Not-for-profit hospitals will wait at least another three months before regulations prescribing new ways to discipline tax offenders come out of the Internal Revenue Service.
Regardless, hospitals shouldn't be asleep at the wheel and instead should be worrying about developing policies and procedures that comply with the law, tax experts warned.
The Taxpayer Bill of Rights, which President Clinton signed into law in July 1996, gave the IRS some middle-of-the-road means of reprimanding tax-exempt organizations for violating the tax code, or so-called "intermediate sanctions" authority.
The sanctions are targeted at tax-exempt organizations that engage in prohibited "private inurement" activities. Under federal tax codes, no earnings of a tax-exempt organization like a not-for-profit hospital can "inure," or benefit, a private individual.
Under the new law, the IRS can impose punitive excise taxes on an organization that has violated the tax code, a less extreme measure than stripping the organization of its tax-exempt status. The IRS has been reluctant to revoke the tax-exempt status of organizations, especially not-for-profit hospitals, because of the severity of the penalty.
"The lack of implementing regulations and the lack of publicity on intermediate sanctions cases have lulled many organizations into what may turn out to be a false sense of security," said James McGovern, a principal at KPMG Peat Marwick in Washington and a former IRS attorney who oversaw tax-exempt organizations. "This is a critically important time for organizations . . . to address the current potential liability of their officers, directors, trustees and others."
The law is effective for transactions occurring on or after Sept. 14, 1995, but its enforcement will begin nearly three years after that, when the new regulations are implemented.
"Today's transactions will generally not be examined until 1999 or 2000 -- a time when regulations will be in place," McGovern said.
Consider the impact of these provisions of the 1996 law:
The IRS has the authority to impose large penalty taxes and personal liability on so-called disqualified persons, or insiders. The government expects to collect $33 million in excise taxes through 2002, McGovern said.
The IRS will also level penalty taxes against not-for-profits that fail to file a timely or complete tax return or do not follow disclosure rules.
If an intermediate-sanction excise tax is assessed against an organization, that organization must disclose that fact on its Form 990.
The law also gives the public greater access to Form 990s, subjecting not-for-profits to more outside scrutiny. As of Jan. 1, all 990s go through one processing center in Ogden, Utah, making it easier for the government to keep track of them. It also gives the IRS the ability to post 990s on its World Wide Web site.
The overworked IRS doesn't expect to have the regulations completed before June, said Bernadette Broccolo, a healthcare tax attorney with Gardner Carton & Douglas in Chicago.
"It's been hurry up, hurry up, but then they got caught in the new tax law," said Gerald Peters, a healthcare tax attorney in the San Francisco office of Latham and Watkins. "The joint venture regulations are even further back on the back burner than the intermediate sanctions."
From a practical point of view, intermediate sanctions offer more of a "guiding spirit" than other laws, said Elizabeth Mills, a tax attorney at McDermott Will & Emery in Chicago.
"We have good guidance in legislative history for intermediate sanctions," she said. "There are other pressing matters we still don't have guidance on, like joint ventures. You can't do everything at once."