA Comments on Redesigned Form 990
The American Hospital Association has submitted comments to the IRS regarding the redesigned Form 990. The AHA states that it is concerned that the filing deadline is far too short and should be extended to tax year 2010 for Form 990 and that the redesigned Form 990 and schedules should be substantially revised. The 13 page letter from the AHA provides a lengthy list of specific concerns to questions in the redesigned Form 990 and schedules. The AHA recommends that the IRS redraft the Form 990 and schedules, re-release it in 2008 and allow another round of comments. The AHA states: "It would be a disservice to the entire tax-exempt sector – hospitals in particular – to undertake the first major overhaul of the Form 990 in 25 years without adequate time for review and input." The AHA previously commented specifically on draft Schedule H. (See August 21, 2007 item below.)

August 21, 2007
AHA Comments on Draft Schedule H to Form 990
On August 21, 2007, the American Hospital Association submitted comments to the IRS regarding Schedule H. (See IRS Publishes Draft Schedule H to Form 990 below for background.) The AHA argues that the draft Schedule H fails to achieve the IRS’s goals, fails to adhere to the IRS rules on the community benefit standard, and should incorporate Medicare underpayments and bad debt into the community benefit calculations. The AHA also requests that the IRS delay implementation of Schedule H until 2010.

July 19, 2007
IRS Releases a Hospitals and Community Benefit Interim Report
On July 19, 2007 the IRS published an interim report, with executive summary, summarizing responses to a questionnaire about how tax-exempt hospitals provide and report benefit to the community. The report contains preliminary information on the way nonprofit hospitals responded to questions about how they provide community benefit. The IRS is still in the process of analyzing the reported data. In an accompanying press release, it was noted that Lois Lerner, Director of the IRS’s Exempt Organizations division, stated: “The lack of consistency or uniformity in classifying and reporting uncompensated care and various types of community benefit often makes it difficult to assess whether a hospital is in compliance with current law.” (see May 2006 IRS Begins Hospital "Community Benefit" Inquiries for background.)

June 14, 2007
IRS Publishes Draft Schedule H to Form 990
The IRS has published a draft Schedule H to the newly revised Form 990. Schedule H is a new 990 schedule to be completed by exempt hospitals.  The draft Schedule H contains five parts: Part I: Community Benefit Report. Part II: Billing and Collections. Part III: Management Companies and Joint Ventures. Part IV: General Information. Part V: Facility Information.

The IRS issued a memorandum explaining the draft Schedule H.  The IRS claims that in creating Schedule H, the IRS “tried to quantify, in an objective manner, the community benefit standard applicable to tax-exempt hospitals.” The IRS modeled Schedule H and instructional worksheets for Schedule H calculations on the Catholic Health Association’s community benefit reporting model.

The IRS currently states that it expects to be using the new Form 990, including Schedule H for the 2008 tax year. Comments regarding the new Form 900, including Schedule H, may be submitted to the IRS by September 14, 2007.

March 1, 2007
IRS Issues Report on Exempt Organization Compensation
Since 2004, the IRS has been conducting a Tax Exempt Compensation Enforcement Project consisting of two parts: Part I focused on the level of compliance with compensation reporting and involved compliance check letters sent to 1,223 organization; Part II focused on compliance with intermediate sanctions rules and involved compliance check letters sent to 782 organizations.

On March 1, 2007, the IRS released its preliminary Report on Exempt Organizations Executive Compensation Compliance Project. According to the Report, the Enforcement Project "uncovered significant reporting errors and omissions in specific compliance areas, particularly excess benefit transactions and transactions with disqualified persons, as well as potential compliance issues related to loans made to officers." The Report contains specific survey information of levels of compliance with various aspects of compensation by exempt organizations. Further, due to concern from information discovered during the Enforcement Project, the IRS has initiated Part III of the Enforcement Project, in which the IRS will perform an additional 200 compliance checks and 50 single-issue examinations focusing on loans to executives.

February 20, 2007
Dirty Dozen Tax Scams
Abuses involving the improper use of tax-exempt organizations and charitable deductions remains on the IRS's annual "Dirty Dozen" of tax scams. The IRS specifically identified donations to donor advised funds and supporting organizations, the overvaluation of property donations, and disguised tuition payments as areas of concern. The full list is available on the IRS website.

