The Internal Revenue Service is expected to release its long-awaited intermediate sanctions regulations this week-just in time for the American Bar Association's tax section meeting July 30.
The proposed regulations could mean sweeping changes in the way tax-exempt hospitals and health systems do business with physicians and other individuals considered to be insiders, or "disqualified persons."
Intermediate sanctions are excise taxes that give the IRS a way to punish individuals at tax-exempt organizations without revoking the organization's tax exemption.
Congress passed the law creating such authority for the IRS in 1996 (See box). The proposed regulations implementing the law likely will come with a 60-day public comment period.
The sanctions are aimed at prohibited "private inurement" activities, where private individuals benefit from the earnings of a tax-exempt organization.
Tax experts expect the IRS to more narrowly define which players can be subject to the sanctions. For example, a "disqualified person" is a private individual who can influence the affairs of the tax-exempt organization. It is not yet clear whether physicians, executives, directors, vendors and others would qualify.
"Prior to the intermediate sanctions law, all physicians were disqualified persons," said James McGovern, a principal at KPMG Peat Marwick in Washington and a former IRS attorney. "Under the new language, it seems physicians would be disqualified only if they could exercise influence over the organization."
Tax experts hope the IRS will elaborate on who is an "organizational manager," which under the intermediate sanctions law is defined as an employee of the tax-exempt organization who authorizes the private inurement activity. It isn't clear how low on the management ladder the label could be applied.
The industry also is hoping the regulations will provide examples of the basic types of private inurement activities that can trigger intermediate sanctions, said Michael Peregrine, a tax attorney at Gardner, Carton & Douglas in Chicago.
"Perhaps the most anticipation is with respect to clarification of what constitutes a prohibited revenue-sharing transaction," Peregrine said. "Virtually no guidance on this issue was provided in the original statute, yet its scope could potentially involve cutting-edge hospital-physician arrangements."