As previously announced, the U.S. Internal Revenue Service (IRS) has begun sending out its Community Benefit “Compliance Check” surveys to tax-exempt hospitals around the country. The compliance check is, in some respects, a sequel to the IRS soft contact executive compensation audits issued in 2005 (many of which are still pending final resolution). It is a targeted effort by the IRS to “touch” a large number of tax-exempt entities, as opposed to the more traditional intensive audit of one entity at a time.
As both Congress and the media evaluate whether hospitals should retain tax-exempt status and, if so, under what conditions, the IRS compliance check is an effort to determine how hospitals as a group are satisfying the community benefit standard for tax-exemption. Unfortunately, uniform surveys like the compliance check don’t take into account the differing needs of the various communities hospitals serve and the different corporate structures they use. Accordingly, to provide the IRS with the most accurate information possible, hospitals’ responses to the questions should clarify and explain any unusual circumstances in the particular hospital’s community or hospital system.
The IRS will send approximately 600 surveys to tax-exempt hospitals around the United States. The following frequently asked questions were prepared in anticipation of the questions that may be raised by hospital executives upon receiving their surveys. Even if your hospital was not one of the “lucky” ones, you should carefully review the compliance check survey as a form of self-examination to see how your current practices fare under the IRS list of questions.
What is a compliance check?
A compliance check is not an IRS audit or examination of the hospital. Instead, it is merely an information-gathering project by the IRS. In fact, responding to the compliance check is technically voluntary.
If the compliance check is voluntary, should I respond?
The IRS cover letter to the compliance check survey clearly indicates that a hospital is not required to file a response. However, the letter notes that the IRS can choose to audit the hospital if it fails to respond. In addition to the IRS, Congress is currently reviewing the community benefit standard for tax-exempt hospitals as well as transparency and accountability for tax-exempt organizations in general. Refusing to respond should be weighed against the current Congressional mindset. Finally, in this era of transparency and accountability, a tax-exempt hospital must take into account how its board of directors and/or its community would perceive the hospital’s failure to respond to the survey.
Can I get an extension of the time to file a response?
Most likely, yes. The IRS has historically granted reasonable requests for extensions of time to file responses. If you are responding to the survey, the request for extension should be made to the contact person listed on page one of the IRS letter in the upper right-hand heading.
Are any of the survey questions particularly sensitive?
Yes. Much of the information requested by the IRS is not otherwise provided to the IRS in annual filings and, in fact, may have to be specifically gathered for purposes of responding. Accordingly, the information must be carefully reviewed before submission. In particular, questions 34 to 42 (involving charity care, patient charges and the like) are particularly sensitive and must be carefully answered. The current IRS focus in this section is on “charges” to patients (as opposed to hospital costs), not actual amounts paid by patients. The hospital must explain the difference to the IRS. Likewise, certain compensation questions and business relationship questions raise tricky issues. For example, the question regarding compensation comparables lists several examples of comparative factors but is not all inclusive. In many cases, “other” should be checked in response to this question and a more descriptive answer provided.
What if the question isn’t clear?
The compliance check was drafted in a “one size fits all” manner so that it could be sent to 600 hospitals. As a result, several questions included in the survey are broadly worded and subject to multiple interpretations. For questions that are less than clear as applied to your hospital or are subject to several interpretations, the hospital should use a reasonable interpretation of the question asked in light of the hospital’s particular situation. For example, some of the IRS questions call for a “yes” or “no” response when, in fact, neither may be appropriate. In such cases, the hospital should not feel obliged to answer “yes” or “no” and instead should provide a separate, more correct response.
Do we have to answer every question?
The hospital should respond to every question in some manner. Refusing to respond to a single question or a series of questions could raise suspicions at the IRS, which could lead to additional follow up.
Many of the questions relate to hospital policies. What if our policies are out-of-date or are being revised?
Many of the questions contained in the survey discuss, directly or indirectly, certain policies of the hospital that may be “out of date” or currently under revision. For those situations, the IRS compliance check could be used a catalyst to review and revise such policies before sending the information to the IRS. Consequently, a review of hospital policies before submitting any responses is recommended.
We are a multi-corporate tax-exempt hospital system. Many of the questions seem to assume that only one tax-exempt organization (the hospital) exists. What if some of the questions relate to activities conducted by another entity within the tax-exempt system?
The answer to this question will depend on the particular hospital system. In some cases, it may be beneficial to include activities of other entities within the system (and so indicate in the response). For example, in one question, the IRS requests information about the composition of the hospital’s board of directors to determine whether it is “community-based.” However, the community-based board of directors could be located in a parent entity that elects and removes directors of the actual hospital entity. The IRS has approved this type of structure for the community board criterion of the community benefit standard.
Where do I sign the compliance check?
There is no requirement to sign the compliance check.
Are the responses confidential?
As a practical matter, no. Do not assume that the responses will be kept confidential. While the IRS will not release the information to the general public, there are no guarantees that the information won’t be provided to Congress or state officials upon request. In addition, it is possible that the responses could become available in litigation. Accordingly, responses should be prepared as if they would be distributed to the general public or media.
Can we just attach our community benefit (or other annual) reporting in response to certain questions?
The IRS’ purpose behind the format of the compliance check is to gather information about the hospital industry in a manner that allows the IRS to consolidate the responses quickly and easily. Merely attaching pre-existing documents in response to several questions will make it more difficult for the IRS to collect and analyze the information it seeks. While it is perfectly permissible to copy portions of annual reports or other filings and use such information, merely responding “see attached” to a large number of questions will make it more difficult for the IRS to do its job and, as a result, likely lead to additional requests for information. However, merely because the IRS phrased a question a particular way does not mean that you have to answer it in the requested manner.
Are there any other general tips for responding?
Prior to submission, the survey responses should be compared for consistency to the hospital’s most recent Form 990, any state filings and any court filings the hospital may have recently made. To the extent discrepancies exist, they should be reviewed closely before making any submission.
The hospital should not feel constrained to limit its responses to the particular questions asked. If a limited response to a question may mislead the reader or cast the hospital in an unfavorable light, additional information should be provided to put the response in its proper perspective. The hospital’s response should rephrase the question in a manner that is still responsive but more informative.