January 30, 2007
Telephone Excise Tax Refund Website
The IRS has developed a Telephone Excise Tax Refund website for exempt organizations with links to forms and questions and answers:The Telephone Excise Tax Refund is a one-time payment available on the 2006 federal income tax return designed to refund previously collected long distance telephone taxes. Note that IRS is scrutinizing early refund claims for abuse.

January 30, 2007
Changes to Form 990
The IRS has provided information about updated Form 990 requirements showing significant changes for 2006:

November 7, 2006
IRS 2007 Exempt Organizations Implementing Guidelines
On November 7, 2006, the IRS released its 2007 Exempt Organizations Implementing Guidelines. These Guidelines include the 2007 Priority Guidance Plan which sets forth the IRS's goals and strategies for 2007. Among the identified "critical initiatives" for 2007 are executive compensation and tax-exempt hospitals. Regarding executive compensation, the IRS notes that it has completed the examinations begun in 2004 and expects to issue a report on the findings by the end of 2006. The IRS proclaims that it will focus on cases involving loans to officers and excess benefit transactions in 2007. Regarding tax-exempt hospitals, the 2007 Priority Guidance Plan states that "over the years questions have arisen about how to differentiate forprofit from non-profit hospitals causing the public and Congress to question whether tax-exempt status for hospitals is still appropriate."

Last year, the IRS asked hundreds of hospitals to complete Community Benefit Inquiries (see May 2006 IRS Begins Hospital 'Community Benefit' Inquiries below). The 2007 Priority Guidance Plan announces that in 2007 the IRS intends to "analyze the data from the compliance check questionnaires and determine the appropriate next steps, which could include education, guidance, examinations, and/or additional compliance check activity."

September 22, 2006
Summary of Changes Affecting Nonprofits by Pension Protection Act Available
The recently enacted Pension Protection Act includes several changes affecting nonprofit organizations. These changes include new requirements on filing Form 990, limitations on charitable contributions, as well limitations on credit counseling agencies and donor advised funds. The IRS has summarized these changes on its website. A summary of these changes is also available in the August 2006 edition of the Nonprofit Advocate.

September 21, 2006
IRS Releases Guidelines for Processing Exemption Applications Filed by Healthcare Organizations; Governmental Organizations
Periodically, the IRS creates and releases guidelines for processing exemption applications filed by certain types of organizations. Recently, the IRS posted guidelines for processing exemption applications filed by healthcare organizations and organizations affiliated with government entities on its website.

September 6, 2006
IRS Commissioner Everson Comments on Executive Compensation of Exempt Organizations in Testimony to the Senate Finance Committee
IRS Commissioner Mark Everson testified before the Senate Finance Committee in a hearing on executive compensation held on September 6, 2006. The hearing dealt primarily with for-profit corporations. However, Commissioner Everson included comments on the exempt organization sector, providing an update on the findings from the soft contact audits conducted of 1800 organizations (see August 10, 2004 -- IRS Announcement of Enforcement Initiatives below for background on these audits). Commissioner Everson stated that the examinations closed to date and the other contacts made with exempt entities have "shown compliance issues associated with reporting and with loans to executives or other controlling officials." Commissioner Everson promised that the IRS would continue to review and investigate these issues, stating: "Executive compensation will continue to be a prime area of focus for our TE/GE group in FY 2007." Witness Testimony .

June 1, 2006
Senator Grassley Urges IRS to Increase Enforcement
On June 1, 2006, Senator Charles Grassley (R-IA), Chair of the Senate Finance Committee, sent a letter to the Chief Counsel of the IRS urging increased enforcement in the tax-exempt sector. Senator Grassley stated that the Senate Finance Committee "continues to consider several legislative proposals affecting tax exempt organizations," but noted that legislation may not be the "easiest or quickest way to correct abuse by and within tax-exempt organizations." Non-profit hospitals were specifically targeted in this letter. Senator Grassley stated that he strongly believes that the IRS should be particularly engaged in the "definition of charity care, the requisite level of charity care, the definition and level of community benefit, the definition of joint ventures, joint ventures involving non-profit hospitals, the payment of excessive compensation and the use of tax-exempt bond proceeds." The letter requested that the IRS provide specific details on the number of revocations and denials issued to non-profit hospitals since 2000 as well as the numbers of lawyers dedicated to tax-exempt organizations and tax-exempt bonds each year since the IRS reorganization in 2000. Non-profit hospitals should be aware of Senator Grassleys continuing efforts to increase enforcement in this area.

