The clock is ticking for tax-exempt hospitals that have yet to figure out how they will expand public access to tax documents they file with the Internal Revenue Service.
Not-for-profits face stiff penalties if they do not comply with the IRS' final regulations about how to report and release information about their finances and activities, including executive compensation.
The regulations, released late last week, will increase public scrutiny of tax-exempt hospitals, nursing homes and health systems, and charitable foundations. They take effect June 8, or 60 days after being published in the April 9 Federal Register.
Since 1987, the law has required not-for-profits to make their tax returns, called Forms 990, available for public inspection. Tax attorneys said the IRS has not enforced the regulations, but they expect that to change.
"As of early June, the information in these annual returns is going to be much more in the public domain," said T.J. Sullivan, general counsel for the Washington-based Coalition for Nonprofit Health Care and a former IRS official. "The Form 990 has changed from a dry tax document to a very important public report that not-for-profits need to ensure tells the whole story (of their charitable activities)."
The regulations-which also expand access to organizations' applications for exemption, called Forms 1023-implement part of the Taxpayer Bill of Rights Act of 1996. That sweeping law increased the IRS' legal powers over tax-exempt organizations' misuse of charitable funds.
The law created new penalties, called intermediate sanctions, for individuals at tax-exempt organizations who arrange "excess benefit transactions" and for the people who receive them. These transactions involve the arrangement and receipt of compensation or other economic benefits that exceed the fair market value of the services for which payments were intended.
Until the 1996 law, the only penalty for such deals was stripping the not-for-profit organization involved of its federal tax exemption-a penalty so harsh that it was rarely used. Now the IRS can assess penalty excise taxes against the individuals involved in the suspect transactions.
However, final regulations implementing the intermediate sanctions legislation have yet to be published. The IRS published proposed regulations for intermediate sanctions last July, but the final set isn't expected before the year 2000.
The IRS proceeded separately with the Form 990 regulations.
Not-for-profit organizations with gross revenues exceeding $25,000 are required to complete Forms 990 to comply with their tax-exempt status. The forms reveal, for example, compensation for their highest-paid executives.
The Form 990 regulations require not-for-profit organizations to make copies of the form available for on-site review. They also must provide copies on demand within 30 days of written requests unless the forms have been made widely available, such as by postings on the Internet. However, even if the documents are available on the Internet, not-for-profits still must make copies available for public inspection at their headquarters and all regional and district offices.
"For large tax-exempt organizations that haven't focused on these issues until now, intense efforts will be needed to get into compliance," said James McGovern, a principal with KPMG in Washington and a former IRS official. "You not only have to establish a procedure for making copies available, but you also have to decide where you make them available. In other words, what constitutes a regional or district office?"
Mary Grealy, chief Washington counsel for the American Hospital Association, said most hospitals are ready for the change in the law.
"Most have been doing this all along," Grealy said. "I don't see this as a major change. We're encouraging our hospitals to be compliant with all state and federal laws."
Fines for failing to allow public inspection, provide copies or file Forms 990 and 1023, increase to $20 per day, up to a maximum penalty of $10,000 for organizations with annual revenues of less than $1 million.
Organizations with annual revenues of more than $1 million are subject to civil monetary penalties of $100 per day, up to a maximum of $50,000.
The IRS already has filed for civil monetary penalties of more than $30,000, McGovern said.
"The IRS requested these regulations in 1993, and I think it's an indication that the service is getting serious about it," he said.
Compliance should improve because of the increased penalties and tougher enforcement of criminal statutes, not to mention increased public interest, tax experts said.
"The organizations interested in obtaining information (news media, watchdog groups and regulatory agencies) will have an easier time," Sullivan said. "Perhaps we'll begin seeing more research and analysis of the whole charitable sector. I just hope that (those reporting will) accurately reflect the good things they do for the communities they serve as well."
The IRS plans to release a separate set of regulations regarding the application of the law, which Congress amended in 1998, to private foundations.