When President Clinton signed the Taxpayer Bill of Rights into law last week, he essentially opened wide the financial records of not-for-profit hospitals and other tax-exempt organizations such as healthcare trade groups.
The new law greatly expands public access to the annual federal tax filings of all tax-exempt organizations, and that expansion likely will represent the law's biggest impact on the day-to-day lives of not-for-profit hospitals, healthcare tax experts predict.
The law also incorporates the much-talked about "intermediate sanctions" legislation that, despite being supported by the Internal Revenue Service and the provider community, had failed to pass out of Congress at least five times over the past three years.
This time, the intermediate sanctions were attached to a popular piece of legislation that gives citizens greater legal power to go after the IRS if they believe they have been treated unfairly by the agency. The Senate passed the legislation unanimously last month as did the House in April.
The law, which is retroactive to last Sept. 14, gives the IRS greater authority to punish tax-exempt organizations that engage in prohibited "private inurement" activities. Under federal tax codes, no earnings of a tax-exempt organization can "inure," or benefit, a private individual.
Until now, the only available penalty under federal statutes for private inurement violations is stripping the organization of its tax exemption. Because of the severity of the penalty, IRS officials have long stated that they've been reluctant to use it against organizations, particularly not-for-profit hospitals.
Under the new law, the IRS will be able to assess penalty excise taxes against organization executives who arrange "excess benefit transactions" and people who receive them.
Excess benefit transactions are those in which a "disqualified person," or insider, receives compensation or another form of economic benefit that exceeds the fair market value of the service for which the payment was intended. In healthcare, an excess benefit transaction is akin to an illegal kickback to induce patient referrals disguised as a payment for services rendered. Excess benefit transactions also are those in which the amount of the compensation or economic benefit paid to an insider is based on the revenues of the tax-exempt organization.
Under the law, insiders who benefit from such transactions are subject to a 25% tax on the amount of compensation determined to be in excess of fair market value. Managers of an organization who arrange such transactions are subject to a 10% tax on the same amount. And insiders would face a 200% tax on the same amount if the organization fails to take corrective action to avoid problems in the future.
The IRS can assess the taxes on individuals in lieu of attempting to strip the organization of its tax exemption.
"The IRS is putting peoples' necks on the line and creating a negative incentive for those who make the decisions to do the deals," said Michael Peregrine, a healthcare tax attorney with Gardner, Carton & Douglas in Chicago.
That, in theory, should discourage private inurement arrangements more than would taxes on organizations that have much deeper pockets, he said.
And all excess benefit transactions and any penalties paid by the individuals involved will have to be reported on the organization's Form 990, which will be made more widely available to the public under the new law.
Previously, an organization's tax filing, which often contains sensitive financial information, was open to public inspection at the organization's headquarters during business hours.
The filings provide a detailed breakdown on an organization's revenues and expenses, including compensation paid to executives and outside individuals and companies that do business with the organization. The filings also indicate whether the organization has any for-profit or not-for-profit affiliates and whether executives receive any compensation from those affiliates.
The new law now will require organizations to make copies of their Form 990s available to interested parties upon request in person or in writing. Organizations must make copies available immediately to people who request them in person. They'll have 30 days to send them to people who request them in writing.
But, organizations can deny requests for copies if they've already made their Form 990s "widely available" or if requests are part of a "harassment campaign." An organization's Form 990 often is sought by union organizers who want to use high executive salaries as a rallying point for lower-paid workers.
The new law instructs the IRS to issue regulations defining when organizations can use either of those exemptions to refuse to release copies of their tax filings to interested parties.
The expanded public reporting requirements have several purposes, said James McGovern, a tax consultant with KPMG Peat Marwick and former assistant IRS commissioner overseeing tax-exempt organizations.
First, the mere fact that the filings are public should serve to discourage organizations from entering excess benefit transactions, McGovern said.
"The IRS hopes to bring people in line by increasing public access," he said. "Sunshine is a compliance tool."
And second, organizations have used the previous narrow disclosure requirements, which simply allow public inspection, to discourage public and news media access to Form 990s.