May 23, 2006
IRS Begins Hospital "Community Benefit" Inquiries
Up to 600 tax-exempt hospitals may soon begin receiving inquiries from the IRS focusing on their compliance with the "community benefit standard" for tax-exemption. Hospitals targeted in this inquiry will receive a questionnaire, IRS Form 13790, from the IRS asking the hospital to provide basic information about its operations, describe its community benefit activities and answer a number of questions about its compensation practices. This "compliance check" by the IRS may presage revisions to the community benefit standard. In the larger context of the many challenges faced by tax-exempt hospitals, any hospital receiving such an inquiry should carefully consider their responses to this questionnaire and consult with counsel. Failure to carefully respond to this questionnaire could not only impact a hospital's tax exempt status, but could also provide ammunition to a plaintiff for claims under Ohio's Consumer Sales Practices Act, since responses to the questionnaire could be made available to the public upon request. More information about Form 13790 is available in the Bricker & Eckler Bulletin on Form 13790.

Congressional Developments

September 6, 2007
AHA Responds to Discussion Draft on Tax Exempt Hospitals
The AHA has submitted written comments to Senator Grassley (R-IA) regarding the "Tax-Exempt Hospitals: Discussion Draft" (see July 18, 2007 entry below) previously issued by the minority membership of the Senate Finance Committee. The AHA suggests that "the draft singles out hospitals for unfair criticism and recommends punitive measures that are unwarranted." The letter provides detailed objections to the proposals in the discussion draft and concludes: "We cannot support legislating any of the proposals in the minority staff draft. By all indications, the hospital field is already addressing the concerns cited in the paper, or those concerns are under study."

July 18, 2007
Senate Finance Committee Minority Issues Discussion Draft on Tax Exempt Hospitals
The minority membership of the Senate Finance Committee (lead by Senator Charles Grassley (R-IA)) issued a document entitled Tax-Exempt Hospitals: Discussion Draft. The document makes numerous recommendations for changes in the law governing tax exempt hospitals, including: (1) requiring hospitals to develop a charity care policy and publicize it, (2) requiring nonprofit hospitals to provide free of charge medically necessary in/out patient hospital services (not otherwise covered by Medicaid, etc.) to all individuals at or below the federal poverty level, (3) providing that no hospital can maintain tax exempt status without dedicating a minimum of 5% of its annual patient operating expenses or revenues to charity care, (4) developing special rules for joint ventures involving tax exempt hospitals, including requiring charity care policies of these entities, (5) requiring a minimum amount of other community benefits from tax exempt hospitals, such as education and outreach, training or research, health protection and health promotion for vulnerable populations, (6) capping the charges to the medically indigent who are uninsured or under-insured to the lower of the amount paid by the government or the actual hospital cost, (7) mandating that not more than 25% of the voting power of the board of directors be vested in persons who are employed by the hospital or who could benefit financially, directly or indirectly, from the organization’s activities. The document proposes penalties including (1) intermediate sanctions for hospital not meeting the quantitative requirements, including excise taxes in an amount at least equal to twice the shortfall of a hospital that fails to meet its annual charity care requirement or community benefit requirement, (2) revocation of tax exempt status, or (3) termination of participation in Medicare.

May 29, 2007
Senator Finance Committee Urges IRS to Increase Transparency of Hospital Information
Senator Max Baucus (D-MT) and Senator Charles Grassley (R-IA), Chair and Ranking Member respectively of the Senate Finance Committee sent a letter to Treasury Secretary Henry Paulson regarding issues of charities and transparency. The letter urges the IRS to adopt a revised Form 990, claiming that the current 990 is “not adequate to encompass vital information regarding major parts of the nonprofit sector – especially hospitals and universities.” Additionally, the letter describes the Senate Finance Committee efforts in numerous areas that Senators Baucus and Grassley believe “are in critical need of greater reporting and transparency” including executive compensation, joint ventures (specifically discussing hospitals), and hospital practices overall including charity care and billing and collection activities. 

