Hospitals are finally receiving something they've dreaded for 10 months-an invitation to explore executive pay, insider dealings and lavish spending with Uncle Sam.
The messages are the first in a series of long-awaited "soft contact letters," also known as "desk audits," announced last year by the Internal Revenue Service. IRS officials have predicted that about one-quarter of the letters will result in audits.
The initiative, part of the IRS' Compensation Enforcement Project revealed in May 2004 (May 31, 2004, p. 6, and Aug. 16, 2004, p. 10), did not get under way in earnest until after agent training was completed in January. The first 200 letters were sent exclusively to private foundations. But early this month, the IRS mailed a second batch of letters seeking information about executive compensation, insider dealing with board members and executives, and excess benefit transactions. Those letters are now landing in hospital mailboxes.
Lucille White, a healthcare tax lawyer with Ernst & Young, said two of the firm's hospital clients have received the three-page letters in the past two weeks. She said she expects more to follow. "Some of us thought hospitals might have dodged a bullet because nobody had heard of any hospitals receiving them yet," White said. "But hospitals shouldn't get a false sense of comfort just because they haven't received a letter. This is just the beginning."
She said IRS officials told her that 1,700 to 1,800 letters in total would be sent to a statistical sampling of small, medium and large tax-exempt organizations, including a sizable but unknown number of hospitals. White said several factors can set off alarms and potentially attract IRS scrutiny, including executive compensation of more than $1 million; loans to officers or board members; and failure to disclose or inadequately report compensation of more than $100,000 to an individual by a hospital-related organization.
The letters pose 11 questions relating to compensation and excess benefit transactions. They ask the organization to identify officers, directors, trustees and key employees and to describe how the organization established the compensation and benefits for them reported on 990 tax forms. They also ask for a list of employment contracts with board members and whether any executives or board members used cars, airplanes, real estate or credit cards for purposes other than tax-exempt ones.