The Internal Revenue Service's proposed regulations announced earlier this month it would increase tax enforcement at a time when not-for-profit hospitals and other tax-exempt organizations face greater public scrutiny from a variety of fronts.
More than 400 not-for-profit hospitals have been hit with civil lawsuits accusing them of discriminating against uninsured patients and employing aggressive debt-collection practices, some of which are advancing in state courts. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) vows to propose legislation intended to curb perceived abuse in the tax-exempt sector.
Last year, the IRS launched a widely publicized probe into executive compensation in tax-exempt organizations, announcing it would send up to 2,000 letters reviewing organizations' tax forms and seeking information about executive pay, insider dealings and excess-benefit transactions (May 31, 2004, p. 6). The results of that inquiry remain spotty. Only a handful of not-for-profit hospitals have received "no change" notices from their executive compensation letters, the hoped-for outcome signaling the IRS will not challenge the submitted tax forms, according to Marcus Owens, a healthcare tax lawyer with the Washington office of Caplin & Drysdale.
Owens said he's aware of only a few cases in which the IRS has imposed sanctions after uncovering excess-benefits transactions and sent statutory notices of deficiency, IRS-speak for tax bills, to tax-exempt organization executives or board members. "Their options are to pay or appeal," he said.
American Hospital Association lobbyist Michael Rock, senior associate director for federal relations, said his members are "hypersensitive to the whole issue" of tax-exempt accountability now. "We've advised our members to be cognizant of those concerns," Rock said.
A senior staffer from the Senate Finance Committee predicted legislation would be proposed by early autumn. "We're intent on having something out soon that will reflect what we've learned from the panel on not-for-profits," said the staffer, who asked not to be identified. He predicted the legislation wouldn't require not-for-profits to adopt a version of the Sarbanes-Oxley Act.