May 8, 2007
Congress Investigates Consulting Companies Regarding Executive Compensation 
On May 8, 2007, Henry Waxman (D-CA), Chair of the House Committee on Oversight and Government Reform sent a letter to six leading executive compensation consulting firms seeking information about the services they provide to large U.S. corporations. The letter asks each consulting firm to identify all companies for which it has provided services during the four year period 2002-2006, and for each company disclose (1) the nature of the executive compensation consulting services performed, (2) the amount of revenues received for the executive compensation consulting services, (3) the nature of other services performed, and (4) the amount of revenues received for the other services. The six companies receiving the letters are: Pearl Meyer & Partners, Towers Perrin, Frederick W. Cook & Co., Mercer Human Resources Consulting, Hewitt Associates, and Watson Wyatt.

December 12, 2006
House Ways and Means Chairman Thomas (R-Ca) has introduced charity care legislation requiring that hospitals provide statutorily mandated amounts of charity care. The bill, H.R. 6420 (Tax Exempt Hospitals Responsibility Act of 2006), requires "specified medical care providers" to provide "specified medically necessary care" to "low-income uninsured individuals" and charge no more than the "maximum allowed charges" of either $25 or the average amount received under contracts with private insurers, depending on the patient's income. The failure to provide this charity care will result in the imposition of excise taxes. In addition, the bill requires hospitals to publicize this charity care policy, as well as the average amount received for specified medically necessary care from private insurers.

September 13, 2006
Senate Finance Committee Hearing Titled "Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals"
On September 13, 2006 the Senate Finance Committee held another hearing concerning nonprofit hospitals and whether such hospital deserve their tax-exemptions. Describing the purpose of the hearing, Committee Chairman Senator Grassley said that "Non-profit hospitals receive billions in tax breaks at the federal, state and local level. The public has a right to expect significant, measurable benefits in return. I hope the hearing will help the Finance Committee decide how we can best ensure that non-profit hospitals provide appropriate levels of benefit to the communities they serve." Senator Grassley indicated his position that nonprofit hospitals need to be engaging in best practices by stating that while many non-profit hospitals are "well-intended and do outstanding work on behalf of their communities," he was concerned that "the best practices of non-profit hospitals are not common practices for all. That needs to change." Testimony and Witness Statements.

September 12, 2006
Senator Grassley Releases Non-profit Hospital Responses
In May 2005, Senator Grassley, Chair of the Senate Finance Committee, sent a letter to ten large hospitals and health systems asking for information in an effort (as Senator Grassley stated): “to learn whether the benefits they provide to the needy justify the tax breaks they receive.” On September 12, 2006, Senator Grassley released the response letters from all ten hospitals and health systems.

Senator Grassley stated that based on these responses he reached the following conclusions: "Non-profit doesn’t necessarily mean pro-poor patient. Non-profit hospitals may provide less care to the poor than their for-profit counterparts. They may charge poor, uninsured patients more for the same services than they charge insured patients. They sometimes give their executives goldplated compensation packages and generous perks such as country club memberships. All of this calls into question whether non-profit hospitals deserve the billions of dollars in tax breaks they receive from federal, state, and local governments." Senator Grassley promised action. Focusing on executive compensation, Senator Grassley said "I’m afraid that if non-profit hospital boards are focusing so little attention on what they’re paying executives, they’re giving even less attention to how the hospitals are helping the community and the poor. I intend to look at legislative reforms that will make sure the boards are more focused on ensuring fair, just executive compensation at all nonprofits, including hospitals.”

April 27, 2006
Catholic Health Association Responds to Senator Grassley Inquiries on Charges to Uninsured and Charity Care
On March 8, 2006, Senator Charles Grassley (R-IA), Chair of the Senate Finance Committee, sent a letter to the American Hospital Association and a letter to the Catholic Health Association regarding charges to the uninsured and charity care. On April 13, 2006, the CHA responded and the letter has been made public. CHA’s letter describes its efforts to implement leading practices in the areas of: joint ventures, taxable subsidiaries, management and administrative contracts, executive compensation, travel and expense reimbursement, billing and collection practices, charity care and discount policies, and conflicts of interest and other governance issues. On April 27, 2006, Senator Grassley issued a memorandum calling the response from the CHA “thoughtful and informative.”

April 2006
Supplemental Report of the Panel on the Non-Profit Sector Issued to the U.S. Senate Finance Committee
In June 2005, the Panel on the Nonprofit Sector released its Final Report regarding its examination of the non-profit industry. In April 2006, the Panel issued a supplement to the Final Report. The Supplemental Report provides recommendations in nine additional areas: international grantmaking, charitable solicitation, compensation of trustees of charitable trusts, prudent investor standard, nonprofit conversion transactions, taxation on sales of donated property, consumer credit counseling organizations, disclosure of unrelated business activities, and federal court equity powers and standing to sue. The Panel has decided to expand its work into two other areas: self-regulation of the charitable sector and improvement of financial reports issued by public charities and private foundations. The Supplemental Report indicates that in the future the Panel will identify sample policies on codes of ethics, conflicts of interest, reporting of misconduct, executive and board compensation, audit committees, and records retention to assist charitable organizations in improving governance and standards of practice.

Ohio Developments

July, 2007
Ohio Hospital Association Releases Community Benefit Report
The Ohio Hospital Association published the first public, statewide study of hospital contributions to community benefit. The 2007 Community Benefit Report shows that Ohio hospitals provided over $1.5 billion in charity care.

Other Developments and Resources

Over The Top
A report released by Care for Ohio, a project of the SEIU District 1199, which purports to be a compilation of the 2004 CEO compensation reported by hospitals throughout Ohio on their Form 990s.

Nonprofit, For-Profit and Government Hospitals – Uncompensated Care and Other Benefits
The House of Representatives Ways and Means requested the Government Accounting Office to examine whether nonprofit hospitals provide levels of uncompensated care and other community benefits that are different from other hospitals. The report, provided as testimony at the Committee’s May 26, 2005 hearing, focuses on hospitals’ (1) provision of uncompensated care, which consists of charity care and bad debt and (2) reporting of other community benefits. One observation made in the report was that “current tax policy lacks specific criteria with respect to tax exemptions for charitable entities and detail on how that tax exemption is conferred. If these criteria are articulated in accordance with desired goals, standards could be established that would allow nonprofit hospitals to be held accountable for providing services and benefits to the public commensurate with their favored tax status.”

AHA Report from the Patient Friendly Billing Project
The AHA published this report in February 2005, providing an examination of the issues surrounding discounting and collection practices for patients with limited ability to pay. The report is the product of extensive research conducted by the AHA, and is designed to describe the alternative approaches and give practical ideas as hospitals review and revise financial and billing policies.

Crossing the Line
Published by the Service Employees International Union District 1199 in June 2005, this report purported to quantify the value of hospitals’ tax breaks and take “a hard look at what taxpayers are getting in return.” The report is the labor union’s position paper criticizing the Ohio hospital industry. Among the claims made in this report: “Hospitals receive four times more in tax benefits than they return in charity care.”

Twice the Price
Published in March 2005 by the Service Employees International Union District 1199, this report is the labor union’s position paper criticizing Ohio hospitals’ pricing and billing policies. In this publication, it was claimed that “Many hospital patients in Ohio who don’t have insurance – or whose insurance doesn’t cover all of their hospital care – pay more than twice the price charged to insured patients” and that “Hospital ‘charity care’ policies offer little protection for the uninsured and underinsured.” The report argued that Ohio should, among other things, take steps to “Set limits on the prices hospitals can charge uninsured and underinsured patients…” and “Create uniform charity care standards defining the amount of free and discounted care…”.

Columbus Dispatch “Prescription for Profit”
Between March 6 and 8, 2005, the Columbus Dispatch ran a series of articles on non-profit hospitals in Ohio entitled “Prescription for Profit.” Among the articles published in this series were: “Healthy Tax Breaks Put Under Microscope,” “Working Poor Pay The Most At Hospitals, Union Study Says,” and “Nonprofit Hospitals’ Collection And Charity Policies Under Fire.” (Registration may be required)